Say's law

The saysche (or Say's ) theorem ( also saysches ( Say'sches ) Act) goes back to Jean- Baptiste Say (1803 ) and James Mill. It formulates a causal link between the macroeconomic factors, supply and demand. The theorem is one of the classical or neoclassical theorems and is a key building block to understanding the modern supply-side economics.

The theorem in the classical representation

Origin and core idea

Characterized and known was the saysche theorem as part of the classical / neoclassical next to Say about James Mill and John Stuart Mill and John Maynard Keynes ( of the theorem considered critical ). A widespread summary is:

Say wrote in 1803 in his book Traité d' economie politique:

Say turned so that in the former discussion against the view expressed by some economists fear that it will come to long term crises of overproduction with technological advances. After Say the production of goods was necessary to provide the necessary funds for goods purchases and goods production thus simultaneously manage supply and demand. Say wanted his theorem not short-term market crises, cyclical depression, and it caused involuntary unemployment challenge as it was then customary, citing his theorem.

This view of Say was later transferred from the Neoklassikern also on aspects such as relative prices and unemployment. An increased supply of goods planned therefore automatically generating a correspondingly higher projected demand. An insufficient level of demand can therefore - apart from short-term fluctuations - the overall economy did not exist. Thus, there could also be no involuntary unemployment (→ full employment ), as long as the state does not in economic policy, for example, is engaged by minimum wages or tax regulations in the market and thereby limits the demand for labor.

Although a partial over-production is possible, which corresponds to a lower production elsewhere. Such an imbalance is only temporary and will eliminate the price mechanism.

Save

In a pure exchange economy, the saysche theorem is a tautological fulfilled identity equation.

In a multi-period cash economy, the theorem can also take over part of the period no tautological validity claim for themselves, because people then have the opportunity to hoard money or to save without having the goal itself to allow goods to buy at the current time. Although each production creates income in exactly the amount of this production, so that the goods produced can be requested with this income, but production and income, which are high during a boom, can be very deep sink into a crisis. The production is always based on the demand in a slump in sales production and income so that may fall far below potential output when demand under the test suffers form of net cash flows of financial assets. The companies will avoid going to produce in stock, only to utilize the productive potential and to enable the targeted savings.

Only if there is a mechanism that ensures that cover the investments of the targeted savings at an optimal utilization of the production potential, the Say's theorem is valid in a modern money economy. As this mechanism, the trailer usually see the interest rate. The goods market is therefore not cleared in a money economy after the sayschen theorem about the price, but over the market rate. Part of goods markets (eg the grain market ) to be cleared about the price.

According to the classical view, the Say's theorem also applies even when money is saved. It is assumed that banks would lend the money saved, making it ultimately remains effective demand, as companies thus may ask investment goods. The market interest rate adjusts according to the classical view, the balance of supply and demand at full utilization of the production potential.

Unlike the savings market participants do not bring the hoarding their money at a bank. Instead, they keep it at home, for example in the piggy bank. It will accumulate cash money stock that are not effectively demand. Under the gold standard, the amount of banknotes in circulation was once limited by the gold reserves, so that the hoarding of banknotes or even of gold could force the central bank to raise interest rates.

Even the classical economists argued here with the quantity theory of money: Even if it were removed by hoarding the circulation of money, so the saysche theorem is valid if one assumes that the reduced amount of money ensures that the average price of all goods decreases. Thus the value of the money in circulation would continue to be upgraded and the total value would be retained.

The classics have assumed that the money now lower price would provide an incentive to spend the money again, and thereby re- equilibration.

Normally, the central banks the same today but reductions in the velocity of money from by increasing the money supply according to the expected velocity of circulation slowdown. Reductions in the velocity of circulation so do not necessarily lead to deflation or (with sticky prices ) even to demand gaps.

Implications for Economic Policy

Since, according to Theorem sayschen will always be a market equilibrium is rejected by the followers of the theorem demand management by the state or the central bank and demanded a supply-side policy.

Criticism

The orthodox economics had assumed the neutrality of money that with a decline in consumption always in the circumferential more is invested. However, the investment may be less profitable monetarily considered in comparison to investments, so that the investment is omitted and an output gap is formed ( see figure at right ). With the output gap decrease the income and savings of households. Household income is determined by the spending and saving the economy by investing.

John Maynard Keynes challenged the validity of the sayschen theorem. Keynes argued especially against the derived from the quantity theory of money proposition that there could be a fall of wages and prices automatically and without crisis and unemployment. Rather, the central bank would intentionally cause with high interest rates and restrictive credit policy, a sales crisis with mass unemployment, to enforce the desired and necessary to the pre-war parities to the gold standard after returning reduction of wages and prices in the market.

Keynes assumed that low interest rates would not move the company in a crisis to invest, if earnings expectations would only be sufficiently low. This case is called the balance in underemployment. The savings would not necessarily involve the investment balance (→ liquidity and investment case ). A self-reinforcing mechanism for escalation of the crisis would thus be set in motion.

So savers are willing to lend their money instead of hoarding it, they must be given an incentive. Since the capital market but possibly very little capital demanders are (eg recessive mood, low sales expectations, low capacity utilization, etc. ) and may prevail due to the low velocity of money even deflation, it could be that the (nominal) market interest not mark dreaming is. The velocity of money would thereby be further reduced (increased hoarding ). There is thus a self-reinforcing process, because the velocity of money also turn on the national product (→ recessive mood ) and the price level ( deflation) effects. Expected deflation in turn strengthened again to hoard the incentive money. In order to ensure a market-clearing real interest rate is moderate (but constant as possible ) inflation so very helpful. They even allow negative real interest rates. At a constant rate of inflation planning certainty for the economic agents is ensured, and the disadvantages of such a moderate inflation thus are limited. Moreover punished low inflation hoarding that ultimately the cause of every demand gap is yes (or actually is an increase in hoarding the cause of lack of demand - ie the first derivative of the hoarding ), and thus provides an incentive to keep little cash ( and instead to invest ).

Several recent publications see no connection between saving and investing. DIW sees no relationship between savings and economic growth.

Karl Marx is made in the course of working through the theory of David Ricardo with the Say's Theorem apart and criticized that Say had chosen his model conditions so that crises are logically impossible. He criticized further, that Say indicates the relation of capital merely as a barter ratio and thus ignore the internal contradictions of capital due realization processes of overproduction. Marx figured Says approach therefore to vulgar economy. In contrast, Marx praises Ricardo for his scientific objectivity in its chapter on the Mechanical and overlooks the inconsistency: Ricardo's theory assumes that a total of Say's theorem. After that unemployment is theoretically excluded at launch of new machines.