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Jean-Baptiste Say

by Ossama Banaja,
May 2002

 

Much of the economic thought that outlines the way in which we conduct policy-making strategies revolves around the behavior of demand and the study of that behavior. Such was the case in the recent economic slowdown in the United States, where experts regard the lack of consumer spending as a major cause in the recession. This perspective considers the demand to be the main force of the economy. John Baptiste Say had a different perspective however, and the debate on whether this perspective was originally his does not undermine his contribution to economic theory. In his most prominent work A Treatise on Political Economy (Traité d'économie politique), Say outlined his theory that there is no such thing as overproduction, and the “supply creates demand.” Before we delve into Say’s law, as it is called, let us look briefly into J. B. Say’s background.

 

Brief Biography

Say was born in Lyons, France as a textile merchant. He served in the army during the French revolution in 1792. It was then that he immersed himself in the teachings of Adam Smith’s Wealth of Nations, and became acquainted with the ideologues, a group of laissez-faire economists whose goal it was to liberalism in France. In 1799 Say was nominated to the Tribunate. His most influential publication, mentioned earlier, appeared in 1803. Within it’s binds it contained Say’s law of supply, which is the center point of this discussion.

 

Say’s Law of Supply

Understanding a theory that regards supply as the driver behind an economy’s success might seem a little backwards, especially in light of the economic rhetoric that surrounds our thought process. The idea that free markets will ultimately work their way into equilibrium is central to Say’s law. The idea previously lingered upon by Adam Smith that “supply creates it’s own demand” is basically the core of the law. His idea is that no matter how much is produced (supply), there will be someone to buy it (demand), he says “I do not see how the products of a nation in general can be too abundant, for each product provides the means for purchasing another.” This means that overproduction is impossible in a free market economy.

 

Application of this theory is simple, let’s regard any company that produces a certain amount of goods, the excess number of goods it produces will be stored in inventories, and prices of these goods begin to drop until eventually they are sold. The process by which the prices of these goods decline is regarded as deflation. Consequently, when this company decides to decrease the price of its goods, its revenues will decline, and so will the labor wage. This decline in the wage rate, however, will be substantially offset by this company’s demand for more labor in its quest for higher production level; after all, this theory does call for increased supply. In this case, since nominal wages are declining at a slower rate than the overall price level, the real wages are actually increasing. As real wages increase, the purchasing power of the population increases with it, and so will the array of goods and services. The process by which nominal wages decreases to the “market clearing” level is solely determined by market forces, and gives labor its true value.

 

A major concern that arises in the firm’s allowing prices to deflate at a faster rate than wages are shrinking is the maintenance of their profit margin. Again, the basic principle of this theory is higher productivity, and since the firm is now producing more, the marginal revenue that this firm is making on the extra goods that it is producing should restore the profit that was lost to higher real wages. Because initially these firms have to deal with higher real wages in the face of lower revenues, and must then increase production to make up for the gap, their profit margin must be sufficient enough to undertake the capital upgrade required for the production increase. A consequence of this is the emergence of capital intensive, high wage-paying firms, and, in turn, a freeing up of a considerable portion of the work force for innovation, services, and the production of labor intensive goods. Naturally, a fear of high unemployment arises, but as these established firms increase their profit margin, in harmony with the Chicago school of thought, new entrants will make their way into those profitable industries bringing prices and wages back to the market clearing level, and thus shrinking the profit margin.

 

Summarizing Say’s law, it is clear that the supply side, and more precisely capital, is the trigger force behind an emerging economy. Capital is needed in this case for the existing firms in order to increase productivity in the face of declining revenues and increasing real wages, it is also important for the entrant firms that seek to take part of the profitable markets. We see then that demand in this case is a consequence of the increased level of real wages.

 

The theories that underlay his 1803 work did not bode well with Napoleon Bonaparte. Say was ordered off the Tribunate after refusing to change certain aspects of his work. Say followed up his work in 1814 after the fall of Napoleon with a second edition. In 1819 he was named Chair of Industrial Economy at the Conservatoire National des Arts et Metiers. Say was then granted the first chair in economics at the prestigious Collège de France in 1831. One year later, he passed away.

 

 

 

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