Say’s Law Applied to a Monetary Economy of n Goods, x1, x2, x3 ,…, xn-1, M, Where M Is the Money Good; Of Course, This Is Precisely the Way Free Markets Work

The principle that has come to be known as Say’s law is considered to be an essential element of classical economics. Properly understood, there are two aspects to Say’s law: 1) there can never be a glut of goods in general; 2) there can be a glut of some goods matched by an insufficiency of other goods. Say himself understood this principle to apply to monetary as well as barter economies. It is the case of monetary economies that is relevant for the purposes of this paper.

Say’s Law applied to a monetary economy of n goods,  x₁,…, x_n-1, M, where M is the money good. Say (1880) maintains that there can never be a glut of the n goods combined; however, there can be a surplus of any subset of the n goods, in which case there necessarily would be a paucity of the goods in the complementary subset. More simply put, there cannot be too many goods in general, but there can be too many of some goods and not enough of others (Sowell, 1972). In such cases, there is a misallocation of resources. Producers have misjudged consumers’ sentiments and produced a suboptimal mix of goods. What is required is a realignment of relative prices such that prices of those goods in excess be decreased relative to the prices of those of which there is a dearth. Of course, that is precisely the way free markets work. The producers of the «glut goods» make actual losses and the producers of «dearth goods» forego potential profits. Their response is to adjust prices altering the structure of prices and reallocating resources more in accord with the desires of consumers. And, it makes no difference if M is the sole good for which there is an insufficiency.

--William Barnett II and Walter Block, "On Say's Law, Keynes's Money, and Post Keynesians," Procesos de Mercado: Revista Europea de Economía Política 4, no. 2 (Autumn 2007): 140-141.