J.b.say

J.b.say

• 1.
  • Jean-Baptiste SAYJean-BaptisteSAY (1776-1832) was a French businessman, • which explains why he was responsible for introducing the work of Adam Smith to Europe. • Say can take credit for the way in which we tend to divide the factors of production into land (all natural resources, Labor (all human resources, and Capital (man-made resources to aid production)
• 2.
  Say was alsoresponsible for introducing the concept of entrepreneur into economics. However, he is best known for his “law of markets” or say’s law, which states: “Supply creates it’s own demand.”
• 3.
  Say’s Law andClassical Monetary Policy • Say’s law is an idea frequently found in Classical Economics • The idea rejects the possibility of a general overproduction or “glut” • Often stated as “supply creates its own demand” • Involves a rejection of Malthus’ theory of gluts • Smith, Say, Ricardo, James Mill, and J. S. Mill all supported Say’s Law
• 4.
  Bases of Say’sLaw: I • The first idea behind Say’s Law is there cannot be too much saving • Saving becomes investment expenditure and is spent just as consumption expenditure • Savings and investment expenditure brought into equality via real interest rate adjustments
• 5.
  Savings and Investment S I i S& I i* If the amount people wish to save increases shifting S to S’ the equilibrium i rate falls S’ i’
• 6.
  Bases of Say’sLaw: II • The second basis of Say’s Law has to do with the demand for money • Generally the Classical view was that people only held money balances to undertake transactions • Demand for money would be determined by the number of transactions planned and the average price at which these transactions were expected to take place • People do not hold money as an asset (as it pays no interest) • So when people find their money balance higher than they wish they either consume or save (invest)
• 7.
  Implications of Say’s Law •If no one runs their money balances up or down then there is no hoarding or dishoarding of money • All income not consumed is saved • All saving is invested • All income is spent • Cannot be overproduction or underconsumption (in general) • Full Employment Agg S = Agg D
• 8.
  Say’s Identity • Classicalwriters sometimes say an excess of supply “is an impossibility” (J. S. Mill) • Implies that Full Emp Agg S is always = Agg D • This is known as the identity version of Say’s Law • A demand is a supply; a supply is a demand
• 9.
  Say’s Identity • Wouldapply to a monetary economy only if a monetary economy behaved like a barter economy • Money only a “veil” and has no real effects • If I sell something my money balance goes up and I then buy something else to reduce my money balance • If I buy something my money balance falls so I then sell something to restore my money balance
• 10.
  Say’s Identity • Peoplecannot run up or run down money balances • Dichotomizes the economy • Real factors only determine employment, output, income and relative prices • Monetary factors have no real effects—determine general price level only • Is this really what the Classical economists thought?
• 11.
  Say’s Equality • Inmany places Classical writers suggest that various disturbances may cause temporary excess supply • J. S. Mill states “commercial crises” may lead to people wishing to accumulate money balances—excess demand for money or deficient aggregate demand for goods • In this case Say’s Law expresses an equilibrium condition, not something that is always true or true by definition • This position is called Say’s Equality
• 12.
  Say’s Equality • Ifwhat the Classical Economists had in mind was Say’s Equality we should find discussions of disturbances and adjustment mechanisms • Monetary factors can affect the real economy but there are adjustment processes back to an equilibrium at full employment • Direct mechanism • Indirect mechanism
• 13.
  Direct Mechanism • Peoplemay wish to run up or down their money holdings • In a “crisis” people wish to hold more money • In this case people will try to increase their money holdings by selling goods or selling off other assets (stocks) • Md > Ms and full employment Agg S > Agg D • Price level falls until real money balances increased and people no longer wish to increase money holdings (real balance effect) • Md = Ms and FE Agg S = Agg D
• 14.
  Direct Mechanism • Or--Caseof increasing money supply • Ms > Md, people find themselves with more money than they wish to hold • Increase consumption or investment expenditures • Add D > FE Agg S • Price level rises which increases demand for money (real balance effect) until Md=Ms and FE Agg S = Agg D • Neutrality of money only as between equilibrium states. Money can be a disturbing cause.
• 15.
  Indirect Mechanism • SomeClassical writers also thought monetary factors could have an effect through the i rate • Market i rate may not equal the real i rate that would give S = I • If market i > real i, then S > I and FE Agg S > Agg D • If market i < real i, then I > S and Agg D > FE Agg S • Adjustment via banks adjusting i rates according to reserve position
• 16.
  Say’s Law--Conclusion • Lackof clarity over what is always true and what is true in equilibrium • The many discussions of “crises” and inflations makes it clear that the Classicals felt money could be a significant disturbing cause • Tendency to equilibrium at FE level of output • Say’s equality rather than Say’s identity