What Does Say Say?

In Econ 101, we learned or were told something called Say's Law. What I assumed the main statement of Say's Law was that when a producer or supplier increases its production of output, demand for the good will increase no matter what. In other words, I interpreted a famous rephrase of Say's Law, "supply creates its own demand", as simply that as long as there is supply of a good, there will be demand for it. I thought of the law as a statement about only one certain good. But it turned out that not only was my short interpretation of Say's Law plain wrong, but also it assumes and claims interesting behavior regarding demand and supply in the economy. So, what does Jean-Baptiste Say say?

In 1803, he argued that a producer supplies a good to receive other goods he or she would like to consume in return. In his word :

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J. B. Say, 1803: pp.138–9)

An interpretation of the above paragraph is that, in short. when one wants to consumer more goods, he or she will produce more or increase the supply of goods he or she supplies. Once the supplier get money by selling its product, he or she now has to get rid of the money because, according to Say, the value of money decreases over time. Therefore, the supplier of X increases demand for Y by supplying more of X.

According to David Glasner on his blog post on Say's Law, Walras Law tells same story as Say's Law:

Walras’s Law says that the sum of all excess demands and excess supplies, evaluated at any given price vector, must identically equal zero. The existence of a budget constraint makes this true for each individual, and so, by the laws of arithmetic, it must be true for the entire economy. Essentially, this was a formalization of the logic of Say’s Law.

In other words, according to Walras's  Law and Say's Law, there will be no shortage of demand in the economy. Therefore, the economy will not experience cyclical unemployment caused by shortage of demand. Opposing views soon came from Malthus, J. C. L. de Sismondi  and later John Maynard Keynes in his famous the General Theory. Keynes argued the assumption made by Say, which says that the supplier of good X has to spend the money received by selling good X on other goods, such as good Y and good Z. Keynes wrote that the supplier doesn't necessarily spend all of the money received as revenue; in fact, in some condition, he or she may think saving that money under a mattress is more reasonable than spending it on some other goods. Basically, Keynes claimed that supply doesn't create its own demand. Moreover, Keynes was bold enough to reverse the statement to that demand creates its own supply. 

Also, Oskar Lange deduced that Walras's Law and Say's Law can be equivalent only in a barter economy, where goods are exchanged directly for other goods. In that case, there isn't intermediary like money, which can make Say's Law not necessarily true.

One implication of Say's Law, if we assume it implicitly holds in reality, if the monetary system can be engineered in a way that it can closely imitate a barter economy, a recession caused by inadequate aggregate demand could be avoided.