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2018 Cambridge Business & Economics Conference ISBN : 9780974211428

SAY’S LAW OF MARKETS ANDINCOME INEQUALITY IN THE

MARKET ECONOMIES

By

Madina Ndefru, Ph.D.

Formerly Senior Lecturer, Economics, Bayero University, Kano, Nigeria

Currently, Adjunct Professor, Cuyahoga Community College, U.S. A.

Phone: 1 – 937 – 241-6366

July 2-3, 2018CAMBRIDGE, UK

Say’s law of markets and income inequality in the market

economies

ABSTRACT

Economists continue to focus interest on the links between rising income inequality and the

corresponding tenuous economic growth rates. Different economic models show negative causal

relationships between economic growth and income inequality. In the supply-side model, income

inequality leads to less-productive labor inputs. In the demand-side model, inequality leads to

less-robust consumption and investment. In the credit-bust model, inequality leads to an

overleveraged middle class, financial market instability, and credit bubble-and-bust cycle.

In the simplicity of Say’s Law of Markets lies a fundamental necessary condition for economic

equilibrium and stability that is still relevant for today’s market economies. According to Say,

demand is constituted by supply; firms only need to produce the maximum production

possibilities to obtain full employment. When they do, there will be sufficient spending to

purchase all the output.Recessions are caused not by a failure of demand but instead due to

problems associated with the structure of supply and hence supply-side market failures. Lop-

sided structure of market demand and supply upsets economic balance and cause more frequent

economic instability. One supply-side market failure is increasing income inequality. A free

market economy will self-correct towards full employment. By this link, Keynesian economics

serve as a continuation of the classical economists’ discourse on markets. This paper focuses on

the market failure of rising income inequality and its obstructions and increasing strangle-hold

on the operations of the modern market economies.

This study starts out with a review and interpretations of the basic tenets of Say’s Law that

include the assumption that aggregate demand could be less than potential production in the short

run. The study goes on to link these basic tenets with the Keynesian perspective in which the

saving-investment relationship is key; and that demand, rather than supply, is the key variable

July 2-3, 2018CAMBRIDGE, UK 1

that determines the overall level of economic activity. The analysis proceeds to explore and

assess the potency of the market economy options versus the government intervention options

for achieving economic growth and long run economic equilibrium as well as for creating

economic mobility.

1. INTRODUCTION

Say’s Law is predicated upon production of goods (supply) and thereby the generation of

demand in the general market economy. Say’s Law, in the perspective of “laissez-faire” classical

economics implies that free markets can operate efficiently to solve economic problems

automatically, and when production precedes demand.

Basic tenet of Say’s Law

Les citations exactes, extraites du Traitéd'économiepolitique de 1803 6eéd. (Livre I, chapitre XV,

Des débouchés), sont les suivantes :

« c’est la production qui ouvre des débouchés aux produits »;

« l’achat d’un produit ne peutêtre fait qu’avec la valeur d’un autre »;

« un produitterminéoffre, dèscet instant, un débouché à d’autresproduits pour tout le

montant de savaleur »;

« le fait seul de la formation d’un produitouvre, dèsl’instantmême, un débouché à

d’autresproduits ».

[The exact quotations, extracted from the Treaty of Political Economy of 1803 6th ed. (Book I,

Chapter XV, Outlets), are the following:

"it is production that opens up markets for products";

"the purchase of one product can only be done with the value of another";

"a finished product offers, from that moment, an outlet for other products for the whole

amount of its value";

"The fact alone of the formation of a product opens, at the same time, an outlet to other

products".(Say J. B., 1855)]


https://fr.wikisource.org/wiki/Trait%C3%A9_d%E2%80%99%C3%A9conomie_politique/Livre_1/Chapitre_15

https://fr.wikisource.org/wiki/Trait%C3%A9_d%E2%80%99%C3%A9conomie_politique/Livre_1/Chapitre_15

https://fr.wikipedia.org/wiki/Trait%C3%A9_d'%C3%A9conomie_politique

In these few lines lies a fundamental necessary condition for economic stability and equilibrium:

That production and sales generate sufficient incomes for spending on the output produced.

Hence, supply is a precondition for demand (Sowell, Say's Law: An Historical Analysis, 2015

[originally published in 1972]).

In agreement with Say, recessions are caused not by a failure of demand but instead due to

problems associated with conditions of supply; the determinants of supply that could cause

supply-side market failures. Income distribution is considered in this study as another

determinant of supply because it has been shown to impact production and economic growth

(Jonsson, 1997) and hence the impetus for this study.

Demand is constituted by supply; firms only need to produce the maximum production

possibilities to obtain full employment; when they do, there will be sufficient spending to

purchase all the output. A free market economy that is inherently capable of self-correcting will

move towards Keynesian economics full employment. Recessions are caused not by a failure of

demand but instead due to problems associated with the structure of supply and hence supply-

side market failures. Impediments in the structure of market demand and supply upset economic

balance and create frequent economic instability. Markets fail when they do not function to bring

about society’s desired outcomes.(Wolf, 1979) In today’s markets, market failure occurs when

increases in labor productivity do not lead to increases in labor demand and when the market

mechanism causes an inequitable distribution of income that further reduces consumer demand.

The ensuing decreases in total production cause increases in unemployment (and

underemployment) ultimately impedes the continuous circular flow of money (products and

resources) between sectors of the economy. (Sechrest, 2000)

Implicit in Say’s Law of markets is not only a necessary condition for economic expansion and

growth but also the preconditions for economic downturn, recession and possibly depression

such as Great Recession and the Great Depression. This postulation that production creates

demand, presupposes the necessary market conditions of productive and allocative efficiencies

and equitable distribution of income that promote economic expansion. Supply-side market

failures negatively affecting growth in aggregate supply and thereby aggregate demand in

modern market economies point directly to and strongly affirm Say’s Law. In this way, Say’s


law is at once a prescription for economic growth as well as an explanation for the lack of

growth. In this regard, one could argue, therefore, that Keynesian economics stand not in

contradiction to but as a continuation of the classical economists’ discourse on markets with

applications that explain existing market deviations from the underlying assumptions of Say’s

Law. The antecedent or mainspring of real economic activities is production with use of

productive resources and other determinants. In this paper, the determinants of production are

considered to include an equitable income distribution since income inequality has been shown

to be a despoiler of economic growth.

