137 Say’s Law versus Keynes’ Law
What you’ll learn to do: compare and contrast the Keynesian and Neoclassical perspectives
Macroeconomists over the last two centuries have often divided into two groups: those who argue that supply is the most important determinant of the size of the macroeconomy while demand just tags along, and those who argue that demand is the most important factor in the size of the macroeconomy while supply just tags along.
As you now know, neoclassical economists emphasize Say’s law, which holds that supply creates its own demand. Conversely, Keynesian economists emphasize Keynes’ law, which holds that demand creates its own supply. Many mainstream economists take a Keynesian perspective, emphasizing the importance of aggregate demand, for the short run, and a neoclassical perspective, emphasizing the importance of aggregate supply, for the long run. In this section, you’ll see how these various approaches apply to various situations, particularly differing in the short term and the long term.
Learning Objectives
- Differentiate between the ways that Say’s Law and Keynes’ Law explain economic behavior
Macroeconomists over the last two centuries have often divided into two groups: those who argue that supply is the most important determinant of the size of the macroeconomy while demand just tags along, and those who argue that demand is the most important factor in the size of the macroeconomy while supply just tags along.
Say’s Law and the Macroeconomics of Supply
Those economists who emphasize the role of supply in the macroeconomy often refer to Say’s law: supply creates its own demand. As a matter of historical accuracy, it seems clear that Say never actually wrote down this law and that it oversimplifies his beliefs, but the law lives on as useful shorthand for summarizing a point of view.
The reasoning behind Say’s law is that each time output is produced and sold, the revenues represent an equivalent amount of income generated. This income allows the owners to purchase the amount of output that was produced. While widget workers may not want to spend their entire paycheck on widgets, they will want to buy something, if not what they produced then something some other workers produced. In the aggregate, supply creates its own demand, or more generally, aggregate supply drives the economy while aggregate demand responds passively.
Try It
Keynes’ Law and the Macroeconomics of Demand
The alternative to Say’s law, with its emphasis on supply, can be named Keynes’ Law: “Demand creates its own supply.” As a matter of historical accuracy, just as Jean-Baptiste Say never wrote down anything as simpleminded as Say’s law, John Maynard Keynes never wrote down Keynes’ law, but the law is a useful simplification that conveys a certain point of view.
When Keynes wrote his great work The General Theory of Employment, Interest, and Money during the Great Depression the 1930s, he pointed out that during the Depression, the capacity of