On the Indirect Productivity of Money

Abstract

The recent approach to the productivity of money in its medium-ofexchange function as it has been developed by authors like Brunner and Meltzer (1971) focuses on the amount of real resources allocated in the exchange activity of an economy; that is, in the purchase and sale of goods (commodities, assets, factors of production). The emergence of a money economy and a higher real quantity of money, respectively, increase the available amount of the original factors of production (capital, labor) for the proper production activity. Consequently, real money balances should be taken into account by the traditional production function. Either one treats them as a third factor of production as it is proposed by Mundell (1971, chap. 5) and Bailey (1971, pp. 54-56, 68-70), ascribing to money a direct productivity, or, as the present note suggests, they have only a derived, indirect productivity, emphasizing the fact that money switches real resources from the exchange activity to the production activity. Even if both approaches may be considered as equivalent with respect to the result that money is productive, the latter constitutes a better analytical device because it reveals some new information on the individual's choice margin to hold money and on the specific shape of the demand curve for real money balances. Referring to a recent empirical study by Sinai and Stokes (1972) who show that, in a Cobb-Douglas production function, the presence of money is highly labor saving (the coefficient of capital services is hardly affected whereas the coefficient of labor services falls at about 20 percent, so the sum of the productive contributions of real balances plus labor is approximately equal to the coefficient of labor services in the production function without money), in what follows we shall assume that the amount of capital employed in the exchange activity is of a rather low magnitude, so we can neglect it. The production function of the economy can be written as