Say's Law

Say's Law (also known as the 'law of markets') is a classical economic principle most famously stated as “Supply creates its own demand.” This elegant idea was popularized by the French economist Jean-Baptiste Say in the early 19th century. At its heart, the law argues that the very act of producing goods and services (supply) generates an equivalent amount of income (in the form of wages, profits, and rent) for the producers. This income is then used to purchase other goods and services (demand). In this view, a widespread economic slump caused by a general overproduction of goods—a “general glut”—is impossible. Why? Because to produce something is to simultaneously create the means to buy something else of equal value. While there might be temporary imbalances—too many candles and not enough coats, for instance—the overall system naturally moves toward equilibrium as producers adjust to what consumers want. It's a powerful argument for the self-regulating power of a free market.

Imagine a self-sufficient village with a baker, a shoemaker, and a weaver. The shoemaker's supply of shoes is not just a pile of leather footwear; it is also his demand for bread and cloth. He sells the shoes and uses the income to buy from the baker and weaver. Likewise, the baker's supply of bread is her demand for shoes and cloth. Say's Law generalizes this simple example. In a broader economy, the total value of all goods and services produced (the Gross Domestic Product, or GDP) must equal the total income paid out to everyone involved in that production. Therefore, the power to demand is directly linked to the value of what has been supplied. The focus is on production as the engine of prosperity. To consume, a nation (or an individual) must first produce. You can't buy a new car unless someone has been paid for making it, designing it, or mining the materials for it. This income, generated by supply, is what forms the basis of demand.

For a value investor, Say's Law offers a timeless and profound perspective that cuts through the noise of short-term market chatter. It encourages you to focus on the supply-side of the equation—that is, the fundamental productive capacity of a business.

• Focus on Real Production: A company's long-term value doesn't come from financial engineering or government stimulus checks, but from its ability to efficiently produce goods or services that people genuinely want. A business that excels at creating valuable supply will, over the long run, find or create its own demand.
• Avoid Demand-Side Illusions: Many market fads are driven by temporary spikes in demand, often fueled by cheap credit or speculative mania. An investor guided by Say's Law is naturally skeptical of these situations, preferring businesses with durable, efficient production models that can thrive across economic cycles. The key question is not “Is there a lot of demand right now?” but rather “Does this company produce something of lasting value?”

The biggest challenge to Say's Law came from the influential 20th-century economist John Maynard Keynes. Writing during the Great Depression, Keynes looked at idle factories and mass unemployment and concluded that supply was clearly not creating its own demand. His core counter-argument was that the link between income and spending isn't automatic. People and businesses can choose to hoard cash instead of spending or investing it, a concept known as liquidity preference. If enough people become fearful about the future and decide to save their money “under the mattress,” aggregate demand can plummet, even if the capacity to supply goods remains. This can trap an economy in a downward spiral where businesses won't produce because there's no demand, and there's no demand because people aren't earning income from production. Keynes argued that in such situations, the government must step in to create demand directly through fiscal policy (e.g., spending on public works projects) to break the cycle. This “Keynesian” view—managing demand—has dominated government economic policy for much of the last century.

So, who is right, Say or Keynes? In many ways, they were simply looking at different time horizons. Keynes was focused on fixing short-term crises (“In the long run, we are all dead”), while Say was describing the long-term, fundamental engine of economic growth. For the patient value investor, Say's Law remains an indispensable mental model. While Keynesian policies might create short-term boosts, true, sustainable wealth is built by productive enterprises. When analyzing a company, look past the temporary demand trends and focus on the enduring quality of its supply. Is the company a low-cost producer? Does it innovate? Does it create a product so good that it becomes essential? A business that masters production is a business that, in the long run, will secure its own prosperity. After all, you can't have a return on your investment if the company doesn't produce anything of value in the first place.