The Suntory and Toyota International Centres for Economics and Related Disciplines

Say's Law: Origins and Content

Author(s): A. S. Skinner
Source: Economica, New Series, Vol. 34, No. 134 (May, 1967), pp. 153-166
Published by: Wiley on behalf of The London School of Economics and Political Science and The
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1967]

Say's Law: Origins and Content

By A. S. SKINNER
I
J. B. Say rarely figures in courses on the history of economic thought,
although his name has become part of the small change of academic
discussion. But as an economist, his contributions were often real, if
rarely startling in their originality. This would appear to be true of
his discussion of methodology, the emphasis given to the strategic role
of the entrepreneur,and his attempt to state a subjective theory of value.
But quite obviously, Say is best known for a law which he rarely
described as such. The law has attracted quite as much attention as
any concept in the history of this subject, but there appears to persist
a somewhat hazy (though not eintirely inaccurate) notion that the
law involves two propositions which are by no means the same, namely,
that supply creates demand, and that there must be, at any given point
in time, a tendency to full employment equilibrium.
The purpose of this article is simply didactic; that is, to examine
from the standpoint of the historian what the main proponents of the
law actually meant by it. While no particular originality of interpreta-
tion is claimed, it is hoped that some clarification of meaning may
result from a consideration of the content of the law, and the assump-
tions connected with its original statement.

TI
It is part of the historian's stock-in-trade that in attempting to
understand any body of thought, two stages must be gone through:
the study of antecedents and the analysis itself. Opinion varies, but
the argument is one of the most respectable antiquity and impeccable
genealogy, containing, besides, a great measure of truth.' It is obviously
easier to appreciate the significance of the marginalist revolution if we
first understand something of the struggles of those (like Say) who
attempted to formulate a subjective theory of value, but who did not
know of the technique. The same may be true of Say's law: it may
be easier to grasp its meaning if we approach it through the past-
I The argumentwas clearly stated by Aristotle in these terms: "If you consider
the state-or anything else for that matter-in relation to the origins from which
it springs, you will arrive at the clearest understandingof its nature",Politics, 1,
1252a.The approachwas applied by Plato in the Laws Ill and by Lucretiusin De
ReruinNaturaV. It was widely applied in eighteenthcenturywriting,e.g. Turgot's
On the SuccessiveAdvancesof the HumantMindand the Notes on UniversalHistory,
1750. The interest in developmentwas particularlyobvious in the work done by
the Scottish Historical School, e.g. Adam Smith's Lectures, ed. Cannan, 1896;
Adam Ferguson's History of Civil Society, 1767 and John Millar's Origin of the
Distinctionof Ranks, 1771. For an account of the analysis of the latter writers,see
"Economicsand History: The ScottishEnlightenment",S-ottishJournalof Political
Economy,vol. 12 (1965).
153

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154 ECONOMICA [MAY

easier to understandwhat Say wrote,if we first considerwhat Smith

and Turgothad alreadydone.
Apartfrom the fact that Say had readTurgotand veneratedSmith,
the threewritersare connectedin this sense: in theirworkswe find an
idea which was first formallydevelopedby Quesnay-the conceptof
the economyas a mechanismwhose parts are not consciouslyrelated,
but which combinein such a way as to producedefiniteresults.'All
three writerstook this view, such that we can find in their works
certaincommonlyacceptedarguments.Theserelateto the majorforms
of activity found within the exchangeeconomy, the various groups
into whichmen are typicallydivided,theirfunctionsand relationships
to each other. Say's law only statedcertainof these relationshipsin a
formalmanner,thus makingexplicitsomethingwhichremainsimplicit
in Turgot2and Smith.
In attemptingto explainthe featuresof the exchangeeconomy,the
earlyclassicalwritersused a simplemodelwhichfeatureda two-sector
economy:manufactureand agriculture.Of the earlierthinkers,Turgot
and Smithwereprobablymost successfulin isolatingthe threefactors
of productionusedin eitheror both of thesesectors.Correspondingto
the three factors, they worked in terms of three main classes: land-
owners, wage labour and capitalist undertakers(operatingin each
sector).In Turgot'sscheme,whichis essentiallysimilarto Smith's,the
first and last groups had importantfunctions. The landownersare
responsiblefor making advances to the capitalist-farmers("cultiv-
ators")while the two capitalistgroupshave the strategicrole of com-
biningthe factorsof productionand advancingwages. Corresponding
to the three main factors, three types of returnwere distinguished:
rent, wages and profits. On this basis it is evident that the factors
receivea returnbecausethey are used for some productivepurpose
(that is, creationof commodities)and that these returnsare used in
two ways: to meet the immediaterequirementsof consumptionand
to make the necessaryadvances.3Thus income is generatedby the
decision to producecommoditiesand is either spent or saved, while
the level of incomepaid in the aggregateto factorscan only be main-
tainedif the products,in the aggregate,are purchased.
It is possibleto demonstratethese points by employinga primitive
sequenceanalysis.We assumeat the beginningof the period: (a) that
there is a stock of money in existencesufficientto meet the needs of
'Many contemporarywriters were struck by the concept of the economy as a
self-regulatingmechanism,notably Mirabeau,Cantillon and Joseph Harris. Harris
in particularhad alreadypointed out the need to show "how the severalparts are
necessarilyconnected, mutually dependent and subservientto each other and to
the whole", Essay uponMoney and Coins, 1757-58, Part 1, p. 25n. Harrisprobably
derived the point from Richard Cantillon's Essai, and an interestingapplication
of the same argumentappearsin Book 1 of Sir JamesSteuart'sPrinciplesof Political
Economy,1767.
2 See especiallyTurgot's Reflectionson the Formationand Distributioni
of Riches,
1766.
3 In general, writers of the time spoke of all expenditureas consumption, this
being divided into productiveand unproductiveconsumption.