The research question in this study becomes does Say’s Law relate to income distribution?

Alternately, what are the implications of Say’s Law for income distribution? How does income

distribution impact production is the basis for economic growth as postulated in Say’s Law?

How is Say’s Law in defense of the invisible hand of free markets? Furthermore, is the analysis

of Say as “an ancestor of modern general-equilibrium” an adequate interpretation of him as in A

History of Economic Thought by Eric Roll?(Sechrest, 2000). These questions provide insights

that continue the theoretical extrapolation of Say’s Law. Their theoretical analysis will support

the view that “inequality and unsustainable growth are two sides of the same coin”,(Berg &

Ostry, 2011), a relationship that is established in this study to be a fundamental supposition in

Say’s Law. The methodology of analysis used is Say's approach to economics; that of an

emphasis on observing the facts of reality(Sechrest, 2000). This paper’s major contribution is

that it extends the economic discussion from production, growth and income inequality to Say’s

Law from antiquity. This is because in this analysis all three economic phenomena are

considered interrelated and, therefore, intuitive and logical implications of Say’s Law.

2. REVIEW OF LITERATURE

The historical context of Say’s Law is distinguished by the classical economics strong opposition

to mercantilism, an advocacy for laissez-faire economics and a focus on analysis of economic

growth elucidated in the writings of Adam Smith (1723 – 1790), Jean-Baptiste Say (1767 –

1832), Thomas Malthus (1766 – 1834), David Ricardo (1772 – 1823), James Mill (1773 – 1836)

and John Stuart Mill (1806 – 1873). Smith, in strong opposition to the mercantilism, argued for

economic self-interest, free competition and free trade. (Britannica, 2017).Thomas Malthus


veloped the idea that underconsumption as the cause of recession. (Wolf, 1979) The beliefs of

Malthus were revived during the Great Depression of the 1930s by John Maynard Keynes;and

James Mill expanded on Say's argument by opposing underconsumption as the cause of

economic recession. For Say, production creates wealth. John Stewart Mill emphasized the role

of savings rather than consumption in wealth-creation when he said "...to consume less than is

produced, is saving; and that is the process by which capital is increased." Classical economists

did not refer to the principle that "supply constitutes demand" as "Say's Law", but called it "the

law of markets".

A summary of the conclusions on the “Law of Markets” is given here. First, Say and other

writers emphasized the primary importance of the real sector of the economy for national

welfare, with money simply serving as an instrument to facilitate production and exchange.

Second, they rejected claims that excessive saving (or an unfavorable trade balance) would

reduce demand for home products. Third, Say, James Mill and Ricardo, following Adam Smith,

opposed the view that general lack of demand was the prime threat to prosperity, arguing that the

main obstacle is inability or unwillingness to produce? Fourth, they argued that saving, seeking

earnings goes quickly into investment in production. Fifth, they emphasized that investment does

far more for growth than demand for wasteful expenditure of resources, such as military activity

and consumption of luxuries. Sixth, they disagreed with those who feared technical change.

Though Say and Ricardo both admitted that innovation can destroy jobs in the short run, Say

emphasized historical evidence that it created jobs in the long-run.(Baumol, 1999)

The several concepts derived from Say’s Law include flexible prices, market forces of supply

and demand, market disequilibrium and equilibrium conditions, the law of demand, price signals,

the rationing function of prices and the saving-investment equality are explained in the

following: “According to Say, it was possible to have a surplus or a shortage of any specific

commodity. Production can be misdirected. Too much of some products can be produced for

which there is insufficient demand. Gluts of production did not occur through general

overproduction, but instead through overproduction of certain goods in proportion to others,

which were under produced. The market, left to its own devices, permits such imbalances to be

corrected through adjustments of prices and costs. (Younkins, 2006) This writer goes on to

regard Say’s Law as a landmark achievement of integration in economic science; an


essentialfoundation for a reality-based macroeconomic theory. It reflects the interconnectedness,

reality, and harmony of human economic behavior in a free market economy. Sayrecognized

thatproduction opens the demand for products.Production leads to more consumption rather than

the other way around. For consumers to exist there must first be producers.(Younkins, 2006).

Say is best known for "Say's Law," also referred to as his theory of markets ( lathéorie des

dedébouchés) or law of markets ( loi des débouchés ). This principle still is one of the key

building blocks of the classical school of economics. Yet, some writers have questioned the

profundity of Say's Law. Alexander Gray refers to "this theory, which perhaps does not come to

much." Even Murray Rothbard calls it a "relatively minor facet of his [Say's] thought." Most

textbooks truncate Say's Law into the transparently false proposition "supply creates its own

demand." At minimum, this should be interpreted as “aggregate supply creates its own aggregate

demand." The production, or supply, of commodities (and complementary services) in general

leads to the consumption of, or demand for, commodities (and complementary services) in

general. (Sechrest, 2000)

Classical economics, especially as directed toward macroeconomics, relies on three key

assumptions--flexible prices, Say's law, and saving-investment equality. Flexible prices ensure

that markets adjust to equilibrium and eliminate shortages and surpluses. Enough income is

generated by production to purchase the resulting production. This law directed attention to the

production or supply-side of the economy. That is, focus on production and the rest of the

economy will fall in line. Say's law further implied that extended periods of excess production

and limited demand, that might cause an economic downturn, were unlikely. Economic

downturns could occur, but not due to the lack of aggregate demand. An assumption of classical

economics is that the aggregate production of good and services in the economy generates

enough income to purchase all output. This notion commonly summarized by the phrase "supply

creates its own demand" is attributed to the Jean-Baptiste Say and although it was subject to

intense criticism by Keynesian economists, it remains relevant in modern times and is reflected

in the circular flow model. The law actually applies to aggregate, economy-wide supply and

demand. A more accurate phrase is "aggregate supply creates its own aggregate demand." This

interpretation means that the act of production adds to the overall pool of aggregate income,

which is then used to buy a corresponding value of production--although most likely not the


original production. This lawdirected attention to the production or supply-side of the economy.

