Chapter 24: Problem 58

Are Say's law and Keynes' law necessarily mutually exclusive?

Short Answer

Expert verified

Say's Law and Keynes' Law are not necessarily mutually exclusive. These laws focus on different economic principles and can apply in various scenarios. Say's Law may be more relevant in an economy with flexible wages, full employment, and short-run equilibrium, while Keynes' Law is more applicable in economies with sticky wages, unemployment, and short-run disequilibrium. Thus, they can coexist depending on the specific economic conditions and situations.

Step by step solution

Define Say's Law

According to Say's Law, supply creates its own demand. In other words, the total value of production in an economy should be equal to the total value of demand. Essentially, this law asserts that there will always be enough demand in the market to absorb the supply produced.

Define Keynes' Law

In contrast, Keynes' Law states that demand creates its own supply. It asserts that an increase in aggregate demand will lead to an increase in aggregate supply. This is because businesses tend to produce more goods and services if they believe people are going to buy them.

Compare the Core Principles of Say's Law and Keynes' Law

It appears that at first glance, Say's Law and Keynes' Law appear to have conflicting views. Say's Law emphasizes that production creates enough demand to absorb all the supply, while Keynes' Law focuses on how an increase in demand motivates an increase in production.

Analyze the Possibility of Coexistence

A deeper analysis of the two laws reveals that they may not be entirely mutually exclusive. They apply to different economic situations and can coexist depending on the circumstances. For instance, Say's Law may be more applicable in an economy with flexible wages and prices, full employment, and equilibrium in the short run. On the other hand, Keynes' Law is more relevant in economies with sticky wages and prices, unemployment, and disequilibrium in the short run.

Conclusion

While Say's Law and Keynes' Law seem to be contrasting, they are not necessarily mutually exclusive. They possess different focuses and can apply in various economic contexts. They can coexist when considering specific economic conditions and situations, highlighting that neither law fits all circumstances perfectly.