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1967] SAY S LAW: ORIGINS AND CONTENT 155

circulation;(b) that the two capitalistgroupspossessa certainquantity

of goods producedin the previousperiod,togetherwith a net revenue
earnedfrom the sale of productsin the previousperiod; and (c) that
neitherwage labour,as a group,nor the landlordspossessany stocks
of consumptiongoods and that the income which had accruedat the
beginningof the previousperiod has been entirelyexpended.
The mechanicsof the flow are simple and may be representedas
follows:
(1) The farmerspay the landownersa rent in returnfor the use of
the factor land, thus providingthis group with an income available
for expenditurein the currentperiod.
(2) This incomewill be spent in two ways: in meetingconsumption
requirements,thus involving purchasesfrom both sectors, and in
makingthe necessaryadvancesto the farmersout of currentsavings.
(3) The capitalistsin both sectors advancewages to labour out of
their savings, thus enablingthis group to subsist duringthe current
period.It is assumedthat the incomethus given to this groupwill be
entirelyspentin makingpurchasesfrom both sectors.
(4) The pattern of transactionswill be completed by those which
take place within each sector (that is, between individualmanufac-
turers or farmers)and between each sector. In the latter case, ex-
penditurecan again be groupedunder two heads: consumptionand
saving; that is, part will be devoted to purchasingfood and manu-
factures,part to the purchaseof goods necessaryto carryon produc-
tion (for example,materialsand implements).
As a resultof the whole process,the landlordsand wage labourwill
end the period as they began-with no income. The farmersand
manufacturerswill replace the revenue they have expended during
the currentperiod through the sale of those products with which
they startedthe period, while the combinationof the factors of pro-
ductionduringthe currentperiodwill replacethe stock of commodities
with which it began. Under these circumstances,the "flow" will be
completeand "static",that is, period t +1 will open under circum-
stancesidenticalto those which obtainedin the period t.
If we take a "static"model of this kind, then certainimplications
may be noticed:
(1) Productionis concentratedin two sectors and will feature the
creationof consumptionand "investment"goods.
(2) A particularlevel of production(in the aggregate)will be asso-
ciatedwith a particularlevel of income.
(3) This income may be used in two ways: directedto consumption
or saving.
(4) The level of productionassociatedwith this particularlevel of
incomecan only be maintainedif incomeis spent,thatis, if theaggregate
demandfor commoditiesis equal to the aggregatesupply.