It postulated a focus on production and the rest of the economy will fall in line. Say's law further

implied that extended periods of excess production and limited demand, the sort of thing that

might cause an economic downturn, were unlikely. Economic downturns could occur, but not

due to the lack of aggregate demand. The saving-investment equality ensures that any income

leaked from consumption into saving is replaced by an equal amount of investment. These three

assumptions imply that the economy would operate at full employment. (ASSUMPTIONS,

CLASSICAL ECONOMICS)

Say has sometimes been considered primarily a diffuser of Adam Smith’s thought; however, it

deviates from it in the Treaty on many points. His treatise will have an important influence on

the economists of the French classical school. Bertrand Nogaro says of the book that it was "the

first book that makes the whole of economics a didactic presentation, following a rigorous plan."

In economics, "Say's Law" (named after the French industrialist and economist Jean-Baptiste

Say (1767-1832)) is commonly known as "the offer creates its own demand". This statement is

misleadingly attributed to Jean-Baptiste Say, who advanced the law of outlets, stating it in the

form "it is the production that opens outlets for the products" or "the purchase of a product can

not to be done only with the value of another." This wording expresses that putting a good on

the market is both a demand for something else, and an opportunity for others to offer something

else to get what the first offers. To make an offer is thus to create a demand, not for the product

which has just been offered, but for the other products. The formulation "the offer creates its

own demand" was simultaneously invented, attributed to Jean-Baptiste Say and refuted by John

Maynard Keynes. By some account, it means, "the value of aggregate demand is equal to the

value of aggregate supply, for all levels of production and employment". Jean-Baptiste Say's

formulation implies that overproduction cannot be general but is necessarily sectoral, because it

necessarily corresponds to an underproduction, that of the goods that are demanded by sellers

who fail to sell their goods. The formulation of John Maynard Keynes explains that a general

overproduction is possible, since money is not only a transitional means of barter, as Jean-

Baptiste Say thinks and says, but a good that some producers may wish to use it to buy other

goods and thus without offering any demand to other producers. Therefore, it is on the role of

money that the two authors, and therefore the two interpretations, oppose each other(Mouchot &

Tiran, 2006).


3. SAY’S LAW AND THE KEYNESIAN PERSPECTIVE

In particular, the phrase "the offer creates its own demand" does not appear in the writings of

Jean-Baptiste Say.

In other words, the producer of a new product opens up new prospects for trade, on the one hand

because he offers something more to others, and thus becomes more solvent; on the other hand,

because it offers the opportunity for other producers of a new outlet for their products.

The following paragraph, extracted from the aforementioned chapter of Jean-Baptiste Say's

Treatise on Political Economy, gives a concise summary of his argument:

"It is good to notice that a finished product offers, from this moment, an outlet to other products

for all the amount of its value. Indeed, when the last producer has finished a product, his greatest

desire is to sell it, so that the value of this product does not lie in his hands. But he is no less

anxious to get rid of the money that his sale gives him, so that the value of money does not fail

either. However, one can get rid of his money by asking to buy any product. We can see that the

mere fact of the formation of a product opens, from the very moment, an outlet for other

products."(Say J. , 1880 (reprint))

The more goods produced, the more these goods can open a demand for other goods(Mouchot &

Tiran, 2006).

Chez Jean-Baptiste Say Le traité a étééditéen 2006 par Economicadansuneédition des

Œuvrescomplètes de Jean-Baptiste Say dirigée par Claude Mouchot (Mouchot& Tiran,

2006) The formulation "the offer creates its own demand" was simultaneously invented,

attributed to Jean-Baptiste Say and refuted by John Maynard Keynes. "The value of aggregate

demand is equal to the value of aggregate supply, for all levels of production and employment".

Jean-Baptiste Say's formulation implies that overproduction cannot be general but is necessarily

sectoral, because it necessarily corresponds to an underproduction, that of the goods that are

demanded by sellers who fail to sell their goods.The formulation of John Maynard Keynes tends

to explain that a general overproduction is possible, since money is not only a transitional means


of barter, as Jean-Baptiste Say thinks and says, but a good that some producers may wish to use

it to buy other goods and thus without offering any demand to other producers.

(Mouchot & Tiran, 2006) (Translation)

"Say's Law" proper

The consequence of Say's law is that there is no demand without a prior offer from the person

who expresses the request. This impliesthat -

• Growth can only be achieved by stimulating production, not consumption;

• similarly, the solution to a crisis of overproduction in a sector is not in a stimulation of the

demand for the goods it produces, but in a stimulation of the supply of the sectors which are in

underproduction (which exist necessarily) and a displacement of the means of production from

the first to the second. For example, a producer who sells his product uses his recipe to buy other

products and creates a demand for an equivalent amount through his action. Any offer is also a

demand, and to any overproduction correlates an equal and opposite underproduction (the lack of

goods that the overproducers desire but do not get): a generalized crisis of overproduction cannot

exist for economic reasons alone. .There may, however, be sectoral crises because producers

may misjudge their demand (which must match the output of other sectors) and the output of

their competitors. These results in an imbalance between two groups of goods: those produced in

too large quantities and those produced in insufficient quantities. The former then no longer find

their counterpart because of the lack of the latter, and this until the means of production move

towards the production of the missing goods, which will have the effect of correcting the

imbalance. In other words, many people have bought less, because they have earned less; and

they won less, because they found difficulties in using their means of production, or because they

missed them. "

What increases the purchasing power that people have, that is, the amount of assets they have,

like the John Stuart Mill formula quoted by John Maynard Keynes, is not the consumption of

others. is their own production. Conversely, if people experience a decline in their production, or

even a smaller increase than that in the rest of the economy, their fellow citizens will experience

overproduction.(Mouchot & Tiran, 2006)


Perspective of John Maynard Keynes

In General Theory of Employment, Interest and Money, Chapter 2, Section VI, p18, John

Maynard Keynes expresses the following, citing John Stuart Mill:

In the days of Say and Ricardo classical economists taught that supply creates its own demand; -

thereby expressing in a significant sense, although not clearly defined, that all production costs

are necessarily spent aggregately, directly or indirectly, when the product is purchased.

