Thursday, February 16, 2017

To say that money is not a factor of production is to accept the view that money is a veil


At Social Democracy for the 21st Century, an oldie: Stagflation in the 1970s: A Post Keynesian Analysis.

There's a lot I like in it. But I don't stop reading when I get to something I like. I stop reading when there's a problem.

There's a problem. LK writes:
The price of commodities produced in an economy depends on the costs of factors of production, in particular the wage bill, and then the mark-up over the costs of factor inputs (Musella and Pressman 1999: 1100).

The factors of production are
(1) primary commodities or natural resources, including land, raw materials, water, and energy;
(2) labour, and
(3) capital goods.

Thus inflationary pressures can result from
(1) surges in the prices of primary commodities or energy, especially when the prices of these factor inputs are set on world markets or are influenced by supply shocks;

(2) workers pushing for wage rises, and

(3) business firms increasing their pricing mark-ups.


No.

Well, yes and no. Everything he's got there is right. It is something left out that I have trouble with.

Where's finance?

LK lists the factors of production, straight out of Adam Smith: land, labor, and capital. But LK says it better: He says capital goods. That excludes money.

That's good, because I count money as factor number four.

I like what LK says, that "The price of commodities produced in an economy depends on the costs of factors of production".

I like it that Adam Smith's discussion of land, labor, and capital has the title Of the Component Parts of the Price of Commodities.

I like the idea that the cost of a product is, at minimum, equal to the total of the costs that went into making the product.

And if, as LK says, the price of commodities produced in an economy depends on the costs of factors of production, then I like to turn that around and say that the factors of production are cost categories. The factors categorize the costs involved in the production of output. And if that is the case, then certainly money is a factor of production.

If you can't accept that, then say money is a factor of facilitation. And when you say "factors" think of both the factors of production and the factor of facilitation. That's fine with me. What's important is to make sure we include all of the categories of cost that add to the cost of output. Certainly, money is one of those categories. Money, or finance, or rent, or call it what you will.

As Bezemer and Hudson say

... it is necessary to divide the economy into a “productive” portion that creates income and surplus, and an “extractive” rentier portion siphoning off this surplus as rents ...

It surely is important to be aware of the "rentier portion" of the economy. It surely is important to consider the cost imposed by that sector on the rest of the economy. So when I see LK limit himself to three factors, and exclude the "rentier portion" from his list of factors, I have to stop reading, and write.

4 comments:

The Arthurian said...

The factors of production are cost categories. Excluding money & finance from the factors means we pretend it has no cost.

'Money is a veil' means money has no effect on the real economy. If we say money has no effect we pretend it has no cost.

Steve Roth said...

Hi Arthur:

Ran across this on Reddit.

I think the whole Factors of Production thing is the problem here. Every time I try to use it to think, it breaks. Like it does for you here, having to resort to "facilitation." Which leaves me like...okay how am I gonna think about all this coherently? Do I need a theory of facilitation?

Main thing: what ARE the factors of production? Exactly the thing you're wrestling with here.

IMO, the overwhelmingly dominant factor of production is cooperation. Two people split up a task and work together, do it more than two times as fast. (Cooperation, after all, is what got humans to the top of the food chain... [NOT competition; all animals compete. Only a handful of species are eusocial.]) Certainly there's no way you're gonna *measure* cooperation.

"Land." WITH does this mean? The land itself is not fed into production. It is the substrate of agriculture, the container of pre-existing minerals that can be extracted, the space available for residency, but... ?? And key: it's not consumed in the production process, while ag products and minerals are. How do I think about that?

Money. Ditto, it's not consumed in the production process. There's just as much after it's "fed in" as there is before. Just in different hands. It's in a complete different conceptual category from other FOPs.

Labor. Okay, this is a endlessly-renewed resource, similar to ag output but certainly not to minerals or money....

This is not a coherent presentation of thinking on the subject, more to suggest that Factors of Production is not *amenable* to coherent thinking. Cause all the factors are not just heterogenous, they're *conceptually* heterogenous.

Thanks for listening...

The Arthurian said...

Hi Steve.

I really like Book 1, Chapter 6 of The Wealth of Nations. It's only a few pages in the book (24 paragraphs at the link).

Smith looks at the component part of the price of output. He considers who the money goes to, and what are their criteria for payment. I don't ask what the factors are. It is all laid out.

I do think that the economy changes, and that finance has grown tremendously since Smith's time. I think finance is big enough to be tallied as a separate factor, where in Smith's time it was not.

I would list "cooperation" as part of human nature, and human nature as a "given". It is not something that economists should try to mess with. It helps to establish the characteristics of "labor", for example, and the criteria for payment.

The main thing that I find useful is to think of the factors of production as cost categories because the payment criteria differ for the different factors.

The Arthurian said...

The main thing that I find useful is to think of the factors of production as cost categories because the payment criteria differ for the different factors.
AND because cost to my mind is the single most significant consideration in determining what succeeds and what fails in the economy.