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156 ECONOMICA [MAY

(5) The size of the circle will contract if any part of the quantity
of money necessary to circulation is withdrawn from it (for example,
through hoarding) or if savings once made are not put back into
circulation in the form of advances. While Turgot in particular pointed
to the problem of hoarding, in fact, the general position adopted was
that of Adam Smith: "What is annually saved is as regularly con-
sumed as what is annually spent, anid nearly in the same time, too,
but by a different set of people."'
(6) The size of the circle can only expand if there is nietsaving during
any production period, and if these savings, once made, are used
for some productive purpose, for example an increase in the fund
available for the payment of wages and in the level of demand for
other factors. The main poinit of emphasis in physiocratic writing
was, of course, the problem of increasing the level of real income-a
point which is evident in the criticism of landlords who devoted too
great a proportion of their revenue to unproductive purposes, that is
to consumption as distinct from making advances.
It follows from the above that the concept of the "flow" directs
attention to the interdependence of classes and forms of activity,
but also to three possible cases: where the flow is static, where the
circle expands, and where it contracts. It will be static only where
aggregate demand for commodities equals aggregate supply; it will
contract if the level of aggregate demand is inadequate; it will expand
only if net savings are possible during any one period. While there
was some disagreement between Turgot and Smith as to which sector
would be more important, the common emphasis was on expansion
or growth. This emphasis can be seen in Smith's praise of frugality2
and in his belief that, given the insatiable wants of man,3 the opportun-
ities for investment were without limit or certain boundary.
The argument is among the most typical of the early classical period
and was to become one of Say's recurrent themes. On the one hand
he argued
that the powersof man, resultingfrom the faculty of amassingcapital,
are absolutelyindefinable;because there is no assignablelimit to the
capital he may accumulate with the aid of time, industry and
frugality.4
On the other, he argued, that as a matter of fact
nous ne connaissionsaucune nation qui soit completementapprovis-
ionnee, puisque,meme chez elles qui passentpour florissantes,les sept
Wealthof Nations, EverymaniLibraryed., vol. l, p. 302, and see book 2, ch. 3.
Smith'spoint was takenup by J. B. Say. See for examplethe Treatiseon Political
Economy,transl. C. R. Prinsep, 1821, vol. 1, pp. 121 and 131.
3 Cf. Smith's Lectures,part 2, division 2, sects. I and 2. The argumentwas quite
typical of the time, particularlyamong French writers, and is especially obviolus
in J. F. Melon's Essai Politique sur le Commeirce, 1734. See R. V. Eagly "Sir James
Steuart and the Aspiration Effect", Ecotioniica, vol. XXVII[l (1961), and his
"Exemples de l'effet d'aspiration",Revued'EconiomiePolitique,no. 1 (1965).
7Treatise,vol. 1, p. 131.

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19671 SAY'S LAW: ORIGINS AND CONTENT 1J57

huiti&mesde la population manquent d'une multitude de produits

regardescomme n6cessaires.1
This concentration on expansion or growth had certain analytical
consequences; as a result, we find the explicit assumption that savings
once made will be used, and the implicit assumption that at any given
point in time there will be no tendency to contraction in the level of
activity. We also find a tendency to concentrate on certain key relation-
ships, including those which exist between production and the creation
of income. Given the emphasis on expansion, this was one of the
major problems considered in fact, although, as we have seen, it was
not the only problem to which the concept of the flow directs attention.
But it was the relevant problem for the early classical writers, and the
one which was taken up by Smith's faithful disciple.

III
Say's law is concerned with this relationship: the relationship between
production and income or purchasing power. In the original for-
mulation, the idea was simple and established with reference to inter-
niational trade. Say stated the basic truth that if two nations are
engaged in trade they must have the wherewithal to exchange; they
must each produce commodities before they can purchase each other's
commodities:
Tn buying of a foreignier,the nation really does no more, than send
abroada domesticproductin lieu of consumingit at home, and consume
in. its place the foreign product received in exchange. The individuial
consumerhimself,probably,does not conductthis operation;commerce
conducts it for him. No one country can buy of another, except with
its own domestic products.2
It follows from this argument that if one country produces a con-
siderable quantity of goods and the other does not, trade between
them must be limited. In this case, the limitation may arise not because
one country produces too much, but because the other produces too
little; the difficulty is caused by a failure of supply rather than by an
excess of commodities.3 Taking the example of England and Italy,
Say argued:
11y a trop de marchandisesanglaisesoffettes en Italie et ailleurs,parce
qu'il n'y a pas assez de marchandisesitalliennesqui puissentconvenir
a l'Angleterre.Un pays n'achetece que qu'il peut payer....4
It is evideintthat supply, or production, creates purchasing power or
the means of exchange, and that an expansion in the means of exchange
will enhance the possibilities of trade. The principle thus applied to
Oeivres Diverses de J. A. Sal, Paris 1848, p. 252. Cf. Say's (Cours compliet
d'econonzie politique practique, Paris 1840, vol. 2, pp. 211-2.
2 Treatise, vol. 1, p. 230. Cf. vol. 1, pp. 173, 231, 238 and 328-9.
1 Cf. J. A. Schumpeter, History of Economic Analysis, 1954, pp. 615-6.
4 ''langes et Correspondance, Paris, 1833, p. 166.

