Say's Law of Markets
It is a classical economic theory that says that the income generated by past production and sale of goods is the source of spending that creates demand to purchase current production.
Briefly stated, this law means that 'supply always creates its own demand.' In other words, according to J.B. Say, there cannot be general overproduction or general unemployment on account of the excess of supply over demand because whatever is supplied or produced is automatically exchanged for money
Whenever additional production takes place in the economy, necessary purchasing power is also generated at the same time to absorb the additional supply; hence, there is no scope of supply exceeding demand and causing unemployment. This law was the basis of their assumption of full employment in the economy which rested on the plea that income is spent automatically at a rate which will always keep the resources fully employed.
Savings, according to classical are just another form of spending; all income, they believed, is partly spent on consumption and partly on investment. There is no ground to fear a break in the flow of income stream in the economy. Hence there cannot be any general over-production or unemployment.
The classical economists always assumed a state of employment in the economy. The normal situation in an economy, according to them was full employment equilibrium. Less than full employment, they believed, was an abnormal situation. Classical always held that there are no lapses from full employment equilibrium and even if there are any, there is always a tendency to return to full employment. This belief of the classical economists was based on the views of a French economist, J.B. Say (1767-1832).[1]