Dear Roy,
I would love to learn from you the problems you see with the poor definition
of production and the associated confusions. Your own messages on HES
archives of April and May 1997 are good ones about this. It would be
stimulating to see how you see the transition from political economy to
economics as it was partly shaped by unclear conception of production. Your
long-standing interest in a sharper focus on the real wealth, and the
problems you see in the obfuscating mathematization that seemingly loses the
implications of property relations could be of great benefit to us if you
cared to point out what the recent literature has overlooked.
Please allow me to point out a few things.
1. There seems to be room for a historical review of the evolution of
the concept of production, and the many confusions surrounding it. In
particular, the Physiocrat views, Smithian notion of division of labor being
guided by profit, Marxian notion of mode of production, marginal
productivity theory of distribution, Coasian ideas about transaction cost
and the firm, Hayeks Prices and Production, and Sraffas production of
commodities by means of commodities would be excellent candidates for
inclusion in a minimal review. A broader review ought to cover reproduction
of human capital a la Malthus, Gary Becker, Julian Simon, and Mark Blaug as
well as the capital controversy and the IS-LM analysis. Then reproduction of
physical capital ought to receive attention with associated matters of
technological change and structural transformation. I suspect that it was a
bumpy ride, but I am eager to hear your opinion.
2. It seems that prevailing semantic usages of the term includes what you
call rendering of services. I am not aware of any great benefit from keeping
services separate from tangible goods. In particular, recent efforts to
build indices of development other than GDP seem to include quality of life
and similar ideas in which the rendering of services plays vital roles. I am
curious about your views on how the distinction between commodities and
services can help us better understand the economy, and how others might
have thought about it.
3. I also suppose that most people now-a-days feel comfortable with the
mathematical precision that comes from separating stocks from flows. I
believe that this separation is useful, at least for analytical purposes.
Thus taking stocks of output at a point of time as wealth, and then counting
a part of it as capital (though seemingly excluding human capital) may seem
reasonable. The flow of goods and services over a period of time is taken as
production, whose value is counted as income. The capital-output ratio
seemingly plays a vital role in the growth literature. I am eager to learn
what you think about this.
4. Being a little crazy guy, my own madness seeks theoretical clarity
about production. It involves connecting production to the pursuit of profit
through exchange in the market. And I agree that Smith provides a good
starting point. While I wish to agree with you that financial values do not
reflect the reality of the annual produce of the nation because nominal
values are artificially changed by money, I wish to think about the
connection between the flow of money and the flow of output. The central
issue in macroeconomics is indeed about the role of money in market
clearing, though it is not seen to be so. The most critical problem is to
separate output from price and I think that there is no tenable price
theory. I am ignorant of whether poor definition of production is part of
the problem.
5. My own madness has been too figure out a simple way of connecting
tradable physical output to fiat money, and then to relate output to
employment and investment in non-human capital. I like to believe that money
as a means of payment exerts a very vital influence on what and how much is
actually produced. To show that, I have to abandon both micro and
macroeconomics, and certainly avoid monetary theory altogether. The reason I
must abandon micro and macro is that I must provide an explanation of both
the prices and the quantities of output in one coherent model. The coherence
means that micro and macro must be the same, and trade theory must also be
monetary theory.
6. I strongly share your interest in production as being a process of
creating real wealth, not just paper values in some book of accounts. Most
people are happy with the notion of zero-profit equilibrium, and the
irrelevance of money as a store of value or a unit of account to the volume
of output or employment. To relate production to money by seeing money as a
means of payment (and not as a store of value) requires much creative
destruction.
Let this good season be of good service to you.
Mohammad Gani
PS: In case you wish to see what I think about micro-macro confusion between
price and output, and the trade-theory -monetary theory confusion about the
relation between output and money, the following working papers are
downloadable at a click.
New Trade Theory Takes Over Monetary Theory
http://econwpa.wustl.edu:80/eps/it/papers/0405/0405005.pdf
Micro Takes Over Macro
http://econwpa.wustl.edu:80/eps/mac/papers/0404/0404012.pdf
Money in Market Clearing
http://econwpa.wustl.edu:80/eps/mac/papers/0410/0410009.pdf
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