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In
economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interact ...

economics
, 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 In computing Computing is any goal-oriented activity requiring, benefiting from, or creating computing machinery. It includes the study and experimentation of alg ...
—that is, finished goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the
production function In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...
. 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 material A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished Product (business), products, energy, or intermediate materials that are feedstock for future finis ...
s) 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 resource Resource refers to all the materials available in our environment which help us to satisfy our needs and wants. Resources can broadly be classified upon their availability — they are classified into renewabl ...
s above or below the soil. Recent usage has distinguished
human capital Human capital is a concept used by human resource professionals to designate personal attributes considered useful in the production process. It encompasses employee knowledge Knowledge is a familiarity or awareness, of someone or somet ...

human capital
(the stock of knowledge in the
labor force The workforce or labour force is the labour Labour or labor may refer to: * Childbirth Childbirth, also known as labour or delivery, is the ending of pregnancy where one or more babies leaves the uterus by passing through the vagina or ...

labor force
) from labor. Entrepreneurship is also sometimes considered a factor of production. Sometimes the overall state of
technology Technology ("science of craft", from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. I ...

technology
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 Physiocracy (; from the Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population i ...
(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 Classical economics or classical political economy is a school of thought A school of thought, or intellectual tradition, is the perspective of a group of people who share common characteristics of opinion or outlook of a philosophy ...
of
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
,
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
, and their followers focus on physical
resource Resource refers to all the materials available in our environment which help us to satisfy our needs and wants. Resources can broadly be classified upon their availability — they are classified into renewable A renewable resource, also know ...

resource
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 is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and consists mainly of Earth's crust, crustal components such a ...
or
natural resource Natural resources are resource Resource refers to all the materials available in our environment which help us to satisfy our needs and wants. Resources can broadly be classified upon their availability — they are classified into renewabl ...
— 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 Renting, also known as hiring or letting, is an agreement where a payment is made for the temporary use of a good, service or owned by another. A is when the pays a flat rental amount and the pays ...
, 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 Literature * Labor (journal), ''L ...
— 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 A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profi ...
. Labor can also be classified as the physical and mental contribution of an employee to the production of the good(s). *
Capital stock__NOTOC__ A corporation's share capitalGlossary on Trade Financing Terms - S
or capital ...
— 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 Return may refer to: In business, economics, and finance * Return on investment (ROI), the financial gain after an expense. * Rate of return, the financial term for the profit or loss derived from an investment * Tax return, a blank document or t ...
.


Marxism

Marx considered the "elementary factors of the labor-process" or "
productive forces Productive forces, productive powers, or forces of production (German German(s) may refer to: Common uses * of or related to Germany * Germans, Germanic ethnic group, citizens of Germany or people of German ancestry * For citizens of Germany, ...
" to be: * Labor * Subject of labor (objects transformed by labor) * Instruments of labor (or
means of labor Means of labor is a concept in Marxist Marxism is a method of socioeconomic analysis that uses a materialist interpretation of historical development, better known as historical materialism, to understand Social class, class relations and soci ...
). 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 or labor may refer to: * Childbirth Childbirth, also known as labour or delivery, is the ending of pregnancy where one or more babies leaves the uterus by passing through the vagina or by Caesarean section. In 2015, there were about 13 ...
" or ability to work. Labor done is often referred to nowadays as "effort" or "labor services." Labor-power might be seen as a
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...
which can produce a
flow Flow may refer to: Science and technology * Flow (fluid) or fluid dynamics, the motion of a gas or liquid * Flow (geomorphology), a type of mass wasting or slope movement in geomorphology * Flow (mathematics), a group action of the real numbers on ...
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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), produc ...
. The hiring of labor power only results in the production of goods or services ("
use-values Use value (german: Gebrauchswert) or value in use is a concept in classical political economy and Marxist economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, or ...
") 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 driven by the supply and demand In microeconomics, supply and demand is an economic model In econo ...
, one of the branches of
mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), c ...
, 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 Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Als ...
include the following: *
Capital Capital most commonly refers to: * Capital letter Letter case is the distinction between the letters Letter, letters, or literature may refer to: Characters typeface * Letter (alphabet) A letter is a segmental symbol A symbol ...
— this has many meanings, including the
financial capital Financial capital (also simply known as capital or equity in finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contra ...
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 Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...
. It refers to machines, roads, factories, schools, infrastructure, and office buildings which humans have produced to create goods and services. *
Fixed capital In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
— 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 collection of instructions Instruction or instructions may refer to: Computing * Instruction, one operation of a processor within a computer architecture instruction set * Computer program, a collection of instructions Music * I ...

