Production generates incomes and purchasing power, so a general excess supply of all goods cannot be explained simply by a shortage of aggregate purchasing power.
Say's 1803 law of markets. The familiar shorthand, supply creates its own demand, is a later formulation that historians dispute as a statement of Say. The standing question is whether the law holds in the short run: Keynes's law was formulated against it, and the 1930s were the decisive test for most economists.
In practice
- A factory that starts producing pays wages, and those wages buy the output of the factory next door, which is the mechanism in its uncontested form.
- Every household in a town holds back spending in the same quarter and the shops empty, and the argument is about whether that persists or corrects itself.
- Standing
- 'Supply creates its own demand' is a later shorthand whose adequacy as a statement of Say is disputed by historians.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money