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158 ECONOMICA [MAY

individualnations was also applied to the provinces of particular

nations:
Une nation voisine,est dans le meme cas qu'une provincepar rapport
a une autre province,qu'uneville par rapportaux compagnes:elle est
interessee 'a les voir prosperer; elle est assuree de profiter de leur
opulence. . . .
Saymadethe samepoint whenspeakingof the UnitedStatesgovern-
ment's attempt to establish industry among the Creek Indians in
1802. The object was to encouragetrade betweenthe white citizens
and the Indians,and this, Say felt, could only be done by encouraging
the Indians to produce commodities,thus providingthem with an
equivalentwhichcould be used in exchange:
The designwas, to introducehabits of industryamong them, and make
them producerscapable of carryingon a bartertrade with the States
of the Union; for there is nothing to be got by dealingwith a people
who have nothing to pay.2
He concluded:"The United States will have the honour of proving
experimentallythat true policy goes hand in hand with moderation
and humanity".3
True policy, which means in this case, and others,that it must be
the "aim of good governmentto stimulateproduction,of bad govern-
ment to encourageconsumption".4The argumentis quite in accord
with the basic principlewhich Say here sought to establish,namely,
that "productsare alwaysboughtultimatelywith products".5
As Say was aware, the argumentthus applied to nations and the
provincesof nations,could also be appliedwhen discussingthe main
sectorswithinany particulareconomy(for example,manufactureand
agriculture).If the creationof commoditiescreatesin turn the power
to purchase,then it is apparentlyself evidentthat "the successof one
branchof industrypromotesthat of all others".6
As the above implies,these ideas, stated originallywith referenceto
internationaltrade,were also consideredto be relevantwhen dealing
with the money or exchangeeconomy.
It is evidentthat persons,like nations,will only possesspurchasing
power by virtue of their ability to produce commoditieswhich can
be used for the purposesof exchange.Say never qualifiedthis prin-
ciple, but he was, of course,obligedto developthe point in view of the
fact that
In a societyeverso littleadvancedin civilisation,no singleindividual
producesall that is necessaryto satisfy his own wants; and it is rarely
that an individual,by his single exertion, creates even any single pro-
duct; . . .7
'Cours Complet,vol. 1, p. 343.
2 Treatise,vol. 1, p. 174.
3Op. cit., Vol. 1, p. 175.
'Op. cit., vol. 1, p. 177.
' Op. cit., vol. 1, p. 226.
' Op. Cit., Vol. 1, p. 172; Cours Complet, vol. 1, p. 342.
' Treatise,vol. 1, pp. 341-2, and see book 1, ch. 21.

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1967] SAY S LAW: ORIGINS AND CONTENT 159

In an economy characterised by the division of labour two points

immediately arise. In the first place, the obvious inconveniences of
the barter economy lead to the use of money as a universal equivalent.
There is thus a "double exchange" involved; goods are sold for money
and this money serves as a means of purchasing other commodities;
it is on Say's argument, nothing more than an instrument: "Money
performs but a momentary function in this double exchange; and
when the transaction is finally closed, it will always be found, that
one kind of produce has been exchanged for another".' A similar
argument appears in the Cours: "L'homme qui veut acheter, doit
commencer par vendre, et il ne peut vendre que ce qu'il a produit, ou
ce qu'on a produit pour lui".2
Secondly, it is evident that in the developed economy goods are not
created by the efforts of individual men, but by virtue of the com-
bination of factors of production, under conditions where processes
are highly sub-divided. Under these circumstances it follows:
Lorsqu'ona cree un produitqui vaut les services,les servicessont payes
par le produit,dont le valeur,se distribuantentreles producteurs,forme
leurs revenues.Vous voyez bien que ces revenuesn'existentqu'autant
que le produit a une valeur exchangeable,et qu'il ne peut avoir une
telle valeur qu'en vertu du besoin qu'on en a dans l'etat actuel de la
societe.3
It seemed self evident that, in dealing with the modern economy,
productsareraisedby the productivemeansat the commandof mankind,
that is to say, by humanindustry,capitaland naturalpowersand agents.
The productsthus raised form the revenue of those possessed of the
meansof production,and enablethemto procuresuch of the necessaries
amdcomforts of existence,as are not furnishedgratuitously,either by
nature or their fellow creatures.4
A simple connection was thus established between the power to
produce and the power to consume and the law emerged in a similar
form to that already stated:
A man who applieshis labourto the investingof objectswith value by
the creation of utility of some sort, cannot expect that value to be
appreciatedand paid for, unless where other men have the means of
purchasingit. Now, of what do these means consist? Of other values,
of other products, likewise the fruit of industry, capital and land.
Whichleads us to a conclusion,that may at first sight appearparadox-
ical; viz. that it is productionwhich opens a demandfor products.5
Say went a step further to argue that there must thus be a definite
relationship between the level of production in the aggregate and the
level of income or purchasing power. The point had been already
'Op. cit., vol. 1, p. 167, and cf. p. 165; Cours Complet, vol. 1, p. 341; Melanges,
p. 157.
2 Cours Conmplet,
vol. 1, p. 341.
3 Mlanges, pp. 173-74.
' Treatise,vol. 2, p. 21.
5 Op. cit., vol. 1, p. 163. "C'est la production scule qui ouvre des ddbouch6s auIx
produits",M6langes,p. 158.

