Factors of production
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In
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
, factors of production, resources, or inputs are what is used in the production process to produce
output Output may refer to: * The information produced by a computer, see Input/output * An output state of a system, see state (computer science) * Output (economics), the amount of goods and services produced ** Gross output in economics, the value o ...
—that is,
goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not t ...
and
services Service may refer to: Activities * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, volunteer service for the benefit of a community or a p ...
. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the
production function In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define ...
. There are four ''basic'' resources or factors of production: land, labour, capital and entrepreneur (or enterprise). The factors are also frequently labeled "producer goods or services" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods". There are two types of factors: ''primary'' and ''secondary''. The previously mentioned primary factors are land, labour and capital. Materials and energy are considered secondary factors in classical economics because they are obtained from land, labour, and capital. The primary factors facilitate production but neither becomes part of the product (as with raw materials) nor becomes significantly transformed by the production process (as with fuel used to power machinery). Land includes not only the site of production but also
natural resource Natural resources are resources that are drawn from nature and used with few modifications. This includes the sources of valued characteristics such as commercial and industrial use, aesthetic value, scientific interest and cultural value. ...
s above or below the soil. Recent usage has distinguished human capital (the stock of knowledge in the
labor force The workforce or labour force is a concept referring to the pool of human beings either in employment or in unemployment. It is generally used to describe those working for a single company or industry, but can also apply to a geographic reg ...
) from labour. Entrepreneurship is also sometimes considered a factor of production. Sometimes the overall state of
technology Technology is the application of knowledge to reach practical goals in a specifiable and Reproducibility, reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in me ...
is described as a factor of production. The number and definition of factors vary, depending on theoretical purpose, empirical emphasis, or school of economics.


Historical schools and factors

In the interpretation of the currently dominant view of classical economic theory developed by neoclassical economists, the term "factors" did not exist until after the classical period and is not to be found in any of the literature of that time. Differences are most stark when it comes to deciding which factor is the most important.


Physiocracy

Physiocracy (from the Greek for "government of nature") is an economic theory developed by a group of 18th century Enlightenment French economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development" and that agricultural products should be highly priced.


Classical

The classical economics of Adam Smith,
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...
, and their followers focus on physical
resource Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon their ...
s in defining its factors of production and discuss the distribution of cost and value among these factors. Adam Smith and David Ricardo referred to the "component parts of price" as the costs of using: *
Land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various isla ...
or
natural resource Natural resources are resources that are drawn from nature and used with few modifications. This includes the sources of valued characteristics such as commercial and industrial use, aesthetic value, scientific interest and cultural value. ...
— naturally occurring goods like water, air, soil, minerals, flora, fauna and climate that are used in the creation of products. The payment given to a landowner is
rent Rent may refer to: Economics *Renting, an agreement where a payment is made for the temporary use of a good, service or property *Economic rent, any payment in excess of the cost of production *Rent-seeking, attempting to increase one's share of e ...
, loyalties, commission and goodwill. *
Labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the la ...
— human effort used in production which also includes technical and marketing expertise. The payment for someone else's labor and all income received from one's own labor is wages. Labor can also be classified as the physical and mental contribution of an employee to the production of the good(s). *
Capital stock A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. "Share capi ...
— human-made goods which are used in the production of other goods. These include machinery, tools, and buildings. They are of two types, fixed and working. Fixed are one time investments like machines, tools and working consists of liquid cash or money in hand and raw material. The classical economists also employed the word "capital" in reference to money. Money, however, was not considered to be a factor of production in the sense of capital stock since it is not used to directly produce any good. The return to loaned money or to loaned stock was styled as interest while the return to the actual proprietor of capital stock (tools, etc.) was styled as profit. See also returns.


