Say’s Law and the Classical Theory of Depressions

Say’s Law occupies a prominent, but equivocal, position in the history of economics, the object of repeated controversies about its meaning and significance since first propounded in the nineteenth century. This chapter proposes a unifying interpretation of Say’s Law based on the idea that the monetary sector of an economy with competitively supplied money involves two distinct markets, not one. Beyond modifying the interpretation of the inconsistency between Say’s Law and a monetary economy, the paper challenges another interpretation of Say’s Law as being refuted by depressions and lapses from full employment. Under the alternative interpretation, Say’s Law suggests a causal theory whereby disequilibrium in one market reduces demand in other markets, initiating a cumulative shrinkage of both demand and supply.