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160 ECONOMICA [MAY

made by James Mill: "Production is the cause anid the sole cause of
demand. It never furnishes supply, without furnishing demand, both
at the same time and both to an equal extent".' Mill pushed the
argument to its logical conclusion both in ComnmerceDefended and
the Elements:
If the demandand supply of every individualare always equal to one
another, the demand and supply of all the individualsin the nation,
taken aggregately,must be equal. Whatever,therefore,the amount of
the annual produce, it can never exceed the amount of the annual
demand.2
With a little more precision he argued:
It is obviously thereforethe collective means of payment which exist
in the whole nation that constitute the entire market of the nation.
But wherein consist the collective means of payment of the whole
nation? Do they not consistin its annualproduce,in the annualrevenue
of the generalmass of its inhabitants?"3
From which it follows that: "Whatever be the additionial quantity of
goods therefore which is at aniytime created in any country, an addi-
tional power of purchasing, exactly equivalent, is at the same instant
created".4
Given the argument thus far, it then appears that the "law" estab-
lishes two useful results: it demonstrates a necessary connection between
increases in the level of production and increases in the level of pur-
chasingpoweri,and it states that there is an equality between particular
levels of production and particular levels of purchasing power.
Now these relationships between levels of production and levels of
purchasing power must hold good; they are necessary connections
which justify the use of the term law. But it will be observed that
while such necessary relationships can be established, the argum-nent
thus far does not attend to the distinction between a level of purchasing
power and the level of effective demand, nor does it consider the
influence of the level of effective demand on the level of production
and income. As we have observed, the concept of the "flow" directs
attention not only to the connection between production and the
power to consume, but also to this distinction in that some contraction
in the level of activity must take place if the actual level of demand is
less than the potential. Say did not neglect this problem. However, like
Smith, he saw no reason to suppose that people would not use their
purchasing power in order to satisfy their immediate consumption
needs. If contraction was to take place (that is, if the level of effective
demand was to be less than the level of purchasing power corresponding
to a particular level of production) he recognised that this would
come about either througlh hoarding or a failure to use that part of

of Political Economy,1821, p.
I E-lemtents 195.
2 Op.Cit.,p. 9o0.
*SelectedEconomnic ed. D. N. Winch, 1966, p, 13~5.
Wfritings,
' Ibid.

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1967] SAY'S LAW: ORIGINS AND C(ONTENT 161

