Jean-Baptiste Say and His Timeless Law of Markets

Richard M. Ebeling

Whatever economic freedom we enjoy in the world today is due, to a great extent, to the ideas and efforts of the classical liberals and economists of the first half of the nineteenth century.

Inspired by the eighteenth-century writings of the French Physiocrats and Scottish Moral Philosophers (for example, David Hume and Adam Smith), they forcefully and insightfully demonstrated the errors and inefficiencies in Mercantilism (the eighteenth-century system of government planning and regulation).

Say greatly appreciated the young America of that time as a beacon of freedom.

In place of Mercantilism, they advocated Adam Smith’s “system of natural liberty,” under which government would be limited, mostly, to the protection of life, liberty, and property. Free men pursuing their individual self-interests would peacefully exchange and, as if guided by an “invisible hand,” the cumulative result of their transactions would generate a greater “wealth of nations” than when governments consciously attempt to plan the economic activities of their citizens and subjects.

One of the most original and influential of these early nineteenth-century classical liberals was the French economist Jean-Baptiste Say. Born on January 5, 1767, Say published the first edition of his famous Treatise on Political Economy in 1803. The book was disliked by Napoleon, who prevented it from staying in print during his reign in France. But soon after Napoleon’s fall from power in 1815, Say’s Treatise reappeared and went through several editions (including an American one) before Say’s death on November 15, 1832.

Advocate of the Ideal of Individual Liberty and Private Property

Say was not very politically active during the revolutionary and Napoleonic periods in France, especially during the dictatorial years of Napoleon’s rule due to the personal dangers of getting on the wrong side of France’s tyrant. But he did advocate a simple, unencumbered constitutional order for France, in which laws would be few in number and mostly limited to the protection, and not the violation, of individual rights.

“There is no security of property, where a despotic authority can possess itself of the property of the subject against his consent."

Say greatly appreciated the young America of that time as a beacon of freedom, and he even contemplated emigrating to the United States during the period of Napoleon’s rule. For example, he wrote to Thomas Jefferson in 1803:  “You will show us the true means to our liberation . . . It is for you [the Americans] to show the friends of liberty in Europe how personal freedom is compatible with maintenance of the social body.”

Like many of the classical liberals of his time, there were inconsistencies and contradictions in some of Say’s views about the role of government in society. Nonetheless, Say was a strong advocate of free markets and freedom of trade and an often sharp critic of various forms of government regulation and control of commerce and industry. The protection of private property was especially crucial to fostering industry and economic improvement. Said Say:

“Political economy recognizes the right to property solely as the most powerful of all encouragements to the multiplication of wealth, and is satisfied with its actual stability, without inquiring about its origin or its safeguards.

“In fact, the legal inviolability of property is obviously a mere mockery, where the sovereign power is unable to make the laws respected, where it either practices robbery itself, or is impotent to repress it in others; or where possession is rendered perpetually insecure, by the intricacy of legislative enactments, and the subtleties of technical nicety. Nor can property be said to exist, where it is not a matter of reality as well as of right. Then, and then only, can the sources of production, namely land, capital and industry, attain their utmost degree of fecundity.

“There is no security of property, where a despotic authority can possess itself of the property of the subject against his consent. Neither is there such security, where the consent is merely nominal and delusive . . .

“The property that a man has in his own industry, is violated, whenever he is forbidden the free exercise of his facilities and talents, except insomuch as they would interfere with the rights of third parties.”  

The Market as the Basis for Opportunity and Prosperity

The main focus of most of his writings was to emphasize the importance of sound economic principles for understanding why the market should be freed from government control. He strongly believed that freeing the market was the best avenue for reducing poverty, eliminating the artificial inequalities in income created by state regulation, and bringing about a much better world for all through increased productivity and competition. As Say expressed it in a lecture shortly before his death at the College of France in Paris in 1832:

“In general, it results from the study of political economy that it is best in most cases for men to be left to themselves because it is thus that they reach a development of their faculties. Only political economy makes known the true ties that bind men in society [the benefits from free exchange]. It sets property on its true foundations, and shows its relation to personal abilities and new inventions . . . Instead of founding public prosperity on brute force, political economy founds it on the well-understood [peaceful] interests of human beings.”

Say’s “Law of Markets”

What Jean-Baptiste Say is, perhaps, most famous for is what has become known as “Say’s Law,” the fundamental idea being that market demand is dependent on market-based supply. He argued that money, most certainly, is an extremely valuable medium through which goods and services may be traded, and without which many potentially mutually beneficial exchanges might be impossible to consummate.

Unless we first produce, we cannot consume; unless we first supply, we cannot demand.

However, it is ultimately produced goods that trade for other produced goods. Thus, our ability to demand any particular goods from others in the market is dependent upon our ability to supply some specific good that those others may be willing to take in payment for what we desire to purchase from them.

The shoemaker makes shoes and sells them for money to those who desire footwear. The shoemaker then uses the money he has earned from selling shoes to buy the food he wants to eat.

But he cannot buy that food unless he has first earned a certain sum of money by selling a particular quantity of shoes on the market. It is his supply of shoes that has been the means for him to demand a certain amount of food.

This is, in essence, the meaning of “Say’s Law,” or what Jean-Baptiste Say called the “law of markets”: unless we first produce, we cannot consume; unless we first supply, we cannot demand.

The Reciprocity of Goods Trading for Goods

How much we can demand, therefore, will be dependent on our ability to produce something others want to buy, and to offer it at a price they are willing to pay, so that we may sell enough of our own good that it will generate the revenue or income sufficient to purchase the quantities of other goods we wish to purchase at the prices at which they are offered to us on the market.

In Say’s own words from his Treatise on Political Economy:  

“It is not the abundance of money but the abundance of other products in general that facilitates sales . . . Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be found that one has paid for products with products . . .