Marxism

Marx considered the "elementary factors of the labor-process" or " productive forces" to be: * Labor * Subject of labor (objects transformed by labor) * Instruments of labor (or
means of labor The means of labor (also called instruments of labor) is a concept in Marxist political economy that refers to "all those things with the aid of which man acts upon the subject of his labor, and transforms it." (Institute of Economics of the Aca ...
). The "subject of labor" refers to natural resources and raw materials, including land. The "instruments of labor" are tools, in the broadest sense. They include factory buildings, infrastructure, and other human-made objects that facilitate labor's production of goods and services. This view seems similar to the classical perspective described above. But unlike the classical school and many economists today, Marx made a clear distinction between labor actually done and an individual's "
labor power Labour power (in german: Arbeitskraft; in french: force de travail) is a key concept used by Karl Marx in his critique of capitalist political economy. Marx distinguished between the capacity to do work, labour power, from the physical act of w ...
" or ability to work. Labor done is often referred to nowadays as "effort" or "labor services." Labor-power might be seen as a stock which can produce a flow of labor. Labor, not labor power, is the key factor of production for Marx and the basis for Marx's
labor theory of value The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The LTV is usually associated with Marxian ...
. The hiring of labor power only results in the production of goods or services (" use-values") when organized and regulated (often by the "management"). How much labor is actually done depends on the importance of conflict or tensions within the labor process.


Neoclassical economics

Neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, one of the branches of mainstream economics, started with the classical factors of production of land, labor, and capital. However, it developed an alternative theory of value and distribution. Many of its practitioners have added various further factors of production (see below). Further distinctions from classical and neoclassical microeconomics include the following: * Capital — this has many meanings, including the
financial capital Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provi ...
raised to operate and expand a business. In much of economics, however, "capital" (without any qualification) means goods that can help produce other goods in the future, the result of investment. It refers to machines, roads, factories, schools, infrastructure, and office buildings which humans have produced to create goods and services. *
Fixed capital In accounting, fixed capital is any kind of real, physical asset that is used repeatedly in the production of a product. In economics, fixed capital is a type of capital good that as a real, physical asset is used as a means of production which ...
— this includes machinery, factories, equipment, new technology, buildings, computers, and other goods that are designed to increase the productive potential of the economy for future years. Nowadays, many consider computer
software Software is a set of computer programs and associated software documentation, documentation and data (computing), data. This is in contrast to Computer hardware, hardware, from which the system is built and which actually performs the work. ...
to be a form of fixed capital and it is counted as such in the
National Income and Product Accounts The national income and product accounts (NIPA) are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general econ ...
of the United States and other countries. This type of capital does not change due to the production of the good. *
Working capital Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
— this includes the stocks of finished and semi-finished goods that will be economically consumed in the near future or will be made into a finished consumer good in the near future. These are often called inventory. The phrase "working capital" has also been used to refer to liquid assets (money) needed for immediate expenses linked to the production process (to pay salaries, invoices, taxes, interests...) Either way, the amount or nature of this type of capital usually changes during the production process. *
Financial capital Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provi ...
— this is simply the amount of money the initiator of the business has invested in it. "Financial capital" often refers to his or her net worth tied up in the business (
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
s minus liabilities) but the phrase often includes money borrowed from others. *
Technological progress Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...
— For over a century, economists have known that capital and labor do not account for all economic growth. To include the technological progress into the theory, it was proposed to introduce capital service and labour service as production factors in line with capital and labour. This is reflected in '' total factor productivity'' and the ''
Solow residual The Solow residual is a number describing empirical productivity growth in an economy from year to year and decade to decade. Robert Solow, the Nobel Memorial Prize in Economic Sciences-winning economist, defined rising productivity as rising outpu ...
'' used in economic models called ''
production function In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define ...
s'' that account for the contributions of capital and labor, yet have some unexplained contributor which is commonly called ''technological progress''. Russian economist
Vladimir Pokrovskii Vladimir Nikolajevich Pokrovskii (russian: Влад’имир Никол’аевич Покр’овский; born 11 May 1934) is a Russian scientist known for his original contributions to polymer physics and economic theory. He was the found ...
proposed to consider capital service as one of independent production factors in line with labour and capital.Pokrovski, V.N. (2003). Energy in the theory of production. Energy 28, 769-788. Capital service as production factor was interpreted by Ayres and Warr as useful work of production equipment, which makes it possible to reproduce historical rates of economic growth with considerable precision Pokrovski, V.N. (2003). Energy in the theory of production. Energy 28, 769-788. and without recourse to exogenous and unexplained technological progress, thereby overcoming the major flaw of the Solow Theory of economic growth.


