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Wednesday, 25 May 2011

State the Say's Law of Markets and how does it represents the Classical Economists or Critically examine the Say's Law of Market

The classical economists were of the view that economy has always tendency to operate at the level of full employment. If at any time general over production or general unemployment takes place in the country, it will purely temporary. The assert that market forces automatically allocate resources among different uses and determines the share of each factor of production and help the economy to operate at the level of full employment, if government adopts the non-interference policy. The assumption of full employment is based on the says law of market.

SAY'S LAW OF MARKET :-
J.B Say was french economist. He says that aggregate demand is always equal to the aggregate supply. There can be no general over production or unemployment in the country and in the long run supply always creates its own demand. If at any time excess commodities are produced then excess demand is automatically created. According to this law the income of the community is spent at such rate that it automatically maintains full employment. The income is mostly spent on consumption and the rest is saved. The savings are again spent on capital, goods. There is a circular flow of national income.

As regard aggregate saving and aggregate investment, it is again automatically maintained through the rate of interest. If total savings exceeds then the total investment at any particular time, the rate of interest will fall. If the volume of saving is lower than the volume of investment, the rate of interest will go up. The equality between the saving and investment at full employment level is brought about the changes in the rate of interest.According to says market has a capability to expand with the increase in supply. So supply always creates its own demand. David Recardo, J.S.Mill and Malthus agreed with the statement that supply always creates its own demand.
But classical economists admit that there can be voluntary unemployment and over production.

ASSUMPTION :

1. It has been assumed that government should interfere in the economic affairs of the public.
2. All the savings must be used for investment.
3. The extent of the market depends upon the volume of production of wealth.
4. Rate of wages is equal to marginal product.
5. Labour is not ready to accept the reduction in wages.
6. There is no gap in national income as it received and it is spent.
7. Rate of interest brings an equilibrium in the savings and investment.
8. Prices and wages are elastic.
9. This law is applicable in a free enterprise economy.

KEYNES OBJECTION ON CLASSICAL THEORY

Keynes has criticized this theory on the following grounds :

1. Savings are not Always Equal to Investment :-
It is not correct to say that savings are always equal to each other because savers and investors are different people.

2. Interference of Government :-
In the present age it is not possible that government should not interfere in economic affairs.

3. 1930 World Depression :-
19030, world depression has proved the failure of this law.

4. Trade Cycle Case :-
This theory does not throw light on the trade cycle.

5. No Perfect Competition :-
In real world, we can not find the conditions of perfect competition.

6. Below or Above the Level :-
According to Keynes, the equilibrium of the economy can take place below or above the level of full employment.

7. Supply Creates Demand :-
The aggregate demand remains below the aggregate supply because when income increases, all the money is not spent.

8. Reduction in Real wages :-
It is also wrong to say that unemployment will disappear if the workers accept the reduction in wages. Because when their wages will fall, their purchasing power will also fall, which will adversely affect the economy.

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