"[2] Some maintain that Say further argued that this law of markets implies that a general glut (a widespread excess of supply over demand) cannot occur.
[3] Say's law has been one of the principal doctrines used to support the laissez-faire belief that a capitalist economy will naturally tend toward full employment and prosperity without government intervention.
Say argued that economic agents offer goods and services for sale so that they can spend the money they expect to obtain.
[10]Say further argued that because production necessarily creates demand, a "general glut" of unsold goods of all kinds is impossible.
Say rejected the possibility that money obtained from the sale of goods could remain unspent, thereby reducing demand below supply.
We hear of glutted markets, falling prices, and cotton goods selling at Kamschatka lower than the costs of production.
But where, I would ask, is there any considerable trade that is confessedly under-stocked, and where high profits have been long pleading in vain for additional capital?
John Maynard Keynes argued in 1936 that Say's law is simply not true, and that demand, rather than supply, is the key variable that determines the overall level of economic activity.
[26] Antonio Fatás and Larry Summers argued that shortfalls in demand, resulting both from the global economic downturn of 2008 and 2009 and from subsequent attempts by governments to reduce government spending, have had large negative effects on both actual and potential world economic output.
In other words, people choose to work less when economic conditions are poor, so that involuntary unemployment does not actually exist.
However, Say himself advocated public works to remedy unemployment and criticized Ricardo for neglecting the possibility of hoarding if there was a lack of investment opportunities.
Thus Say's law, in its original concept, was not intrinsically linked nor logically reliant on the neutrality of money (as has been alleged by those who wish to disagree with it[31][unreliable source?
]), because the key proposition of the law is that no matter how much people save, production is still a possibility, as it is the prerequisite for the attainment of any additional consumption goods.
Say's law states that in a market economy, goods and services are produced for exchange with other goods and services—"employment multipliers" therefore arise from production and not exchange alone—and that in the process a sufficient level of real income is created to purchase the economy's entire output, due to the truism that the means of consumption are limited ex vi termini by the level of production.
[citation needed] Because historically there have been many persistent economic crises, one may reject one or more of the assumptions of Say's law, its reasoning, or its conclusions.
Taking the assumptions in turn: As for the implication that dislocations cannot cause persistent unemployment, some theories of economic cycles accept Say's law and seek to explain high unemployment in other ways, considering depressed demand for labour as a form of local dislocation.
Krugman dismisses Say's law as, "at best, a useless tautology when individuals have the option of accumulating money rather than purchasing real goods and services".
The flexibility of markets under laissez faire allows prices, wages, and interest rates to adjust so as to abolish all excess supplies and demands; however, since all economies are a mixture of regulation and free-market elements, laissez-faire principles (which require a free market environment) cannot adjust effectively to excess supply and demand.
A response to this in defense of Say's law (echoing the debates between Ricardo and Malthus, in which the former denied the possibility of a general glut on its grounds) is that consumption that is abstained from through hoarding is simply transferred to a different consumer—overwhelmingly to factor (investment) markets, which, through financial institutions, function through the rate of interest.
Keynes' innovation in this regard was twofold: First, he was to turn the mechanism that regulates savings and investment, the rate of interest, into a shell of its former self (relegating it to the price of money) by showing that supply and investment were not independent of one another and thus could not be related uniquely in terms of the balancing of disutility and utility.
Through this identification, Keynes deduced the consequences for the macroeconomy of long-run equilibrium being attained not at only one unique position that represented a "Pareto Optima" (a special case), but through a possible range of many equilibria that could significantly under-employ human and natural resources (the general case).
This gap between production and realization creates the possibility for capitalist crisis, but only if the value of any item is realised through the difference between its cost and final price.
Modern advocates of Say's law see market forces as working quickly, via price adjustments, to abolish both gluts and shortages.
Thus, Say's law is part of the general world view of laissez-faire economics—that is, that free markets can solve the economy's problems automatically.
Contradicting this view, Arthur Cecil Pigou, a self-proclaimed follower of Say's law, wrote a letter in 1932 signed by five other economists (among them Keynes) calling for more public spending to alleviate high levels of unemployment.
An early example was Jacob Viner, who in his 1936 review of the General Theory said of hoarding that Keynes' attaches great importance to it as a barrier to "full" employment' (p152) while denying (pp158f) that it was capable of having that effect.
have argued that financial markets, and especially interest rates, could adjust to keep hoarding and dis-hoarding equal, so that Say's law could be maintained, or that prices could simply fall, to prevent a decrease in production.
To Keynes, in the short run, interest rates are determined more by the supply and demand for money than by saving and investment.
Before interest rates can adjust sufficiently, excessive hoarding causes the vicious circle of falling aggregate production (recession).
The recession itself lowers incomes so that hoarding (and saving) and dis-hoarding (and real investment) can reach a state of balance below full employment.