Ecological economics

Ecological economics is an alternative to
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
. It integrates, among other things, the first and second laws of thermodynamics (see:
Laws of thermodynamics The laws of thermodynamics are a set of scientific laws which define a group of physical quantities, such as temperature, energy, and entropy, that characterize thermodynamic systems in thermodynamic equilibrium. The laws also use various paramet ...
) to formulate more realistic economic systems that adhere to fundamental physical limitations. In addition to the neoclassical focus on efficient allocation, ecological economics emphasizes sustainability of scale and just distribution. Ecological economics also differ from neoclassical theories in its definitions of factors of production, replacing them with the following: * Matter — the material from which products are produced. Matter can be recycled or reused through refining or reforming, but it cannot be created or destroyed, placing an upper limit on the amount of material that can be withdrawn and used. Consequently, the total amount of available matter is fixed, and once all the available matter is used, nothing more can be produced without recycling or reusing matter from prior products. * Energy — the physical but non-material inputs of production. We can place different forms of energy on a scale of utility depending on how useful it is for creating a product. Due to the law of entropy, energy tends to decrease in utility over time. (e.g. electricity, a very useful form of energy, is used to run a machine that builds a stuffed bear. In the process, however, electricity is converted to heat, a less useful form of energy). Like matter, energy can neither be created nor destroyed and thus there is also an upper limit to the total amount usable energy. * Design intelligence — a factor that incorporates the knowledge, creativity, and efficiency of how goods are created - the better the design, the more efficient and beneficial the creation is. Designs are usually improvements on their predecessors since our store of accumulated knowledge grows with time. One possible neoclassical analogue of design intelligence is technological progress. Integral to ecological economics is the following notion: at the maximum rates of sustainable matter and energy uptake, the only way to increase productivity would be through an increase in design intelligence. This provides the basis for a core tenet of ecological economics, namely that infinite growth is impossible.


The fourth factor

In the first half of the 20th century, some authors added the work of organization or entrepreneurship as a fourth factor of production. This became standard in the post-war Neoclassical synthesis. For example, J. B. Clark saw the co-ordinating function in production and distribution as being served by
entrepreneur Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values t ...
s;
Frank Knight Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago School. Nobel laureates Milton Friedman, George ...
introduced managers who co-ordinate using their own money (financial capital) and the financial capital of others. In contrast, many economists today consider " human capital" (skills and education) as the fourth factor of production, with entrepreneurship as a form of human capital. Yet others refer to
intellectual capital Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner ( organization), covering the competencies of its people ( human capital), the value rel ...
. More recently, many have begun to see "social capital" as a factor, as contributing to production of goods and services.