In John Stuart Mill's Principles of Political Economy, this doctrine is expressly put forward:

What constitutes the means of payment for goods is simply property. What each person has to

pay for other people's productions is what he owns himself. All sellers are inevitably, and by the

very sense of the word, buyers. If we could suddenly double the productive forces of the country,

we would double the supply of goods in all markets; but, at the same time, we would double the

purchasing power; everyone could buy twice as much, because everyone would have twice as

much to offer in exchange. (Mill, 1909)

John Maynard Keynes thus expresses "the supply creates its own demand" by linking it to the

costs of production: the producer has incurred costs, he has expressed a demand before having a

product to sell, and he will ask the buyer of his product to cover these costs. He expresses that

this is (according to him) the teaching of classical economists; what he thinks of himself is not

expressed here.John Maynard Keynes goes on to explain in section VII his wording of the law

that supply creates its own demand in the sense that the aggregate price is equal to the aggregate

supply price for all levels of output and employment. (Keynes, The General Theory of

Employment, Interest, and Money, 1964).

Keynesian Criticism

For John Maynard Keynes, on the contrary, it is the demand that creates the supply, and

especially the demand for money for itself: people produce and sell for money. This currency

they will not necessarily use to buy goods from other producers, which makes possible a general

crisis of overproduction (in the extreme, everyone wants to sell for money, and nobody bought).


The criticism of John Maynard Keynes therefore focuses on the postulate of currency neutrality,

which Jean-Baptiste Say expresses, certainly, but which is not at the heart of the law that bears

his name.

Nevertheless, John Maynard Keynes's criticism can be understood by noting that it is at the

macroeconomic level and is concerned with aggregate supply and demand, while Jean-Baptiste

Say speaks of the microeconomic level and the supply and demand side of the economy. John

Maynard Keynes, in turn, was challenged by monetarists, who believe that money and its value

are less important than expectations about their variation, and therefore play on the currency to

stimulate the Economy was mostly about playing with money. They believe it is a dangerous

game causing more long-term inconvenience than short-term benefits. (Mouchot & Tiran, 2006)

The assumptions derived from Say’s Law include free enterprise markets; a price mechanism

operates with flexible prices; efficient allocation of resources into production processes;

competitive markets; a continuous circular flow of money between sectors of the economy;

equality of savings and Investment; long run equilibrium of aggregate demand and aggregate

supply; laissez-faire policy of the government; and limited government intervention. Supply is a

precondition for demand. A produced good (supply of a good) constitutes demand for other

goods; the very act of producing goods generates income equal to the value of the goods

produced; people work in order to earn income and they plan to spend the income on output;

general gluts cannot occur. There cannot be overproduction of goods in general for a very long

time because those who produce the goods, by their act of producing, produce the purchasing

power to buy other goods. An economy’s output is essentially its income because money is

“recycled”; income earned will be recycled or spent on output; the economy’s spending flow is

continuously recycled in production and earning income;. Unspent part of consumer income is

redirected via saving into investment spending on capital goods. Consumers borrow to finance

purchases. Government taxes income to spend in the economy. Aggregate demand could be less

than potential production in the short run. The major point is that sales proceeds from production

are what enable consumers to buy goods and services and which further more production and

sales. Therefore, supply creates its own demand; firms only need to produce the maximum

production possibilities in order to obtain full employment. When they do, there will be

sufficient spending to purchase all the output; a free market economy will self-correct towards


what Keynesian economists call full employment. Self-correction occurs in the market economy

as income earned is re-used or spent on output.What increases the purchasing power that people

have, that is, the amount of assets they have, like the John Stuart Mill formula quoted by John

Maynard Keynes, is not the consumption of others. It is their production. Conversely, if people

experience a decline in their production, or even a smaller increase than that in the rest of the

economy, their fellow citizens will experience overproduction.(Mouchot & Tiran, 2006)

Steven Kate, writing on the ‘true meaning of Say’s Law argued.“The disappearance of the

guiding principles underlying Say’s Law has grievously damaged our understanding of economic

processes”. He referred to Jonsson to have correctly demonstrated that J. –B, Say not only had a

theory of the cycle, but that this theory was also, in its basic features, the same as the modern

theory of the cycle based on co-indication failure. Indeed, the importance of the law of markets

in classical economic theory was precisely that it denied that demand failure might be a cause of

recession. Whether expressed by the words “there is no such thing as a general glut’ or stated as

the proposition that overproduction is impossible, it was this conclusion which was meant.

Recessions and the associated high unemployment were neer the consequence of demand failure.

And it was this proposition that every major economist, prior of the publication of the General

Theory, assented…. Say’s Law meant Say’s Equality: i.e. supply and demand are always equated

by a rapid and powerful equilibration mechanism.(Kates, 1997)

Say’s Law: a restatement and criticism gives a list of diverse views on Say’s Law collectively

referred to as the “Proportionality Interpretation”: (1) Our supply of goods and services is

ultimately what constitutes our demand. (2) Gluts of one good are necessarily accompanied by a

shortage of another good. (3) For all scarce goods, unemployment is a sign of

disproportionality. (4) Saving is a reduction, not the negation, of demand. (5) In general

equilibrium, all goods will be sold at cost-covering prices. It is also stated that this emphasis on

proportionality is being recognized among non-supporter of Say’s Law as well. For according to

