Economic Theories Essay Example | Topics and Well Written Essays - 2250 words

Economic Theories - Essay Example Keynes was the one who completely refuted Say's Law, so much so that he said that the opposite of the law was actually the truth. In this paper we will analyze the criticisms of all these three major economists in comparison with each other. J.B.Say believed that production causes consumption, that is, production is the main source of consumption. What, and how much a person demands depended on the income produced by their own acts of production. Say says that a person pays for goods and services through goods and services. This means that the demand for a commodity is a function of the supply of other commodities. Say's Law of Markets explains the process through which supplies in general are converted into demands in general. Say found that supply will be equal to the demand for other goods. For him, since demand results from the production of products, so there can never be excess supply over demand. Thus, Say believes that there cannot be general overproduction in an economy. He did say that it was possible to have a surplus or shortage of a particular commodity, but these gluts of production were not a result of general overproduction, but instead they were a result of overproduction of a certain good in comparison with other goods which were under produced. So he accepted that there could be short term gluts in an economy, but that it will right itself automatically through the mechanism of prices. He wrote in his "Treatise on Political Economy": "Garnier, in the notes he joins to his excellent translation of Adam Smith, says that in the old nations of Europe, where capital has accumulated for centuries, a superabundance of annual product would be an obstruction to circulation were it not absorbed by a proportionate consumption. I can see that circulation can be obstructed by superabundance of certain products, but that can only be a passing evil, for people will soon cease to engage in a line of production whose products exceed the need for them and lose their value, and they will turn to the production of goods more in demand. But I do not see how the products of a nation in general can ever be too abundant, for each such product provides the means for purchasing another." (Translated by Palmer 1997, p.76, Cottrell 1997, p.2) Thus, Say implies that an adjustment in production, prices or marketing strategies would lead to the removal of disequilibrium - arising from overproduction in a particular type of product - in a free market economy. This is the basic proposition of Say's Law of Markets. Say also believed that savings are beneficial for the economy and are a means of future growth. So they are even better than consumption. He said that savings are led immediately into investments in pursuit of profits, so there would be no deficiency of income, production or consumption. This means that income is always spent either on satisfying current wants through consumption or satisfying future wants through savings accumulation. Hence the market would automatically return to equilibrium even if some income is not devoted to consumption but rather goes to investment. So, general under consumption, just like general over production of a product was not possible, ever. He made an implicit assumption that prices and wages should be flexible. (Anderson) For him money was only a medium of exchange and not a store of wealth. As an inference, Say denounced government interference with the pricing