income which is saved. Thus Say argued that an act of saving would
not lead to a loss of effective demand only "provided the thing saved
be reinvestedor restored to productiveemployment".1'
If it is not restored to productive employment, there is an immediate
differencebetween the level of purchasing power and the level of effective
demand. In such a case, the level of effective demand being less than
the level of purchasing power, the level of production which generated
the latter cannot be maintained. A similar problem may occur in
periods of uncertainty where
thereis a generaldispositionto hoard: a considerableportiontherefore,
of the medium of exchange is withdrawnfrom circulation, and the
evils of scarcityof moneyareimmediatelyfelt; the pricesof commodities
fall, the value of money rises; those who have goods to sell, and those
who have debts to pay, are subject to losses; and calamity is widely
diffused.2
Say had recognised a distinction, which remains implicit in his
argument, between the power to purchase and the level of effective
demand. Given this, the possibility of contraction was also recognised
but, like Mill, Say abstracted from crisis of confidence and assumned,
like Smith, that savings once made, would in fact be used:
It must on no account be overlookedthat, in one way or another, a
saving such as that we have been speakingof, whetherexpendedpro-
ductivelyor unproductively,still is in all casesexpendedand consumed.3
James Mill echoed this argument, and indeed went so far as to
point out:
Of the two parts of the annual produce,that which is destinedfor re-
productionand that which is destinedfor consumption,the one is as
completelyexpendedas the other, and the part which is destined for
reproductionis that whichis probablyall expendedin the shortesttime.4
As a result, the assumption appears in the Traite as in the works
of James Mill that while a particular level of production will be assoc-
iated with a particular level of income, this income will be used, thus
allowing the original level of production to be maintained; an assump-
tion which was not unrealistic given the emphasis on expansion.5
It will be observed that this last point involves a judgment as to a
matter of fact and that in so far as both Say and James Mill took this
position we may describe it as their probable (as distinct from possible)
case.
Treatise,vol. 1, p. 115 (my italics).
2 Elements,p. 115; cf. Treatise,ch. 16.
3 Treatise,vol. 1, p. 115 (my italics).
' Selected Writings,p. 132. The point recurs throughout ch. 6 of Cointnerce
Defended,1808.
6 A similarlybased argumnent was that losses in particularfields would be com-
pensated by excess profits in others, a problem with which, it was felt, the price
mechanismcould safely deal. See for example,the Treatise,vol. 1, pp. 168 and 180
MeIanges,p. 162; Cours Complet,vol. 1, p. 345, and cf. vol. 2, p. 210.

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162 ECONOM1CA [MAY

Given these points it would appear to follow that:

(1) The law strictly so called establishes a necessary relationship
between production and the level of purchasing power.
(2) In dealing chiefly with increases in the level of production and
purchasing power, Say assumed that the level of effective demand
would be co-extensive with the level of purchasing power.
(3) Given the above assumption it was then possible for Say and James
Mill to hold that there would be no tendency for a fall to take place
in the level of activity.
(4) However, since this last point depends not on the wording of the
law, but on an assumption, it is evident that Say could and did, quite
consistently with his statement of the law, recognise the possibility
of a fall in the level of activity. Such a case will obtain wherever the
assumed equality between purchasing power and effective demand
does not hold good.
All these points may be illustrated from the writings of Say, and
also from those of J. S. Mill, who lent the prodigious weight of his
authority to the doctrine.
In the first place, he stated the law almost in its purest form. To the
question "what is it which constitutes the means of payment for
commodities ?" the answer is:
It is simply commodities.Each person'smeans of paying for the pro-
ductions of other people consists of those which he himself possesses.
All sellersare inevitablyand ex vi terminibuyers.1
Having stated the necessary relationship between production and the
ability to purchase, Mill went on to point out that there must always
be an equality between them:
Could we suddenlydouble the productivepowers of the country, we
should double the supply of commodities in every market; but we
should, by the same stroke, double the purchasingpower.2
Given this argument, Mill went on to establish the point usually asso-
ciated with the law: that a general over-production of commodities
is impossible. He went so far as to state that
in whatevermanner the question is looked at, even though we go to
the extremevergeof possibilityto invent a suppositionfavourableto it,
the theory of generaloverproductionimpliesan absurdity.3
This is an apparently startling statement, but in strict logic, the
argument follows from the previous one. If production creates a
demand for commodities and if the level of purchasing power must
bear a definite relationship to the level of production, there can be
no such thing as over-production. The possibility is excluded, as it
were, by definition. Whatever the level of production, there must be
a corresponding level of purchasing power.
1 Principlesof Political Economy.1903 ed., p. 379.
2blbid.
3 Op. cit., p. 381, and see book 3, ch. 14.