software
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 National accounts or national account systems (NAS) are the implementation of complete and consistent accounting technique Technique or techniques may refer ...
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 (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capi ...
— 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 Inventory (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...
. 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 Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contra ...
— 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 Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s minus
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, reta ...
) but the phrase often includes money borrowed from others. *
Technological progress Technology ("science of craft", from Ancient Greek, Greek , ''techne'', "art, skill, cunning of hand"; and , ''wikt:-logia, -logia'') is the sum of any Art techniques and materials, techniques, skills, Scientific method, methods, and Business ...
— For over a century, economists have known that capital and labor do not account for all economic growth. This is reflected in ''
total factor productivity In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behav ...
'' and the ''
Solow residualThe 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 Output ...
'' used in economic models called ''
production function In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...
s'' that account for the contributions of capital and labor, yet have some unexplained contributor which is commonly called ''technological progress''. Ayres and Warr (2009) present time series of the efficiency of primary energy (exergy) conversion into useful work for the US, UK, Austria and Japan revealing dramatic improvements in model accuracy. With useful work as a factor of production they are able to reproduce historical rates of economic growth with considerable precision 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 Ecological economics, bioeconomics, ecolonomy, eco-economics, or ecol-econ is both a transdisciplinary Transdisciplinarity connotes a research strategy that crosses many disciplinary boundaries to create a holistic Holism (from Ancient Gre ...
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 driven by the supply and demand In microeconomics, supply and demand is an economic model In econo ...
. It integrates, among other things, the first and second laws of thermodynamics (see:
Laws of thermodynamics The laws of thermodynamics define a group of physical quantities, such as temperature Temperature ( ) is a physical quantity that expresses hot and cold. It is the manifestation of thermal energy Thermal radiation in visible light can be ...
) 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.


A 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 The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a post-World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a global war A world war is "a war ...
. For example, saw the co-ordinating function in production and distribution as being served by
entrepreneur Entrepreneurship is the creation or extraction of 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 than simply ...

entrepreneur
s;
Frank Knight Frank may refer to: People As a name * Frank (given name) Frank is a masculine given name. While ''Frank'' has been a European name in its own right, the given name in the English-speaking United States arose in the 20th century as a shor ...
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 Human capital is a concept used by human resource professionals to designate personal attributes considered useful in the production process. It encompasses employee knowledge Knowledge is a familiarity or awareness, of someone or somet ...

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 An organization, or organisation (Commonwealth English The u ...
. 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 A planned economy is a type of economic system An economic system, or economic order, is a system A system is a group of interacting Interaction is a kind of action that occurs as two or more objects have an effect upon one another. T ...
, 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 (28 August 1916 – 20 March 1962) was an American sociologist, and a professor of sociology at Columbia University Columbia University (also known as Columbia, and officially as Columbia University in the City of New Y ...

C. Wright Mills
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 Public choice, or public choice theory, is "the use of economic An economy (; ) is an area of the production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in t ...
) refer to "
political entrepreneur The term political entrepreneur may refer to any of the following: * someone (usually active in the fields of either politics Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social gro ...
s", 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 Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand In microeconomics, supply and demand is ...
and
government failure Government failure, in the context of public economics Public economics (or economics of the public sector) is the study of government policy through the lens of economic efficiencyIn microeconomics, economic efficiency is, roughly speaking, a sit ...
. In the book ''Accounting of Ideas'', "intequity", a
neologism A neologism (; from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is appro ...
, 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. 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 Nature, in the broadest sense, is the natural, physical, material world or universe The universe ( la, universus) is all of space and time and their contents, including planets, stars, galaxies, and all other forms of matter and ...
''


Energy

Exercise can be seen as individual factor of production, with an elastication larger than labor. A
cointegration Cointegration is a statistical Statistics is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data Data are units of information Information can be thought of as the resoluti ...
analysis support results derived from linear exponential ( LINEX) production functions.


Cultural heritage

C. H. Douglas disagreed with classical economists who recognized only three factors of production. While Douglas did not deny the role of these factors in production, he considered the “
Cultural heritage Cultural heritage is the legacy of tangible and intangible heritage assetA heritage asset is an item that has value because of its contribution to a nation’s society, knowledge and/or culture. They are usually physical assets, but some countries ...
” 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 upright=1.14, alt=Painting depicting a woman draped in white robes flying westward across the land with settlers and following her on foot, John Gast, ''American Progress'', Progress is the movement towards a refined, improved, or otherwise de ...
). Consequently, mankind does not have to keep "
reinventing the wheel To reinvent the wheel is to duplicate a basic method that has already previously been created or optimized by others. The inspiration for this idiom An idiom is a phrase or expression that typically presents a figurative language, figurative, no ...

reinventing the wheel
". "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 Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
,
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
, and
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher A philosopher is someone who practices philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about reason, M ...

Karl Marx
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 Value or values may refer to: * Value (ethics) In ethics Ethics or moral philosophy is a branch of philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about Metaphysics, existence, reason, E ...
,
costs In production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production ...
and
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or b ...

price
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 Pyotr Alexeyevich Kropotkin (; russian: link=no, Пётр Алексе́евич Кропо́ткин ; 9 December 1842 – 8 February 1921) was a Russian Russian refers to anything related to Russia, including: *Russians (русские, ...

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 Production economics Labour economics
Capital (economics) {{Cat main This category is about the Capital (economics), economic concept of capital; for capital cities, see :Capitals, Capitals; other uses, see Capital (disambiguation). Factors of production Capitalism ...
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