Introduction:

Say’s law of market is the foundation theory of classical economics. Assumptions of full employment as a normal condition of a free market economy are justified by classical economics by a law known as say’s law of markets. It was this law on the basis of which classical economists thought that general over production and general unemployment was impossible. The explanation of Says law Market purely classical thought considered as very important theory of employment.

Say’s Law.

According to JB say, a French economist asserted that supply creates its own demand. In say’s word it is production which creates market for goods for selling and at the same time more of production more of creating demands for other goods. Every producer finds a buyer every supply of output creates an equivalent demand for so that there can never be a probable of general over production say’s law denies the possibility of the deficiency of aggregate demand.

Say’s law so describe an important fact about the working of the free exchange economy that the main source of demand is the sum of income earned by the various productive factors from the process of production. The employment of unutilized labor and other resources pays its own way because it enlarges the market demand for goods by an amount equivalent to the income creates and the value of output produced. A new productive process by paying out income to its employed factors generates demand at the same time it adds to supply. It is thus production which creates market for goods. It is the cause and soul cause of demand.

David Ricardo, the chief among the classical economist said “No man produces but with a view to consume and never sells but with an intention to purchase some other commodities which may be useful to him which contributes to future production. In the words of James mill “conception is co- extensive with production. Say’s law was faithfully followed by the neo classical economist like Marshall and Pigou.

Suppose 1000 Meters of cloth one produced the value of cloth has been distributed in the form of wages, rent, interest, profit as reward to the participating factors of production. The purchasing power so generated will be spend either on purchasing the cloth or some other commodities. The factor of production producing the other commodities will receive purchasing power as reward which may be spent on the purchase of clothes and again some other commodity thus the circle of production as well as purchase of goes on widening till the supply of no commodity reminds unsold in the market. Hence the total or aggregate supply of commodity in the economy equal to aggregate demand .There being no deficiency of demand general over production is out of the question. It may be that at any given time the supply of commodity may exceed the demand for it. But it will be only temporary disequilibrium ultimate demand will equal supply and the entire production will be taken off the market, provided of course there is no interference in the working of free market forces .In brief says law of market is a denial of the possibility of general over production.

ASSUMPTIONS OF THE LAW:

• The law can operate only in a free exchange economy where there is perfect freedom for the buyer to buy and seller to sell. There are no restriction imposes either on the producers or on the consumers and there is no price control.
• There is free flow of money income as this income are received they are immediately spent even saving must be invested and spent on acquiring producers goods.
• Saving are equal to investment and this equalities brought about by flexible interest rate.
• The government follows the policy of laissez fare and does not interfere in any manner with the operation of the market forces.
• The size of the market is limited by the volume of production only then will demand equal supply or supply creates its own demand.

CRITICISM OF THE LAW:

• Supply may not create its own demand when a part of the income is saved aggregate demand is not always equal to aggregate supply.
• Employment in the increase by means of general wage cut through it may be possible in particular industry. It is wrong to apply microeconomics principle to macroeconomic activities or situations.
• Interest rate cannot solve saving investment problem. Saving and Investment are not interest elastic.
• The economics system is not so self adjusting as it is supposed. Hence government intervention in economics sphere becomes necessary.
• Assumption of free and perfect competition is not realistic.
• Say’s law cannot explain the occurrence of trade cycle.
• The classical theory does not explain how level of employment is determine. It evades the problem by assuming full employment.

also read: explain the keynes theory of employment.