Good Essay On Research Questions (Related To Say's Law AND Has 3 Components)

Type of paper: Essay

Topic: Taxes, Business, Theory, Income, Money, Economics, Kinship, Commerce

Pages: 4

Words: 1100

Published: 2023/02/22

Say’s the rule is an economic regulation that states that the production is the root source of demand. According to this law, when a person produces an item for consumption, he gets compensated for that job and is then capable to use that pay to ask for other services and goods. Say’s rule has many interpretations. In the short run, there would be no overproduction of products relative to demand.
Says rule is named after a French typical open-minded economist Jean-Baptiste, who made the notion attractive. According to Jean-Baptiste, consumption consumes wealth, and production is the one that creates capital (Rockwell & Sowell, 1974). The ideas of Say, Ricardo and Mill, who were great economists were incorporated in classical economics. John Stuart augmented their ideas and put more effort on the part of savings instead of consumption in creating wealth. Classical economists implied that demand is created by supply. However, Say’s law was also criticised by John Keynes, who relied on the formulation of the rule by John Stuart.
According to Say, one must produce something that creates interest to another. He also agrees that commodities could be in short term gluts. However, this can happen when people do not have products to exchange in return when supply has already surpassed demand. He also dealt with the point indicating that in production, profit and loss system will compel producers away from non-profit making things to areas that have good profits. The only thing that would hinder such a beneficial transformation in production would be a natural disaster or government interference.
John Stuart Mill is a son of James Mill, who was also an economist. He was concerned with the criticism made to the Say’s law and defended it to contradict the argument that the market would be much improved if the rich saved little and used more on unproductive expenditure. Mill also realised that there may be an unwarranted supply of individual produce as the economy reacts to varying conditions of supply and demand.
However, he argued that it was not logical to do this study into macroeconomics and concluded that an excessive supply of all merchandise could exist for long. In his stand to defend the Say’s law, John Stuart distinguished three possible economies and among them is barter trade. Barter trade is where commodities are exchanged for other commodities and no money exists (Tarnell, 2011). Mill stated that there can never be a deficiency of comprehensive demand in a barter trade economy. In addressing this problem, Mill introduced financial analysis into the typical view by beginning a psychological assumption of business cycles. According to Mill, the introduction of cash in the market allows the possibility of a general flood of products. This is caused by changing expectations of the business society.
Finally, money was introduced, and all other goods were in relative disrepute. In many cases, money is collected in large quantities and hoarded, and in milder cases, people don’t like parting with their money. This may result to fall in prices of commodities. If such a thing happens to a single commodity, there may be a superabundance of that product.2.
Savings rate refers to an economic situation and growth of a country. According to economists saving is spending less out of what a person has in order to spend more in future. Therefore saving is the verdict to defer spending and to store this deferred spending in the form of resources. A country’s economic growth and savings rate are related. If the population of young people is higher than the old, it’s more likely that most workers will save for their retirements than will be the old who have already retired and are not saving. As a result, the net saving becomes positive.
In an economy that does not have technology growth, one would think that there are no savings with the exception of it being needed to cover the depreciating resources. When an economy’s saving is zero, it means that the positive savings accumulated by assets balance the negative savings of those assets that are not accumulating. According to Singh (2009), a high speed of saving can have a lasting positive result on the growth rate of an economy. This is due to the accumulation of large capital which leads to the increase in the growth rate of technology.
Economists developed three major theories of saving and consumption, these theories include; the relative income hypotheses, the life-cycle hypotheses and the permanent income hypotheses. The concepts of these theories are based on the macroeconomic assumption of consumer choice. The permanent income and life-cycle hypotheses assume that people try to maximize their efficacy by balancing their earning with their lifetime expenditure. However, relative hypotheses income is different because it deals with the absolute intensity of spending as compared to the relative level.
The relative income hypotheses by Dusenberry (1949), reconciles disagreeing pieces of data about expenditure and income relationships. This has a substantial influence on the present macroeconomics. This theory depends on the current revenue relative to some revenue that the households set on its previous income. Lifecycle theory by Modighiani and Brumberg (1954) shows how savings could be used to shift purchasing authority from one phase of life to the next. Consumers who wish to have smooth expenditure would like it better to borrow loans during their early low earning years and repay them later at their high-income years as they build up wealth. The amount saved would be spent once one retires (Wang & Holton, 2005). Permanent income theory by Freidman (1957) talks of the problems that households face when there is fluctuation in their income. This could either be due to business cycles or effects from life cycles. Similarly, Friedman argued that permanent expenditure would be relative to permanent revenue. He felt that permanent revenue is what a household uses without its wealth being diminished.
In response to provisional reductions in their revenue, both life cycle model and permanent income model foresee that household will try to stretch the revenue reduction. 

References

Rockwell, A. E., & Sowell, T. (1974). Say's Law: An Historical Analysis. Economic History Review. doi:10.2307/2593408
Tarnell, B. (2011). A brief look at Say's Law: Attempting to understand its relevance and meaning.
Wang, G. G., & Holton, E. F. (2005). Neoclassical and Institutional Economics as Foundations for Human Resource Development Theory. Human Resource Development Review. doi:10.1177/1534484304273733

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