“Should a tradesman say, ‘I do not want other commodities for my woolens, I want money,’ there could be little difficulty in convincing him, that his customers cannot pay him in money, without having first procured it by the sale of some other commodities of their own . . .

“ ‘You say, you want only money; I say, you want other commodities, and not money.’ . . . To say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; an error that proceeds from the circumstance, that almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce . . .

“A product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should vanish in his hands. Nor is he less anxious to dispose of the money he may get for it, for the value of money is also perishable.

“I would not be understood to maintain in this chapter, that one product cannot be raised in too great an abundance, in relation to all others; but merely that nothing is more favorable to the demand of one product, than the supply of another . . .

“But it may be asked, if this be so, how does it happen, that there is at times a great glut of commodities in the market, and so much difficulty in finding a vent [an outlet] for them? . . . I answer that the glut of a particular commodity arises from its having outrun the total demand for it in one of two ways: either because it has been produced in excessive abundance, or because the production of other commodities has fallen short.”

Say argued that there certainly could be “too much” – a “glut” or an “oversupply” – of any particular commodity because more of it has been produced than consumers are willing to buy at a particular price, and because consumers prefer to demand more of some other goods, instead.

The solution is for less to be produced of the good oversupplied and for it to be offered at a lower price to “clear” its supply off the market, and for resources, capital, and labor to be transferred to the production of the other goods for which the demand is greater than the existing supply at their particular price.

There were some critics of Jean-Baptiste Say who replied to his reasoning that it is possible, and sometimes happens, that individuals will not immediately spend all the money that they have earned – they might “hoard” a portion of their earned money income and revenues.

Money Demand and a “General Glut” of Goods

This, the critics said, could result in a “general glut” of many goods and services in the economy as a whole. Here would not be merely a relative oversupply of one good in comparison to a relative undersupply of some other good. That is, could there not be an insufficiency of general or “aggregate” demand for the output of the society as a whole?    

Several years later the answer to this question was given by the British classical economist, John Stuart Mill (1806-1873), in an essay, “Of the Influence of Consumption on Production,” published in his book, Some Unsettled Problems in Political Economy (1844):

“General eagerness to buy and a general reluctance to buy, succeed one another in a manner more or less marked, at brief intervals . . . There is almost always either great briskness of business or a great stagnation . . . In the last case, it is commonly said that there is a general superabundance . . .

“Persons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity.

“Money consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded, in the milder cases people merely defer parting with their money . . . But the result is, that all commodities fall in price and become unsalable . . .

“It is, however, of the utmost importance to observe that excess of all commodities, in the only sense which is possible, means only a temporary fall in their value relatively to money.”

John Stuart Mill, in other words, admitted that there could be a situation in which there seemed to be a “failure,” or insufficiency, of a general, or “aggregate,” demand for commodities as a whole in the economy.

But Mill went on to argue that this was still a relative imbalance, but this time it was due to many individuals having an increased demand to hold a larger than usual quantity of money in their cash balances, relative to their, now, lower demand for many other goods in general at the existing general level of prices.

“Balance” in the economy could, again, be restored with a general fall in the prices of these goods, relative to an increase in the general value, or purchasing power, of money that trades for those various other goods.

The key to the successful rebalancing of the economy in terms of coordinated supplies and demands in and across markets required flexibility and adaptability to change, including a situation in which the relative demand to want to hold money had increased and the relative demand for many other goods had decreased. Price and wage flexibility was the institutional prerequisite for markets to effectively function to bring supplies and demands into balance with each other and to restore and maintain “full employment” within an economy.

Monetary Manipulation Creates Economy-Wide Imbalances

In addition, the occasional disruptions and economy-wide imbalances that could result in people wishing to hold, unspent, more of their earned money revenues and income than usual, and therefore temporarily reduce their demands for many other goods throughout the market, was usually the outcome of prior distortions and excesses caused by monetary manipulations introduced by governments.

If such economy-wide fluctuations and “crises” were to be avoided, the task, the classical economists like Jean-Baptiste Say reasoned, was to keep the hands of government off the monetary printing presses that brought about the unstable and price- and production- distorting inflations that necessitate a later correction and the often painful transition, which the required adjustments may temporarily impose on the society to restore balance among the many supplies and demands for various goods in the market at different and possibly lower prices.

Classical economists like Jean-Baptiste Say and John Stuart Mill understood that while ultimately goods trade for goods in the marketplace, it is done through the medium of money that makes many transactions possible and far less costly than direct barter exchange.

Say’s Law of Markets already included the answers to the questions against free markets with which the Keynesians attempted to challenge the efficacy of capitalism a century later.

They understood that there could be times when economy-wide imbalances may disrupt the smooth operation and functioning of the exchange processes of the market. And when such events occurred people might wish to hold back on purchases and hold on to money earned due to the uncertainties of such times.

And this could create the impression as if there was, to use the more modern Keynesian terminology, “aggregate demand failures” in which all that is produced for the market lacks a general demand to take it all off the market.

But what both Say and Mill were already arguing a century before the rise of Keynesian Economics was that such economy-wide imbalances were not inherent in the market, but were created by monetary manipulations introduced by governments. And they could not be cured by still more monetary manipulations.

Correction of the monetary-induced misdirection of market supplies and demands could, ultimately, only come through appropriate price and wage adjustments and changes in resource uses and production patterns to reflect the reality of post-inflationary market conditions.

Thus, Say’s Law of Markets already included the answers to the questions against free markets with which the Keynesians attempted to challenge the efficacy of capitalism a century later. Anyone who carefully reads what Say and Mill actually had to say about such situations knows that the Keynesian arguments of the twentieth century were actually wrong from the start.