22.44 ndian onom
expected returns and certainty that it will deliver The logic of the law goes like this–the very act
them – the act which cannot get enough risk. of production generates an income (in the form
of wages, salaries, profits, etc.) exactly equal to the
rule of thumb output which if spent is just sufficient to purchase
A rough-and-ready decision-making aid that the whole output produced. Ultimately, it gives
provides an acceptably accurate approximate an important clue, i.e., in order to reach full-
solution to a problem. Where refined decision- employment level all that is needed is to increase
making processes are expensive (in terms of the aggregate supply.
information gathering and processing them), such The key assumption behind the law is that
a method looks justified.
the economic system is ‘supply-led’ and that all
income is spent. But in practice, some income
‘leaks’ into saving, taxation, etc., and there is no
The error which comes up due to rounding off the auto-guarantee that all income is ‘injected’ back
figures in decimals, for example, considering 3.6 as spending. This is why others suggest for a
as 4 and 3.4 as 3. Such rounding off the data is ‘demand-led’ idea of the economic system under
never going to be mathematically correct.
which demand creation is attended vigorously.
The payment made to employees of an
organisation, firm, etc., for the use of labour as a The idea was put forward by Richard Lipsey
factor of production. It differs from wage in the and Kelvin Lancaster (1924–99) in 1956 which
following two ways: suggests a way out of the situation when all the
(i) It is not paid on hourly basis (or for the assumptions of an economic model are not met.
actual number of hours worked by the As per the theory, the second-best situation is
employee) as wages are paid, and meeting as many of the assumptions as possible
(ii) It is usually paid on monthly basis whereas (but it might not give the optimum or the desired
wages are paid on daily or weekly basis. results).
sAtisfying theory securities trAnsAction tAx
A theory which suggests that firms do not want [See Chapter 17, Tax Structure in India]
only ‘satisfactory’ profits but maximum profits
as well as other objectives such as sales increase,
size increase, etc. might be having equal or greater
importance than profits. A method of generating resource by a government
through printing of fresh notes/currency
sAy’s lAw notes. Money printing at higher rate to pay the
Named after the French economist Jean Baptise government expenditures leads to inflation that
say (1767–1832), the law proposes that aggregate enables the government to secure extra resources
supply creates its own aggregate demand. though that is called ‘inflation tax’ also.