Thursday, March 28, 2013

Is money a factor of production?

An easy trick question to ask students about factors of production is whether money is one. Of course it is not, unless you consider burning it to fuel an oven. A factor of production is an input to the production process, such as capital, labor, raw materials, energy, etc. Money is only a facilitator in the acquisition of those goods. And if money or credit are constraining production, this belongs in a separate constraint, not in the production function.

Why do I mention this? Because money is occasionally put in a production function, and Jonathan Benchimol makes it even the focus and title of his paper. Why does he do that? He wants to estimate a New-Keynesian model and see whether money would matter in such a way. It does not. But who could really blame him for trying, as these models either have money in the utility function (few people enjoy money per se, most people enjoy what you can do with it, and that is already in the utility function) or no money at all (at still manage to draw lessons for monetary policy). In the kingdom of the blind men, those who are blessed with one eye are kings.

10 comments:

michael webster said...

You write: ". Of course it is not, unless you consider burning it to fuel an oven. A factor of production is an input to the production process, such as capital, labor, raw materials, energy, etc."

No, I don't agree.

And your alternative explanation that it money merely facilitates the acquisition of goods is inadequate.

Each of the other factors also facilitates the acquisition of goods.

Vilfredo said...

So you claim you could substitute labor with money? Of course not, you can substitute labor with capital, and both happen to be bought with money, but were it bought with apples it would make no difference.

Anonymous said...

First, one of your keyword is "bad research": I don't think so. It's a really great breakthrough in the Money and DSGE fields. This research is innovative and informative while being rigorous. It is a good paper.

Second, if you had read this paper, you should have known that this paper also deals with the role of money under two kind of production functions, one constrained with constant returns to scale and an other with decreasing returns to scale. And to achieve this, in addition to the use of Bayesian techniques and simulations, mathematical development used is innovative. For instance, this paper uses the log marginal data density in order to compare the two models and to deduce that money is not an omitted variable in the production function...

An other theoretical innovation of this paper is the money in the flexible price equation.

Last but not least, these new techniques (empirical and theoretical) highlight same results than several very old papers...

I hope that you a are a researcher, or at least an economist...

Harvard researcher.. said...

Fully agree with Anonymous.
EL, you should read commented articles...

Economic Logician said...

The way money can influence real output is through the financial sector or by facilitating transactions. If any friction is present, you model this explicitly, but you do not put this in the production function. As Vilfredo mentioned, you cannot substitute a factor of production with money. Or are you telling me the reason employment is still so low in the US is that the firms are sitting on a lot of cash and have substituted labor with cash?

Harvard researcher... said...

Ok, so read only the introduction or Benhabib, Schmitt-Grohe and Uribe (AER 2001), or the 1970's literature...

Gert P. said...

I am agree with others, you should read the papers you comment

Alan NYC said...

Good paper. Thanks EL to speak about it, even if I am not agree with you.

HDel said...

Good paper
EL, you should re-read it.
Thanks

Tshabi Rankapole said...

Yes money is a factor of production. It is used to buy inputs in order to produce outputs.Without inputs there wont be any economic growth or development.It can also be integrated with other production factors such as labour,workers expect to be remunerated.