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1967] SAY S LAW: ORIGINS AND CONTENT 163

Now this position is logicallydistinctfrom, but tends to be linked

with, the argumentthat a downwardchange in the level of activity
is, in the generalcase, unlikely.The latterstatementcan be made only
if, followingSay and the two Mills, we assumethat resourcesused for
purposesother than the immediaterequirementsof consumptionare
put backinto circulation.Like Say, John StuartMill assumedthat this
would be the case; that savingswould infact be used:
The person who saves his income is no less a consumerthan he who
spendsit: he consumesit in a differentway; it suppliesfood and clothing
to be consumed,tools and materialsto be used,by productivelabourers.'
Now as long as we can say that a particularlevel of productionmust
be associatedwith a particularlevel of income and that this income
willbe usedeffectively,then we can concludethat a downwardtrendin
the level of activity(that is, a contractionin the size of the "circle")is
impossible.In this form, the argumentagain involvesan implicitdis-
tinction between purchasingpower and effectivedemand (by virtue
of the assumptionmade).2It also establishesone necessaryrelationship
(betweenproductionandthe levelof income)andtwoequalities(between
productionand purchasingpowerand betweenthe latterand effective
demand).Only one of these equalitiesis a necessaryone; the latter
rests only on an assumption,which may, or may not always hold
good.
This was the generalposition adopted by Say and the two Mills,
but while the younger Mill adheredto this argumenthe recognised
the importanceof the distinction between purchasingpower and
effective demand and thus the importanceof the assumedequality
between them. Further,while he did not in general believe that a
failure of effectivedemand was likely, as a matter of fact, he was
aware that there were severalpossiblereasonswhich would serve to
explain a divergencebetweenthe level of purchasingpower and the
level of effectivedemandand thus a variationin the level of activity.
All of these points are either derived from or connectedwith the
argumentas statedby Say and JamesMill.
Firstly, there is the generalproblem of commercialconfidence,a
characteristicproblem of any developed economy: "Unreasonable
hopes and unreasonablefears alternatelyrule with tyrannicalsway
'Essays on Some UnsettledQuestionson Political Economy,1844, p. 48.
'It is interestingto note that this distinction became explicit during the course
of the Malthus-Ricardodebate on accumulation. Malthus for example, pointed
out that while "the power to purchasemay perhaps be representedcorrectly by
the produce of the country",yet "Effectual demand consists of two elements, the
powerand the will to purchase".He added: "I by no means think that the power
to purchasenecessarilyinvolves a proportionatewill to purchase".Ricardo, Works,
ed. Sraffa, 1952, vol. 6, pp. 131-2. It is equally interestingto note that Ricardo
graspedthe distinction involved: "We agree", he replied,"that effectual demand
consists of two elements,the power and the will to purchase,but I think the will is
very seldom wanting where the power exists-for the desire of accumulationwill
occasion demandjust as effectuallyas a desire to consume; it will only change the
objects on which the demand will exercise itself." Op. cit., p. 133.

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164 ECONOMICA [MAY

over the minds of a majorityof the mercantilepublic". I The consequence

is, that
except duringshort periods of transition,there is almost always either
great briskness of business or great stagnation; either the principal
producersof almost all the leading articles of industryhave as many
orders as they can possibly execute, or the dealers in almost all com-
moditieshave their warehousesfull of unsold goods.2
Secondly there are reasons to expect variations in the level of activity
arising from the use of money. As Mill noted, the use of money means
that there is always a double exchange, goods for money and money
for goods. But
althoughhe who sells, really sells only to buy, he needs not buy at the
same moment when he sells: and he does not thereforenecessarilyadd
to the immediatedemand for one commodity when he adds to the
supply of another.The buyingand selling being now separated,it may
very well occur, that there may be, at some given time, a very general
inclinationto sell with as little delay as possible, accompaniedwith
an equallygeneralinclinationto deferall purchasesas long as possible.3
A further, and not unconnected problem might arise, he argued, from
the fact that money is itself a commodity. A change in the level of
demand for manufactured goods might, as Mill clearly saw, be explained
as due to the fact that "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".4
It will of course be observed, that all these points, ranging from
the statement of the law to the discussion of effective demand, are
logically quite consistent with each other.

IV
Having come thus far, it may be interesting to unravel some parts
of the previous argument as a means of stating just what the law
amounts to.
(1) If we agree that the idea of the economy as a mechanism is
basic to the early classical system, then we may say that the "circular
flow" tells us something as to its nature. The analysis was designed
to expose some of the main features of the money or exchange economy
as a type of economic organisation; to expose the main classes involved,
the relationships between them and between the two main sectors. It
is evident that within the framework of the exchange economy, goods
are only produced as a result of combining factors of production which
command a price. The income created as a result of the production of
commodities provides an equivalent which can be used in order to
purchase commodities. This connection is implied in the concept of
I Unsettled Questions, p. 68.
2 Ibid.
3 Op. Cit., p. 70.
' Op. cit., p. 72.