Thomas Sowell in his book Say’s Law: An Historical Analysis: It is clear that Say’s Law … did

not preclude disequilibrium and that the ‘balance’ referred to was not an accounting identity

persisting through all conditions of the market, but an equilibrium condition that could be

reached in a ‘properly functioning economy.’ (Combs, 2016)


The assumptions derived from Say’s Law are those of classical economics. They include the

concepts of –

the ‘Invisible Hand of markets

free enterprise markets

a price mechanism and competitive markets

a continuous circular flow of money between sectors of the economy

equality of savings and investment

long run equilibrium of aggregate demand and aggregate supply

laissez-faire policy of government, and

limited government intervention

The derived interpretations are those of –

supply is a precondition for demand

a produced good (supply of a good) constitutes demand for other goods

income earned will be recycled or spent on output

the economy’s spending flow is continuously recycled in production and earning

income, and unspent part of consumer income is redirected via saving into investment

spending on capital goods

consumer borrow to finance purchases and government taxes income to spend in the

economy

aggregate demand could be less than potential production in the short run

sales proceeds from production are what enable consumers to buy goods and services and

which further more production and sales; therefore, supply creates its own demand

a free market economy will self-correct towards its production possibilities frontier

self-correction occurs in the market economy as income earned gets re-used or spent on

output


4. RISING INCOME INEQUALITY AND ITS IMPACT ON ECONOMIC

GROWTH

As production provides incomes for factors of productions including labor which in turn creates

demand for goods and services, is becomes imperative, therefore, to examine the links between

distribution of income and Say’s Law. Say’s Law assumes a distribution of income supportive of

a continuous circular flow of incomes. When this is empeded, by market imperfections such as

labor and credit market imperfections, persistent unemployment and skewed education and work

opportunities, the circular flow of resources, products and money is hampered and aggregate

economic activity diminishes. Various studies show rising income and wealth inequality. This

economic phenomenon is observed within most advanced and emerging markets developing

countries (EMDCs) (Dabla-Norris, Kochhar, Suphaphiphat, Ricka, & Tsounta, 2015). Their

study shows that widening inequality can be an indication of lack of income mobility and

opportunity; which could have significant implications for macroeconomic stability.

Studies affirm thegap between rich and poor is at its highest level since 30 years in most OECD

countries. Econometric analysis suggests that income inequality has a negative and statistically

significant impact on subsequent growth. However, no evidence is found that those with high

incomes pulling away from the rest of the population harms growth.(Cingano, 2014) From

another perspective, excessive levels of inequality can erode social cohesion, lead to political

polarization, and ultimately lower economic growth, but whether inequality is excessive depends

on country-specific factors, including the growth context in which inequality arises, along with

societal preferences. (IMF, 2017)

Depending on whether income inequality is assessed across or within countries, the evidence is

divergent(IMF, 2017). It is shown that at the global level, inequality has declined substantially

over the past three decades due to income convergence between developing and advanced

economies aided by globalization and technological advancement. Within national boundaries,

however, the evidence is mixed. For some countries, inequality is declining while for other

countries, particularly advanced economies, inequality is on the rise. Excessive inequality

resulting in the erosion of social cohesion and political polarization ultimately lowers economic

growth (Berg and Ostry 2011; Rodrik 1999).


At the global lever, income inequality has declined substantially in the past three. However,

within countries, the picture is mixed with some countries experiencing a reduction in inequality

while others, particularly advanced economies, have seen a significant increase. Research

indicates that increased inequality can erode social cohesion, lead to political polarization, and

ultimately lower economic growth(IMF, 2017).

Poverty rates in the United States increased over the 2000s. This trend worsened by the Great

Recession and its aftermath. In an international context, the U.S. experience with poverty is

studied in a comparison of the lower end of the wage and income distribution in the United

States with that of “peer” countries, largely countries within the Organisation for Economic Co-

operation and Development (OECD) with roughly similar GDP per hour worked as the United

States. (Gould, 2012) Figure 1below compares the level of earnings (a measure of living

standards) of low-earning workers in the United States with the living standards of low-earning

workers in peer countries. The figure is scaled such that earnings at the 10th percentile in the

United States equal 100 percent, making it easy to identify countries with higher relative

earnings by their longer bars. Despite the relatively high earnings at the top of the U.S. income

scale (as illustrated in the forthcoming (Michel, Bivens, Gould, &Shierholz, 2012)) inequality in

the United States is so severe that low-earning U.S. workers are actually worse off than low-

earning workers in all but seven peer countries. In Figure 1, the United States ranks 12th out of

the 19 peer countries shown.(Gould & Wething, 2012)

Early views on the distribution of income in classical economics are expressed by Thomas

Sowellwriting on ‘Social Philosophy of Classical Economists’. ‘The emphasis of the Ricardian

School on the distribution of income by social class certainly was not one which exemplified any

‘harmony of interests.’ In Ricardo, as in Smith, the landlord gained in the long run at the expense

of capitalists and workers, and, in addition, wages and profits – in Ricardo’s particular definition,

always moved inversely to one another. Furthermore, “John Stewart Mill found the distribution

of income anything but harmonious. “The largest portions” going to those who have never

worked at all, the next largest to those whose work is almost nominal, and so in a descending

scale, the remuneration dwindling as the work grows harder and more disagreeable, until the

most fatiguing and exhausting bodily labour cannot count with certainty on being able to earn the


necessaries of life”. Those views hold true until today in many ways regarding aspects of the

distribution of income in many economies.(Sowell, 2006)

Figure 1:Earnings at the 10th percentile in selected OECD countries relative to the United States,

late 2000s.Source “U.S. poverty rates higher, safety net weaker than in peer countries” Figure

B(Gould & Wething, 2012)

Poverty rates in the United States increased over the 2000s, a trend exacerbated by the Great

Recession and its aftermath. By 2010, just over 46 million people fell below the U.S. Census

Bureau’s official poverty line (according to data from the Current Population Survey). This

preview of The State of Working America, 12th Edition puts the U.S. experience with poverty in

an international context, comparing the lower end of the wage and income distribution in the

United States with that of “peer” countries, largely countries within the Organization for

Economic Co-operation and Development (OECD) with roughly similar GDP per hour worked

as the United States.(Gould & Wething, 2012)


In their international comparison of poverty rates above, they examine the share of the

population living below half the median household income in the United States and select OECD

countries, a measure known as the relative poverty rate. According to Figure 2, in the late

2000s, 17.3 percent of the U.S. population lived in poverty—the highest relative poverty rate

among OECD peers.

