Sunday, February 3, 2013

The Factor of Facilitation

I typically call finance a "factor of production " like labor and capital and natural resources. But the thing of it is, finance facilitates production. Finance is not itself productive. If output goes up it is because there is more labor (or better skill) or more capital (or better technology) applied. Finance facilitates this process, or hinders it. But finance does not otherwise contribute. Money is not a "real" factor, not in the sense of real versus monetary. So really, finance is the factor of facilitation, not one of the factors of production.

Maybe I'll call it that from now on.

So anyway, what happens is that when we apply more factors of production we generally increase both the factor cost and output. But when we apply more of the factor of facilitation, we don't get any more output from that alone. We only get more output if increasing the "F of F" causes an increase in the "F of P".

Costs go up with the F-of-P, and costs go up with the F-of-F as well. But output only goes up with the F-of-P. So an increase in F-of-F is likely to be inflationary. This is why people talk of "good debt" and "bad debt". If an increment of debt (F-of-F) leads to greater use of F-of-P, then output grows. So this F-of-F was "good" debt.

But if the F-of-F doesn't boost the use of F-of-P and fails to boost output, well, people will say it was bad debt.


Greg said...




I like it!

Very strange that you were working on that post when I made my comment yesterday

The Arthurian said...

I know. I was amazed.

Your new post is really good, by the way.

Greg said...

I really think this needs to be pushed very hard. A bank is really no different than a govt, when it comes to its monetary relationship to the public. We are led to believe that banks are creators, that these private money men are THE drivers of capitalism. The truth is the people are the drivers of whatever ism there is. Capitalists simply profit from the industriousness of others. This isnt meant as a dis to capitalism per se, I just wish people would present it honestly. Makes me think that they suspect that an honest exposition of capitalism will lead to its decline. I think its the lies that have led to its decline. We simply need to look at the ways in which each entity, banks or govts, CAN facilitate and let them do what they do best.

I'm not unaware that I am mixing a discussion of banks and capitalism because I say banks are how capitalism gets done, at least in the way we know it today. So I think you can substitute one word for the other and not lose much of anything.

The Arthurian said...

Okay, I see what you're saying: Banks are no more the drivers of capitalism than government is! Gotcha.

"Capitalists simply profit from the industriousness of others."

Sometimes capital is productive equipment, and sometimes capital is money. It's very convenient, and I suspect that the meaning changes surreptitiously as needed to suit the argument. I still don't know what capital is, and I still don't know what capitalism is. I like the word "finance" and I would completely agree that Finance profits from the industriousness of others. This goes back to the post.

The factor of facilitation draws income from the factors of production. It is exactly as Smith said: The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue... The income to finance (or to any non-productive factor) is always derived from the income to the productive factors. Because income originates with output... with production.

Greg said...

Right! Govts support and enforce the private property laws of their country, which without, there would be no capitalism. Additionally govts provide the backstop banks need to remain trustworthy to the citizens. Its actually a hand in glove type relationship so anyone who tries to separate them and speak as if they are of separate and different importance/nature is being disingenuous.

Yes I like your wording better, finance is what profits. Without capitalism their is no finance sector but its the finance sector which is squeezing the profits form the rest of us.