Land, Labor, Capital, and Finance

A post by Gunnar Tomasson of Gang8, on the Keen-Krugman dispute. Most of it escapes me. But not all:

Back to Samuelson. On another occasion in the late 1970s, I wrote to him and stated that it was logically impossible to integrate money into a unified general equilibrium framework because NO real factors of production were involved in the supply of modern (electronic) money.

In other words, something which cost nothing to produce could not in principle be placed in an equilibrium setting with something whose production required inputs of real factors of production (labor and natural resources).

Forget the context. Or, go read it. Whatever. I need to focus on a detail.

Tomasson says no real factors of production are involved in the supply of modern money, and money costs nothing to produce. I think he refers to the central bank's ability to create money by 'pushing a button on a computer'.

By contrast, credit or bank money does involve real factors of production. Those are the factors Thomas Philippon has in mind when he says, "The sum of all profits and wages paid to financial intermediaries represents the cost of financial intermediation."

But wages are wages, and profits are profits. Apart from those payments to labor and capital, there is the payment to finance: interest.

And, you know, if you have a few dollars in savings and earn just a few pennies interest on that money, to that extent you are part of finance.

If we say excessive finance is the problem then you are not part of the problem, for your few pennies are not excessive, certainly. Not to worry about that.

In TWON, Book 1, Chapter VI, Adam Smith wrote:

When those three different sorts of revenue belong to different persons, they are readily distinguished; but when they belong to the same they are sometimes confounded with one another, at least in the common language.

I think of myself as a workingman; my neighbor thinks himself a capitalist. Both of us to some extent receive interest income. The sources of revenue are often confused.

Smith didn't include finance among his sorts of revenue, but I do. Interest is not the same as wages, not the same as profit, and not the same as rent. Therefore there must be a separate category into which interest costs resolve themselves.

At the start of capitalism -- Smith's time -- finance played a very small role. At the end of capitalism -- our time -- it plays a very large role. The cost Smith overlooked was negligible. Today, we can no longer afford to overlook the cost of finance.