Figure 2:Relative poverty rate in the United States and selected OECD countries, late

2000s.Source “U.S. poverty rates higher, safety net weaker than in peer countries” Figure

C(Gould & Wething, 2012)

The U.S. relative poverty rate was nearly three times higher than that of Denmark, which had the

lowest rate (6.1 percent), and about 1.8 times higher than the (unweighted) peer country average

of 9.6 percent. (Gould, 2012)


Figure 3:Child poverty rates in selected developed countries, 2009. Source “U.S. poverty rates

higher, safety net weaker than in peer countries” Figure D(Gould & Wething, 2012)

The overall relative poverty rate in the United States is higher than that of peer countries as

shown in Figure 2. Moreover, the extent of child poverty is even more severe as reported in

Figure 3(Gould & Wething, 2012).In 2009, the United States had the highest rate of child

poverty among peer countries, at 23.1 percent. This study shows that in 2009 more than one in

five children in the United States lived in poverty (as measured by the share of children living in

households with household income below half of median household income). This level is

almost five times as high as that of Iceland, which had the lowest level, at 4.7 percent, and over

two times higher than the (unweighted) peer-country average of 9.8 percent. (Gould & Wething,

2012)


Figure 4: Effect of Increase of Different Factors on Growth Spell Duration.Source “Inequality

and Unsustainable Growth: Two Sides of the Same Coin?” Figure 3(Berg & Ostry, 2011)

In another study, results for questions on income distribution and economic growth offer more

understanding on the subject matter. The questions are asked. Can growth be sustained in the

face of a highly uneven income distribution? Does less inequality help to increase the duration of

growth? Are inequality and unsustainable growth two sides of the same coin, or largely unrelated

issues? (Berg & Ostry, 2011) They indicate that by the late 1990s, many authors had examined

empirically the relationship between income distribution and growth and that an empirical

consensus had emerged that countries with more equal income distributions tended to grow

faster (e.g., Alesina and Rodrik, 1994), though the evidence was admittedly not robust

(Deininger and Squire, 1998; Barro, 2000).

In ‘Putting the Hazards Together’, identified determinants of growth spells duration are

correlated with one another in a multivariate analysis. The Figure below, (The Effects of Increase

of Different Factors on Growth Spell Duration) presents the results. The drivers of growth spells

show varying growth spells durations. The key result from the joint analysis is that income

distribution is one of the most robust and important factors associated with growth duration.

Also, that inequality retains a similar statistical and economic significance in the joint analysis


despite the inclusion of many more possible determinants. This suggests that inequality matters

in itself and not just as a proxy for other factors. Inequality also preserves its significance more

systematically across different samples and definitions of growth spells than the other variables.

Inequality, therefore, is a more robust predictor of growth duration than many variables widely

understood to be central to growth.(Berg & Ostry, 2011)

Figure 5: Income Gains Widely Shared in Early Postwar Decades – But Not Since Then. Source: https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality Figure 1


https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality

https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality

Figure 6: Wealth distribution in the United States in 2017. Source: https://www.statista.com/statistics/203961/wealth-distribution-for-the-us/. This statistic shows the wealth distribution in the United States in 2017 based on family data. The distribution indicates that the lower-income 50 percent of the American population owned about 1.1 percent of the total wealth, while the 1percent top-earners were in possession of about 35.5 percent of the wealth.


https://www.statista.com/statistics/203961/wealth-distribution-for-the-us/

Figure 7: The United States and other Western industrialized Nations economic mobility. Source http://www.elearningark.com/social-mobility/ [citing] Grusky, et al., 2016 The Fading American Dream: Trends in Absolute Income Mobility Since 1940

Table 1:US Business Cycle Expansions and ContractionsSource: Public Information Office,

National Bureau of Economic Research, Inc.,1050 Massachusetts Avenue, Cambridge MA

02138, USA, 617-868-3900 (Public Information Office, The National Bureau of Economic

Research, 2010)shows US BUSINESS CYCLE EXPANSIONS AND CONTRACTIONS, 1857

– 2007 dating peaks and troughs and showing duration of expansion.

The NBER defines a significant decline in economic activity spread across the economy, lasting

more than a few months, normally visible in real GDP, real income, employment, industrial

production, and wholesale-retail sales.


5.ANALYSIS

The starting point for this analysis is provided by these statements on the failure of markets:

“Markets have clearly not been working in the way that their boosters claim. Markets are

supposed to be stable, but the global financial crisis showed that they could be very unstable,

with devastating consequences. … The virtue of the market is supposed to be its efficiency. But

the market obviously is not efficient. The most basic law of economics – necessary if the

economy is to be efficient – is that demand equals supply. But we have a world in which there

are huge unmet needs – investments to bring the poor out of poverty, … to retrofit the global

economy … At the same time, we have vast underutilized resources – workers and machines

that are idle or are not producing up to their potential. Unemployment – the inability of the

market to generate jobs for so many citizens – is the worst failure of the market, the greatest

source of inefficiency, and a major cause of inequality. … The underlying thesis is that we are

paying a high price for our inequality – an economic system that is less stable and less efficient,

with less growth, and a democracy that has been put into peril. (Stiglitz, 2013)

The theoretical explanation of Say’s Law

Different studies have been presented that show negative causal relationships between economic

growth and income inequality. Different economic models show negative causal relationships

between economic growth and income inequality. The supply-side model of income inequality h

leads to less-productive labor inputs; demand-side model, inequality that leads to less-robust

consumption and investment; and the credit-bust model which explains how changes in spending

patterns affect relative prices which in turn alter the pattern of use of productive resources

causing boom and bust in the economy. In this section, the key questions of the paper are

discussed to establish the economic links between rising income inequality and weak and

unsustainable economic growth. The discussion will demonstrate that Say’s Law is in defense of

efficientlyfunctioning free market economies; “an ancestor of modern general-equilibrium

theory”; and that “inequality and unsustainable growth are two sides of the same coin”.


