Say’s Law essentially states that “supply creates its own demand.” The logic is that when a firm employs workers, resources, and technology to produce output, it creates incomes as it pays for raw materials, wages, and interest. If the firm turns a profit, this becomes income for the owners. Therefore, the entire value of the production becomes income for someone in society, so the society must have enough income to purchase the output. If Say’s Law is true, insufficient demand in the economy as a whole can never constrain overall production and employment. In this sense, Say’s Law directly opposes the core logic of Keynesian macroeconomics.
Say’s Law was a guiding principle of Classical economics until John Maynard Keynes published the General Theory of Employment, Interest, and Money in 1936. The General Theory, as this famous book is usually known, explicitly refutes Say’s Law. For further discussion that largely parallels Keynes’s discussion in chapter 14 of the General Theory, see Interest Rates, Aggregate Demand, and the Paradox of Thrift.
Although the name “Say’s Law” refers to late 18th century French economist Jean-Baptiste Say, the closest formulation actually used by Say was “products are paid for by products.” Furthermore, Say does not appear to have supported the common Classical interpretation of Say’s Law, as he advocated public works in order to rectify a shortfall in aggregate demand. Nonetheless, his name is associated with this controversial idea, which continues to be a major dividing line between macroeconomic schools of thought.