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19673 SAY'S LAW: ORIGINS AND CONTENT 165
the flow and is a necessaryfeature of the type of economy considered.
In its originalform, Say's law directsattentionto this feature;this is
preciselythe point conveyedby the statementthat
productsare raised by the productivemeans at the commandof man-
kind.... The productsthus raisedform the revenueof those possessed
of the meansof production,and enable them to procure... the neces-
saries and comforts of existence.,. * 1
(2) If we examinethe economyfrom the point of view of explaining
its features,we can establishcertainresults,such as that mentioned
above, basic to our understandingof it. On the other hand, we can
not only state certainrelationships,for examplebetweenproduction
andpurchasingpower,but also the variousways in whichthis relation-
shipmay workout. The way in whichwe selectand deal with problems
of this kind will inevitablybe affectednot only by our understanding
of the natureof the systembut also by our graspof its trends.In the
case of the early classicalwriters,includingSmith and Say, growth
was the main relevantproblemand expansionthe actual trend. Here
again the law tells us somethingof significancewith referenceto the
mechanicalrelationship,which must exist, between increasesin the
level of activity and increasesin income or purchasingpower. The
point conveyed is quite simple, although the formulationinvolves
what Say describedas an apparentparadox,namelythat "it is produc-
tion which opens a demandfor products".2
(3) Given the concept of the "circularflow", a concept whose
importanceit would be difficultto exaggerate,it is evident that the
size of the circle will not contract only if aggregatesupply equals
aggregatedemand,and that it will contractwhereveraggregatedemand
is less than the level of purchasingpowerappropriateto a givenlevel
of activity.In other words,for thereto be a tendencyto full employ-
ment equilibriumat any given point in time (that is, for there to be
no tendencyto contraction)theremustbe an assumedequalitybetween
the level of effectivedemandand the level of purchasingpower. This
assumptionappearsin the main writingsinvolved;hence for example
Say's explicit assumptionthat the portion of income which is saved
. . . still is in all cases expendedand consumed".3

(4) The law then establishesa necessaryconnectionbetweenproduc-

tion and purchasingpower. However, the argumentthat there will
be no tendencyto contraction,given a particularlevel of production,
is seen to dependon an assumption;an assumptionwhichwas justified
in that it reflectedwhat Say and the two Mills regardedas the probable
case. It is evident,that havingmadean explicitassumption,the writers
involvedwere able to, and did, visualisea possiblecase, that is, where
the assumptionmightnot in fact hold good. Thisaspectof the argument
I Supra,p. 159.
2 Supra, p. 159.
3Supra, p. 161.
D

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166 ECONOMICA (MAY

is particularlyobvious in J. S. Mill's treatmentof the subject; it is

particularlyobvious in the reasonshe advancedas to why theremight
be variationsin the level of activity.
(5) It follows from the above that Say's law, which establishesa
necessaryconnection between productionand purchasingpower, is
not logically(althoughit is in fact) connectedwith the idea of non-
contractionin the level of activity.That is, the relationshipbetween
productionand incomemusthold good irrespectiveof the relevanceof
the assumption.The status of the connectionbetween the law and
the concept of "full employmentequilibrium"thus appears to be
historical ratherthan necessaryor inevitable.
(6) This last circumstanceseems to have broughtwith it two con-
sequences.In the first place, while Say and the Mills recognisedthe
possibilityof contractionin the level of activity,they did not regard
this as a probablecase and thus did not give the problemany great
emphasis.This led, with the partialexceptionof J. S. Mill, to the issue
of effectivedemandand its influenceon the level of activitybeinggiven
very little formal attention. In general, the writers involved con-
centratedmuch more on the issue of expansion, rather than con-
traction,and the treatmentof the law becamefirmlyassociatedwith
the former argument.Secondly,this (historical)associationof ideas
seemsto have involvedthe modernstudentin a pardonableerror,but
none the less an error.The modernaccountof Say'slaw wouldappear
to framethe law in sucha way as to implythat it establishesa necessary
connectionnot only betweenproductionand purchasingpower, but
also betweenpurchasingpower and effective demand, thus firmly linking
the law with the idea of full employmentequilibrium.It must be
admittedthat the originalformulationof the law invited this inter-
pretation;it must also be recognisedthat whateverthis is, it is neither
an accurateinterpretationof Say's law, nor an adequateaccount of
the argumentof one who went out of his way to discussthe techniques
of thinkingand the methodologyappropriateto soientificeconomics.
University of Glasgow.

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