Income inequality and economic growth – supply-side models

Economic growth theories emphasize the supply side of the economy(Feldstein, 1986);

The amount and quality of inputs that go into the production of goods and services;

Inequality of labor income –with the explanatory factors of the educational system, the

structure of the labor market, determination of wages, technology and human capital,

discrimination;

Income inequality from capital – with the explanatory factors that include ability, education,

training, discrimination, monopoly market power, the ability to rig the market

Discrimination transfers earnings from some people to others thereby contributing to income

inequality and increasing poverty.

Income inequality from capital and labor - the more unequally distributed each of these two

components is the greater the total inequality.

Income inequality impact demand negatively when high levels of income and wealth are

concentrated at the higher quintiles in the distribution of income where the propensity to

consume is low;

Investment itself is a function of output growth and thus consumption.

The supply-side model, income inequality leads to less-productive labor inputs. Credit

market imperfections influence the labor market and aggregate economic activity. In turn,

macroeconomic factors have an impact on the credit sector. We demonstrate that credit

frictions amplify macroeconomic volatility through a financial accelerator. The magnitude of

this general-equilibrium accelerator is proportional to the credit gap, defined as the deviation

of actual output from its perfect credit market level. (Wasmer, 2004).

Credit market frictions may be an important contributor to high unemployment in Europe.

although credit market imperfections are unlikely to have been the major cause of the

increase in European unemployment, they may have played some role in limiting European

employment growth. (Acemoglu, 2001)

Income inequality and economic growth – demand-side models

The demand-side model, inequality leads to less-robust consumption and … investment.


On the demand site, inequality is likely to affect growth negatively; through the differences

in the marginal propensity to consume across the income scale.

Assumed is diminishing marginal utility of money.

Economists believe that individuals with higher incomes have lower marginal propensities to

consume and thus have higher tendencies to save.

The U.S. economy is 70 percent consumer spending—much higher than the 55 percent

average in Europe, for example.

The shares of income going to the top 1%, 5% and 10% of income earners in an economy are

strong indicators of income inequality in a society.

They reflect the extent of income inequality as well as the relative sizes of the total

population involved.

The fundamental point of Say’s Law is that revenue from production and sale of products

create incomes for consumer demand. Thus, demand is constituted by supply.

Investment demand itself is a function of output growth and thus consumption.

Income inequality and economic growth – credit-bust models

Inequality leads to an overleveraged middle class, financial market instability, and a credit

bubble-and-bust cycle.

The cycle starts out with a period of easy credit that encourages increased investments. An

excess of investment could result into declining asset values. When this leads to investment

loses andcredit becomes difficult. The bust phase ensues asinvestors reduce

employment.output declines, and consumers cut spending.

The reduction in available credit could lead to a recession or depression. The recent Great

Recession is a case in point.

Counties in the U.S. that experienced a large increase in household leverage from 2002 to

2006 showed a sharp relative decline in durable consumption starting in the third quarter of

2006 – a year before any significant change in unemployment. Similarly, counties with the

highest reliance on credit card borrowing reduced durable consumption by significantly more

following the financial crisis of the fall of 2008. Overall, our estimates show that household

leverage growth and dependence on credit card borrowing explain a large fraction of the

overall consumer default, house price, unemployment, residential investment, and durable


consumption patterns during the recession.(Mian, 2010 - Springer)Our main results are

consistent with the view that the dramatic increase in household leverage from 2000 to 2007

was a primary driver of the recession of 2007 to 2009.(Mian, 2010 - Springer)

Also, this is explained by the Cantillon effects of the Austrian boom-bust cycle which is a

general principle of monetary theory based on monetary changes and their impact on

spending;

In the Cantillon effects, the monetary changes temporarily misdirect production which could

result in economic crisis with the accompanying existence of discrepancies between the

distribution of demand for goods and services and the allocation of labor and other resources;

With Cantillon effects, the allocation of resources and the valuation of assets (bubbles) are

shaped by non-neutral monetary changes. (BOETTKE & Coyne, 2015)

Market Economy Options versus Government Options

Market Economy Options

• promote efficient allocation of labor resources into production processes

• Increase opportunity in access to and quality of education

• Pay wages equal to the MRP of labor

• Promote employment for the middle class through effective labor market policies

• greater redistribute income

• Promote economic mobility

• Promote market competition

• Reduce barriers to free market competition

• Promote price mechanism with flexible prices and wages

• Promote the “laissez-faire” economic doctrines


• increasing the income share of the poor and the middle class actually increases growth

while a rising income share of the top 20 percent results in lower growth—that is, when

the rich get richer, benefits do not trickle down. (Dabla-Norris, Kochhar, Suphaphiphat,

Ricka, & Tsounta, 2015)

Government Intervention Options

• More government taxing and spending in the economy

• Expanding redistribution policies of taxes and transfers

• Deficit-funding spending increases

• More government regulation

• Increasing national debt

• Anti-poverty government programs

• Antidiscrimination policies

• Income-maintenance programs

• Fighting inequality, a pillar of the Obama administration policy – economic mobility

• Well-targeted subsidies, improvements in economic opportunities for the poor, and active

labor market policies that promote employment. (Gould & Wething, 2012)

• Policies of inclusive growth that involve tax rates at the top of the income distribution,

the introduction of a universal basic income, and the role of public spending on education

and health. (Tackling Inequality, 2017)

• This Fiscal Monitor discusses how fiscal policies can help achieve redistributive

objectives. It focuses on three salient policy debates: tax rates at the top of the income

distribution, the introduction of a universal basic income, and the role of public spending

on education and health. (Tackling Inequality, 2017)


• Drawbacks are Supply-side economics concerns for distortions of economic incentives to

save, investment and work and increasing the national debt.

