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Say's Law

Cowboy0108
Posts: 420
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5/16/2015 9:37:19 PM
Posted: 1 year ago
Say's Law states that AS creates its own AD. By increasing production, more people get jobs, wages increase (see the wage Phillips Curve), and more people have more buying power. This leads to increased AD which is good for the economy.
Do you agree with this, is there more to it, did Say miss something, is there an example that contradicts this?
hatshepsut
Posts: 72
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5/17/2015 5:24:57 AM
Posted: 1 year ago
I would say there's more to it. Supply cannot create demand by virtue of being supply. It depends on what's being supplied. Even the fact that producers pay the wages that workers use to satisfy their demands doesn't itself guarantee demand. The workers may hold on to their money as long as possible, as they do in panics. Withholding of money has gotten more important since Say's time, now that a larger portion of the money supply is in the hands of actors that don't exhibit subsistence-directed behavior, such as banks. Unlike workers who usually must spend most of their income or starve, banks can sit on their money almost indefinitely while calling in their loans, although they do not normally do unless they fear a run on deposits or loss of valuation on their reserve instruments.

Say did say (pun) that an excess supply of one good implies unmet demand exists for some other good. This means a good doesn't create demand for itself. Instead, it reflects that a person offers a good for sale only when that person desires to have different goods. As in trading haircuts for shoes. So, supply of one good represents demand for other goods.

In the long run, aggregate demand and supply are nearly equal: Economies produce roughly what they consume, and no economy can consume more than it produces. Strictly, we have to make sure we have a closed system in this analysis. Japan consistently produced more than it consumed during the 1960s-80s, building up capital reserves, and the USA has been consuming more than it produces since about 1985. Today we have to use the globe as this closed system as most countries have a fifth of their economy international now.

We talked about Keynes' demand-driven economy in the '30s. Then we were all about "supply-side economics" when Reagan was U.S. president. But the thing is, supply & demand are restoring forces in an equilibrium; neither drives the other.

-I'm not an economist so I "Say" don't take my word for it.
ResponsiblyIrresponsible
Posts: 12,398
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5/17/2015 6:47:04 AM
Posted: 1 year ago
Say's Law only holds in the case that savings is equal to investment, but that only happens after markets equilibrate to their long-run equilibrium - so, technically speaking, Say's Law does hold, but it need not hold during normal times. Short-run output fluctuations may distort the balance between savings and investment which obviously would throw off this narrative.
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Cowboy0108
Posts: 420
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5/17/2015 6:55:39 PM
Posted: 1 year ago
At 5/17/2015 6:47:04 AM, ResponsiblyIrresponsible wrote:
Say's Law only holds in the case that savings is equal to investment, but that only happens after markets equilibrate to their long-run equilibrium - so, technically speaking, Say's Law does hold, but it need not hold during normal times. Short-run output fluctuations may distort the balance between savings and investment which obviously would throw off this narrative.

Could you put that into simpler terms. I know a lot about economics, but I do not understand that level.
ResponsiblyIrresponsible
Posts: 12,398
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5/17/2015 6:59:00 PM
Posted: 1 year ago
At 5/17/2015 6:55:39 PM, Cowboy0108 wrote:
At 5/17/2015 6:47:04 AM, ResponsiblyIrresponsible wrote:
Say's Law only holds in the case that savings is equal to investment, but that only happens after markets equilibrate to their long-run equilibrium - so, technically speaking, Say's Law does hold, but it need not hold during normal times. Short-run output fluctuations may distort the balance between savings and investment which obviously would throw off this narrative.

Could you put that into simpler terms. I know a lot about economics, but I do not understand that level.

Sure.

Let's say there's a shock to the economy in the short run. Barring expansionary policy which moves the AD curve up and down to return output its long-run normal level, we tend to think that there's this self-correcting mechanism whereby wages and prices adjust, pushing the AS curve up and down and returning output to its longer-run level. That level is consistent with savings being exactly equal to investment, and because wages and prices are perfectly flexible, production - supply - but not demand determines output. My point is that Say's Law will likely hold then, but not in the short run.
~ResponsiblyIrresponsible

DDO's Economics Messiah
Cowboy0108
Posts: 420
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5/17/2015 7:17:54 PM
Posted: 1 year ago
At 5/17/2015 6:59:00 PM, ResponsiblyIrresponsible wrote:
At 5/17/2015 6:55:39 PM, Cowboy0108 wrote:
At 5/17/2015 6:47:04 AM, ResponsiblyIrresponsible wrote:
Say's Law only holds in the case that savings is equal to investment, but that only happens after markets equilibrate to their long-run equilibrium - so, technically speaking, Say's Law does hold, but it need not hold during normal times. Short-run output fluctuations may distort the balance between savings and investment which obviously would throw off this narrative.

Could you put that into simpler terms. I know a lot about economics, but I do not understand that level.

Sure.

Let's say there's a shock to the economy in the short run. Barring expansionary policy which moves the AD curve up and down to return output its long-run normal level, we tend to think that there's this self-correcting mechanism whereby wages and prices adjust, pushing the AS curve up and down and returning output to its longer-run level. That level is consistent with savings being exactly equal to investment, and because wages and prices are perfectly flexible, production - supply - but not demand determines output. My point is that Say's Law will likely hold then, but not in the short run.

Thanks that made much more sense!
lannan13
Posts: 23,078
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5/27/2015 2:59:06 PM
Posted: 1 year ago
At 5/16/2015 9:37:19 PM, Cowboy0108 wrote:
Say's Law states that AS creates its own AD. By increasing production, more people get jobs, wages increase (see the wage Phillips Curve), and more people have more buying power. This leads to increased AD which is good for the economy.
Do you agree with this, is there more to it, did Say miss something, is there an example that contradicts this?

Could you explain this a little better for me or at least have a WS source for this?
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darkkermit
Posts: 11,204
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5/27/2015 3:23:11 PM
Posted: 1 year ago
Say's law states that AS curve is vertical. An increase in Aggregate Demand won't change the quantity of production, but increase prices. This holds true in the long-run, but since prices are sticky it doesn't hold true in the short-run.
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