Factors of production

In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, finished goods and services. The amounts of the various inputs used to determine the quantity of output according to a relationship is called the production function. There are three basic resources or factors of production: land, labour, and capital. These factors are also frequently labeled "producer goods" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods." All three of these are required in combination at a time to produce a commodity.

Factors of production may also refer specifically to the primary factors, which are land, labor (the ability to work), and capital goods applied to production. 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 become part of the product (as with raw materials) nor become significantly transformed by the production process (as with fuel used to power machinery). Land includes not only the site of production but natural resources above or below the soil. Recent usage has distinguished human capital (the stock of knowledge in the labor force) from labor.[1] Entrepreneurship is also sometimes considered a factor of production.[2] Sometimes the overall state of technology is described as a factor of production.[3] The number and definition of factors varies, depending on theoretical purpose,[4] empirical emphasis, or school of economics.[5]

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.[6]

Differences are most stark when it comes to deciding which factor is the most important. For example, in the Austrian view—often shared by neoclassical and other "free market" economists—the primary factor of production is the time of the entrepreneur, which, when combined with other factors, determines the amount of output of a particular good or service. However, other authors argue that "entrepreneurship" is nothing but a specific kind of labor or human capital and should not be treated separately. The Marxian school goes further, seeing labor (in general, including entrepreneurship) as the primary factor of production, since it is required to produce capital goods and to utilize the gifts of nature. But this debate is more about basic economic theory (the role of the factors in the economy) than it is about the definition of the factors of production.

Classical

An advertisement for labour from Sabah and Sarawak, seen in Jalan Petaling, Kuala Lumpur.

The classical economics of Adam Smith, David Ricardo, and their followers focuses on physical resources in defining its factors of production, and discusses the distribution of cost and value among these factors. Adam Smith and David Ricardo referred to the "component parts of price"[7] as the costs of using:

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:

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" 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 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, 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:

A fourth factor?

As mentioned, recent authors have added to the classical list. For example, J.B. Clark saw the co-ordinating function in production and distribution as being served by entrepreneurs; Frank Knight 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. More recently, many have begun to see "social capital" as a factor, as contributing to production of goods and services.

Entrepreneurship

Consider entrepreneurship as a factor of production, leaving debate aside. 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 and 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. Of course, just as with market entrepreneurs, the benefits may mostly accrue to the entrepreneurs themselves.

The sociologist C. Wright Mills refers to "new entrepreneurs" who work within and between corporate and government bureaucracies in new and different ways.[10] 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 and government failure.

In the book Accounting of ideas, "intequity", a neologism, is abstracted from equity to add a newly researched production factor of the capitalist system. Equity, which is regarded 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.[11]

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.[9] See also: Natural resource economics

Energy

Exercise can be seen as individual factor of production, with an elastication larger than labor.[12] A cointegration analysis support results derived from linear exponentional (LINEX) production functions.[13]

See also

References

  1. ↑ Paul A. Samuelson and William D. Nordhaus (2004). Economics, 18th ed., "Factors of production", "Capital", Human capital", and "Land" under Glossary of Terms.
  2. ↑ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 4. ISBN 978-0-13-063085-8. Cite uses deprecated parameter |coauthors= (help)
  3. ↑ Michael Parkin and Gerardo Esquivel (1999). Macroeconomía (in Spanish) (5th ed.). Mexico: Addison Wesley. p. 160. ISBN 968-444-441-9.
  4. ↑ Benchimol, J., 2015, Money in the production function: A new Keynesian DSGE perspective, Southern Economic Journal, Volume 82, Issue 1, pp. 152-184.
  5. ↑ Milton Friedman (2007). Price Theory. Transaction Publishers. p. 201. ISBN 978-0-202-30969-9.
  6. ↑ Classical price theory follows "costs of reproduction" and does not allow for "factor" gains. The great questions of Rent, Wages, and Profits must be explained by the proportions in which the whole produce is divided between landlords, capitalists, and labourers, and which are not essentially connected with the doctrine of value. (Ricardo Johnson , David,1820; 1951, "The Works and Correspondence of David Ricardo", edited by Piero Sraffa, 10 Volumes, Cambridge: Cambridge University Press 1951–1955, VIII, p. 197.
  7. ↑ Adam Smith (1776), The Wealth of Nations, Smith: Wealth of Nations | Library of Economics and Liberty B.I, Ch.6, Of the Component Parts of the Price of Commodities in paragraph I.6.9.
  8. ↑ "Das Kapital", chapter 7, section 1.
  9. 1 2 Robert U. Ayres; Benjamin Warr (2009). The Economic Growth Engine: How Energy and Work Drive Material Prosperity. Edward Elgar Publishing. ISBN 978-1-84844-182-8.
  10. ↑ "White Collar: The American Middle Classes," 1956. Oxford: Galaxy Books, pp. 94–100.
  11. ↑ Pienaar, M.D. (2014). Intequisms: Accounting of ideas, chap. 6. Centurion: Africahead, 2nd edition, Kindle eBook, Amazon.com.
  12. ↑ R. Kümmel: The Productive Power of Energy and its Taxation, 4th European Congress Economy and Managers of Energy in Industry, Porto, Portugal, 27.-30. Nov. 2007.
  13. ↑ R. Stresing, D. Lindenberger, R. Kümmel (2008). "Cointegration of Output, Capital, Labor, and Excercise" (PDF). European Physical Journal B 66 (2): 279–287.

Further reading

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