6. CONCLUSION Say’s Law was the basis for the classical theory of the cycle.Say’s Law was part of the

explanation of the business cycle.Say illustrated the particular significant role of the

supply side of the economy. In Say’s Law lies a fundamental necessary condition for

economic stability and equilibrium because production and sales generate sufficient

incomes for spending on the output produced. Hence, Supply is a precondition for

Demand.

Recessions were not caused by a failure of demand, but rather due to problems associated

with the structure of demand relative to the structure supply.

Lopsided application of market economic theories upsets economic balance

The 90% becoming poorer as the economy becomes more and more unstable.

Different economic models show negative causal relationships between growth and

inequality. These are the supply-side model, the demand-side model, and the credit-bust

model.

Widening income inequality that leads to decreases in spending, total production and

chronic unemploymentcauses a break down in the continuous circular flow model of the

economy.

Market failure occurs when increases in labor productivity do not lead to increases in

demand for labor;market failure occurs when the market mechanism causes an

inequitable distribution of income;

Market failure includes unacceptable levels of unemployment or under-employment;

An economy’s output is essentially its income because money is “recycled”.

While the market options for promoting economic growth and mobility in the market

economies are ideal based on the laissez-faire economic system institutions, the existence of

imperfectionsin today’s markets frequently impede their efficiencies.Hence, market failures,

including increasing income inequality, are justifications for government intervention;

intervention that sometimes results in various types of government failure.


Extensive studies have shown various implications of widening income inequality on growth.

In this paper, distribution of income is assumed a determinant of supply, an assumption that

has not been derived in any previous study. It is derived in this study as the operational

factor that creates the implied link. As a determinant of supply, widening income inequality

has been shown to have declining effects on growth. Appropriate market and or government

options that improve income distribution could promote market efficiencies, reduce income

inequality, and promote growth. Thus is the link between Say’s Law and income inequality

that has been explored with data sources and analysis in this paper.

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Baumol, W. J. (1999). Retrospectives, Say's Law. Journal of Economic Perspectives, 195-2.

Berg, A. G., & Ostry, J. D. (2011, April 8). Inequality and Unsustainable Growth: Two Sides of

the Same Coin? IMF Staff Discussion Notes. International Monetary Fund.

BOETTKE, P. J., & Coyne, C. J. (2015, October). Austrian Monetary Theory and CAPITAL -

STRUCTURE - BASE MACROECONOMICS. Oxford handbook of Austrian economics,

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Cingano, F. (2014). Trends in Income Inequality and its Impact on Economic Growth. JEL, 64.

Combs, C. (2016). Say's Law: Critisms, Responses, And Restatement.


Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Ricka, F., & Tsounta, E. (2015). Causes and

Consequences of Income Inequality : A Global Perspective. IMF: International Monetary

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Gould, E., & Wething, H. (2012). U.S. poverty rates higher, safety net weaker than in peer

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IMF. (2014). Fiscal Policy And Income Inequality. International Monetary Fund.

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Jonsson, P. O. (1997). On gluts, effective demand, and the true meaning of Say's law. Eastern

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TABLES

Table 1:US Business Cycle Expansions and ContractionsSource: Public Information Office,

National Bureau of Economic Research, Inc.,1050 Massachusetts Avenue, Cambridge MA

02138, USA, 617-868-3900 (Public Information Office, The National Bureau of Economic

Research, 2010)

BUSINESS CYCLE

REFERENCE DATESDURATION IN MONTHS

Peak month Trough monthPeak month

number

Trough

month

number

Duration, peak

to trough

Duration,

trough to peak

Duration,

peak to peak

Duration,

trough to

trough

December 1854 660

June 1857 December 1858 690 708 18 30 48

October 1860 June 1861 730 738 8 22 40 30

April 1865 December 1867 784 816 32 46 54 78

June 1869 December 1870 834 852 18 18 50 36

October 1873 March 1879 886 951 65 34 52 99

March 1882 May 1885 987 1025 38 36 101 74

March 1887 April 1888 1047 1060 13 22 60 35

July 1890 May 1891 1087 1097 10 27 40 37


January 1893 June 1894 1117 1134 17 20 30 37

December 1895 June 1897 1152 1170 18 18 35 36

June 1899 December 1900 1194 1212 18 24 42 42

September 1902 August 1904 1233 1256 23 21 39 44

May 1907 June 1908 1289 1302 13 33 56 46

January 1910 January 1912 1321 1345 24 19 32 43

January 1913 December 1914 1357 1380 23 12 36 35

August 1918 March 1919 1424 1431 7 44 67 51

January 1920 July 1921 1441 1459 18 10 17 28

May 1923 July 1924 1481 1495 14 22 40 36

October 1926 November 1927 1522 1535 13 27 41 40

August 1929 March 1933 1556 1599 43 21 34 64

May 1937 June 1938 1649 1662 13 50 93 63

February 1945 October 1945 1742 1750 8 80 93 88

November 1948 October 1949 1787 1798 11 37 45 48

July 1953 May 1954 1843 1853 10 45 56 55

August 1957 April 1958 1892 1900 8 39 49 47


April 1960 February 1961 1924 1934 10 24 32 34

December 1969 November 1970 2040 2051 11 106 116 117

November 1973 March 1975 2087 2103 16 36 47 52

January 1980 July 1980 2161 2167 6 58 74 64

July 1981 November 1982 2179 2195 16 12 18 28

July 1990 March 1991 2287 2295 8 92 108 100

March 2001 November 2001 2415 2423 8 120 128 128

December 2007 June 2009 2496 2514 18 73 81 91

1854-2009 (33 cycles) 17.5 38.7 56.4 56.2

1854-1919 (16 cycles) 21.6 26.6 48.9 48.2

1919-1945 (6 cycles) 18.2 35.0 53.0 53.2

1945-2009 (11 cycles) 11.1 58.4 68.5 69.5

Note: Month numbers start in January 1800


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