Question

Why is Say’s Law not applicable in a money economy?

Answer 1

Say’s Law has some flaws that have developed over time or have always been present. Money can be hoarded during recession causing a massive lack of demand as people become afraid to spend their money. Increased savings can result in people earning more than is spent, as not all money that is saved is invested in any way. Therefore spending would not equal income, as people decide to withdraw their money from the system. This is largely why recessions happen. People hoard their money instead of spending it, causing businesses to be unable to sell goods. Then businesses will let go of employees, which will lead to less demand for products.

Say’s Law assumes that money is just another good, just like any widget. The reality though is that money is viewed and used quite differently. Money can be held almost permanently and there is a limited supply of money. While the introduction of debt has reduced this problem somewhat, there is still the fact that people will be unwilling to create debt at certain times. There can not be a general glut of all goods if money is a good, which is only sensible if money is viewed as any other good.