Thoughts on Say's Law

Much of the disagreement in macroeconomics boils down to whether or not a person believes in Say's Law. Jean-Baptiste Say claimed that under-investment/production is impossible - in a free market, there will never be unused resources. This is in direct conflict with Keynes' and his descendants' argument that monetary/fiscal stimuli are able to bolster economic activity by draining away excess reserves and putting them to productive use. In other words, Keynesians believe that there is no (or very little) opportunity cost for the resources expended by expansionary monetary or fiscal policies, because if they are not spent by the government or central bank, they will simply be hoarded by the private sector.

Taken at face value, I think most people would consider Say's Law to be observably false. After all, most people have a savings account with "unused resources" at this very moment. In that sense, I would agree that Say's Law appears to be incorrect. There are constantly resources being held and not being put to immediate use in neither production nor consumption. However, I don't believe that's what Say was trying to say (pun intended).

Yes, at any given time an individual or a business may hold resources in reserve. But those resources are not held arbitrarily - they are being accounted for and being put to a use other than production or consumption. Consider a business holding capital in reserve. Why might they do this? There are a few possible explanations, but one of the more obvious responses is that they are holding them as a safeguard. The business is likely using up other resources in production or investment. The resources held in reserve function to diminish the risk associated with undertaking such production or investment projects. Without those reserves, those projects may well become too risky for the business to undertake. So, while the reserves are not being used in a physical sense, they are still serving and important function. 

When you think of it like this, Say's Law doesn't seem so wacky after all - in fact, it seems like common sense. The point is, all resources are appointed certain roles for very good reasons. It is certainly plausible that one of those roles could be functioning as held reserves, hedging against risk. Re-applying this understanding of how resources are used creates a gigantic problem for proponents of fiscal or monetary stimuli. Depleting reserves may appear to cause no harm to the private sector, but it would necessarily change the way businesses and individuals use their other resources - it now becomes more costly (due to risk) to use the remaining resources. No matter how many resources are held in reserve by people or businesses, taking those resources will divert the economy away from the decisions made by individuals and make it more costly for the private sector to produce and consume. Neither monetary nor fiscal stimuli are free from opportunity costs.