BARTER ECONOMY

BARTER ECONOMY

                  Every producer produces goods and services more than this own personal requirements with the intention that the excess amount of goods and services would be brought into the markets for change with the goods and services produced by the other producers excess of their needs. This method of production and the system of exchange is carried out in the economy throughout the year and hence aggregate supply become equal to the aggregate demand. Therefore, there exists no question of over production or unemployment.

               Keeping in view the barter economy, Ricardo expresses Says law of markets in the following words: “No man produces but a view to consume or sell and he never sells but with an intention to purchase some other commodity which may be useful to him or which contributes to future production. By producing them he necessarily become either the consumer of this owns goods or the purchaser and consumer of the goods of some other persons. Productions are always bought by productions: money is only the medium by which the exchange is affected.

MONETARY ECONOMY

              In a monetary economy, goods and services produced throughout the year by the combination of the four factors of production. They are given rewards in form of rent, interest, wages and profits respectively for the services rendered. These rewards are simply used for purchasing the goods and services, so the consumers pay back these rewards in the form of prices to the firms for the goods and services purchased. Hence, aggregate supply = aggregate demand. Therefore there is no over-production as in the aggregate sense. People living in a country are by themselves the producers as well as the consumers. With the same token no question of unemployment arises (note that this is an explanation with reference to the circular flow of national income).

CRITICISM ON SAY’S LAW OF MARKETS

(1) NOT APPLICABLE TO THE WHOLE ECONOMY

                The critics who oppose Say, mention that Say’s Law of markets can only be applied in one industry or firm and is not applicable on the whole economy as desired. For example, as it result of over-production in the industry there will be unemployment and hence rewards to factors of production will be cut down, under free consumption. Cost of production will fall and as a result prices of the products will also fall. Hence, there will be excess demand for goods and services and over production will be eliminated. But this is possible only in case of an industry. However, Say’s theory is not applicable on the economy as a whole because as a result of the low prices of the product the aggregate demand cannot be increased and hence over-production will continue and unemployment will persist.

(2) INAPPLICABLE WHEN PRICES ARE STABLE

            According to Says prices of goods are highly flexible at the full employment level due to which the aggregate supply of the goods adjusts with the aggregate demand for it and therefore, eliminates any possible signs of over-production and unemployment. However, in the real world today, prices of goods and services are generally stable. Hence, in case of stable prices, over-production cannot be eliminated and consequently unemployment takes place.

(3) IGNORES THE TIME LAG IN INVESTMENT

              Say’s theory is explained with reference to the circular flow of national income, according to which people living in a country are in the aggregate sense, the producers as well as the ultimate consumers. Consequently, over-production does not take place. For example, we already know that the people get their rewards in the form of rent, interest, wages and profits respectively by which they create demand for the aggregate supply of the goods and services. Now in reality, demand for consumer goods takes place immediately but the demand for the capital goods takes some time to be initiated as the people would generally think fast about their investment project. As a result of this time lag, over production and unemployment takes place.

(4) THE CLLASICAL THEORY OF FULL EMPLOYMENT

              Following Say’s Law of Markets, the classical economist believed that there would always be full employment of resources (I, e, the land, labour and organization) in a laissez faire economy and this was said to be normal situation. Another strong belief of the classical economists was that there would be lapses from full employment at certain time due to the establishment of monopolies and by government intervention in the economic life of the people. However they added that despite this handicap, tendency to restore full employment will always exist. Hence, according to the classical economist such a thing as unemployment and over production does not exist in a free economy. And if by some reason any such thing appears it will automatically disappear with the interaction of natural forces of demand and supply. Thus according to this theory, if the employment level goes up in one firm or industry under the situation of full employment, it would result in the employment level of another firm and industry going down. Similarly, if the production level in one industry rises, it falls in the other due to the given level of resources in the economy. Hence, there exists no question of unemployment and no question of over-production. This simply means that the classical economists believe that the laissez faire economy is always static at full employment level, instead of being dynamics

              This proposition of the classical economists rests on the plea that national income is spent automatically at a rate which will always keep the resources fully employed. Savings, according to classical are just another form of spending. National income they believe is in a large part spent on consumption and the rest on investment. Therefore there is no ground to fear about any obstruction in the flow of income stream in the economy. Hence there cannot be any general over-production or general unemployment.