Entrepreneurship

In markets, entrepreneurs combine the other factors of production, land, labor, and capital, to make a profit. Often these entrepreneurs are seen as innovators, developing new ways to produce new products. In a planned economy, central planners decide how land, labor, and capital should be used to provide for maximum benefit for all citizens. Just as with market entrepreneurs, the benefits may mostly accrue to the entrepreneurs themselves. The sociologist
C. Wright Mills Charles Wright Mills (August 28, 1916 – March 20, 1962) was an American Sociology, sociologist, and a professor of sociology at Columbia University from 1946 until his death in 1962. Mills published widely in both popular and intellectual journ ...
refers to "new entrepreneurs" who work within and between corporate and government bureaucracies in new and different ways. Others (such as those practicing public choice theory) refer to " political entrepreneurs", i.e., politicians and other actors. Much controversy rages about the benefits produced by entrepreneurship. But the real issue is about how well institutions they operate in (markets, planning, bureaucracies, government) serve the public. This concerns such issues as the relative importance of
market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indi ...
and
government failure Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the bene ...
. In the book ''Accounting of Ideas'', "intequity", a
neologism A neologism Greek νέο- ''néo''(="new") and λόγος /''lógos'' meaning "speech, utterance"] is a relatively recent or isolated term, word, or phrase that may be in the process of entering common use, but that has not been fully accepted int ...
, is abstracted from equity to add a newly researched production factor of the capitalist system. Equity, which is regarded as part of capital, was divided into equity and intequity. Intequity means capital of ideas. Entrepreneurship was divided into network-related matters and creating-related matters. Network-related matters function in the sphere of equity, and creating-related matters in spheres of intequities.


Natural resources

Ayres and Warr (2010) are among the economists who criticize orthodox economics for overlooking the role of natural resources and the effects of declining resource capital. See also: ''
Natural resource economics Natural resource economics deals with the supply, demand, and allocation of the Earth's natural resources. One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to devel ...
''


Energy

Exercise can be seen as individual factor of production, with an elastication larger than labor. A
cointegration Cointegration is a statistical property of a collection of time series variables. First, all of the series must be integrated of order ''d'' (see Order of integration). Next, if a linear combination of this collection is integrated of order less ...
analysis support results derived from linear exponential ( LINEX) production functions.


Cultural heritage

C. H. Douglas disagreed with
classical economists Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...
who recognized only three factors of production. While Douglas did not deny the role of these factors in production, he considered the “ Cultural heritage” as the primary factor. He defined cultural inheritance as the knowledge, techniques, and processes that have accrued to us incrementally from the origins of civilization (i.e.,
progress Progress is the movement towards a refined, improved, or otherwise desired state. In the context of progressivism, it refers to the proposition that advancements in technology, science, and social organization have resulted, and by extension w ...
). Consequently, mankind does not have to keep "
reinventing the wheel To reinvent the wheel is to attempt to duplicate—most likely with inferior results—a basic method that has already previously been created or optimized by others. The inspiration for this idiomatic metaphor is that the wheel is an ancient ar ...
". "We are merely the administrators of that cultural inheritance, and to that extent, the cultural inheritance is the property of all of us, without exception. Adam Smith,
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...
, and
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
claimed that labor creates all value. While Douglas did not deny that all costs ultimately relate to labour charges of some sort (past or present), he denied that the present labour of the world creates all wealth. Douglas carefully distinguished between value,
costs In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which ...
and
price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
s. He claimed that one of the factors resulting in a misdirection of thought in terms of the nature and function of money was economists' near-obsession about values and their relation to prices and incomes. While Douglas recognized "value in use" as a legitimate theory of values, he also considered values as subjective and not capable of being measured in an objective manner. Peter Kropotkin argued for the common ownership of all intellectual and useful property due to the collective work that went into creating it. Kropotkin does not argue that the product of a worker's labor should belong to the worker. Instead, Kropotkin asserts that every individual product is essentially the work of everyone since every individual relies on the intellectual and physical labor of those who came before them as well as those who built the world around them. Because of this, Kropotkin proclaims that every human deserves an essential right to well-being because every human contributes to the collective social product: Kropotkin goes on to say that the central obstacle preventing humanity from claiming this right is the state's violent protection of private property. Kropotkin compares this relationship to feudalism, saying that even if the forms have changed, the essential relationship between the propertied and the landless is the same as the relationship between a feudal lord and their serfs.


See also


References


Further reading

* *


External links

* {{Authority control Labour economics Capital (economics) Management cybernetics