Say’s law is summarized as ‘supply creates more demand’. It indicates that activity meant to produce aggregate output with enough income to purchase the entire output produced. The law indicated that insufficient demand for production or excess production was unlikely to occur at the minimum of an extended period.
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The law explains further that economy would easily maintain full employment of the resources. The major element of Say’s law is that recession does not happen as a result of lack of money or failure in the economy.
In terms of business he argued [against the belief that business was suffering since people lacked enough money and therefore should be printed more. The believers of the theory holds that power to purchase could only upsurge by more production.
During great recession, there was less supply and therefore the demand was also low. The argument consistent with the Says point is that the purchasing power of the populace depends on the increase in the production of goods and services.
There are a number of policies which the government can put in place according to the Says law. The first policy is to come up with stimulus program to increase the production of goods and services in the economy.
The stimulus program will ensure that the existing companies produce more products in the economy and at the same time enhance the capacity of the small companies to produce the right and required products in the economy.
Another policy that the government can put in place is the tax secession. The tax break policy can be given to firms which are involved in the production of those products which required in the economy.
Low taxes will mean that the cost of production will go down and therefore revenue and profits will realize an upsurge. Therefore the supply of products and services in the economy will definitely increase.
How Did Marx and Keynes Challenge Say’s Law?
These critiques came during the depth of great depression in 1936.The first question is on whether or not supply does help in the creation of demand.
According to them and the principles the generated revenue through production process usually ends up as the household income though does not happen instantaneously. Households can only spend the income that they have.
If the income is less then expenditure, sales will be less, less will be produced and therefore less revenue will be produced. (MacEwan and John 56)
Marx’s Theory of Crisis
A profit squeeze is defined as the reduction in earnings which is caused by bad business climate, rising costs and increased competition. Capital accumulation might pull they demand for labor power and raising wages. The rate of profits will be hurt when wages go higher leading to recession.
In the crisis of realization there is the contradiction in the capitalist mode of the entire production process and also the laborers ac ting as the buyers of various commodities which are quite important to the market. The capitalist society tends to keep them down to some minimum price though as sellers of their own commodity-labor power.
Profit squeeze theory is more preferred since recession and poor performing business will likely occur when there is low profit. Poor performing business climate will result in low revenue and therefore low profit; this will result in low capital formation and therefore squeezing the profit and low standards of living.
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According to Marx, society is comprised of the bourgeoisie and the proletariats. This leads to the existence of two different classes in the society. To him this is what leads to the inequality in the society. With the inequality, wealthy and the power to purchase will be in the hands of a few rich people in the society. Low spending among other factors will result into recession and poor performances of various businesses in the economy.
In the analysis of Marx all value derives from various labor times which are necessary for the production of goods. Therefore all the value derives exclusively from the workers efforts; later, the profits which come from the seized workers. The argument of Marx is that through class the capitalists will create demand through paying their workers and therefore Say’s claim that is the supply that creates demand.
Aggregate Supply Function
This is delineated as the total supply of goods and services produced in an economy at some specific overall price level in some period of time. The curve describes relationship between price level of and total output that the firms are willing to provide. When the supply of goods is limited then it means that less people will be employed in the firms.
Aggregate Demand Function
This Is defined as the total amount of goods and services which are demanded in the economy at some given overall price level and a given period of time. When there is less demand in the economy, production of goods and services will come down.
This is defined as the level of demand representing a real intention to purchase by people within a means to pay. When the effective demand is low then the level of unemployed people will increase.
Rate of New Investment (Or Investment Demand)
This is delineated as the level of injections in the economy; the amount of money which is invested in the economy. When the rate of investment is high, many firms will be in a position to create jobs in the economy. When the rate of investment is low it means that there will be low capital formation and therefore less number of people will be in a position to get jobs.
Marginal propensity to consume
This is defined as the proportion of Income that is converted into consumption. When the Marginal propensity to consume is high it means the marginal propensity to save is low and the vice versa. Keynes also state that savings are equivalent to investment In an economy. When the marginal propensity to consume is high then it means that the ability to invest in the economy will see an upsurge. This will result in the creation of jobs in the economy.
Marginal Efficiency of Capital
The marginal efficiency of capital is the rate of discount which is usually equates the price of a given price of a specific capital asset. When the rate is high then unemployment will reduce. (MacEwan and John 93)
The major importance of the distribution of income to Key it helps in the explanation of unemployment in the economy. Poor distribution indicates high level of unemployment in that specific class. When there is unequal distribution of resources in the economy then it means that the level of dependency will go high, resulting into the level of unemployment going higher. (Rajan 78)
Keynesian disagreed with the belief that supply in the economy creates demand. He instead argued that the purchasing lower in the economy is what leads to an upsurge in the value of goods which are being demanded.
According to Keynes recession is caused as a result of decline in the Gross Domestic Product. This results from the slowdown in various activities in the economy like reduction in the manufacturing and also the increased unemployment.
The major suggestion that will be put forward by Keynes to help address recession is through ensuring that there is full productivity in the economy. There should be enhanced production and performance of various sectors in the economy.
The Golden Age (1950’s – 1970’s) vs the Neoliberal Era (1980’s – 2007)
Golden age in the economy was that period when there was no free economy. Most of the production was purely under control. Neo liberal economy is whereby the economy is free to operate without regulations in it. The n economy is free to operate with minimal interference.
I would regard the neo liberal era as the very best approach as the economy should be given room to operate with minimal interference if there are. The government policies like taxation, wage rates, growth rates should be left to operate with eased without any interference in the economy.
When the regulations are enhanced then a myriad of players will be discouraged from entering into the economy.
Labor accord is defined as the control and regulations which were put to various labors in the economy. There was cohesion in the management of the labor. This ended as there were a myriad riots and chaos in the economy.
In the neoliberal area, there was upsurge in the number of banks in the economy as compared to the golden age. (Rajan 113)
Inequality was a major enhanced by the increased number of capitalist in the economy.
MacEwan, Arthur, and John A. Miller. Economic collapse, economic change: getting to the roots of the crisis. Armonk, N.Y.: M.E. Sharpe, 2011. Print.
Rajan, Raghuram. Fault lines: how hidden fractures still threaten the world economy. Princeton: Princeton University Press, 2010. Print.