Factors of production

Categories: Production

Classical economics distinguishes between three factors of production which are used in the production of goods:

• Land or natural resources - naturally-occurring goods such as soil and minerals. The payment for land is rent.
• Labor - human effort used in production. The payment for labor is a wage.
• Capital goods - human-made goods (or means of production) which are used in the production of other goods. These include machinery, tools and buildings. In a general sense, the payment for capital is called interest.

These were codified originally in the analyses of Adam Smith, 1776, David Ricardo, 1817, and the later contributions of Karl Marx and John Stuart Mill as part of one of the first coherent theories of production in political economy. Marx refers in Das Kapital to the three factors of production as the "holy trinity" of political economy.

In the classical analysis, working capital was generally viewed as being a stock of physical items such as tools, buildings and machinery. This view was explicitly rejected by Marx. Modern economics has become increasingly uncertain about how to define and theorise capital (see capital controversy).

With the emergence of the knowledge economy, more modern analysis often distinguishes this physical capital from other forms of capital such as "human capital" (economics jargon for education or training).

Also, some economists mention enterprise, entrepreneurship, individual capital or just "leadership" as a fourth factor. However, this seems to be a form of labor or "human capital." When differentiated, the payment for this factor of production is called profit.

The classical theory, further developed, remains useful to the present day as a basis of microeconomics.

Contents 1 Developments and Alternative views 2 Classical view as the base of microeconomic theory 3 See also 3.1 List of Marketing TopicsList of Management TopicsList of Economics TopicsList of Accounting TopicsList of Finance TopicsList of Economists

Developments and Alternative views

Classical view as the base of microeconomic theory

Although it did not deal substantially with complex issues of a sophisticated modern economy, the classical theory remains useful to the present day as the basis of microeconomics, however many distinctions one cares to make or macro-theory or political economy one chooses to apply to trade them off or set their valuations in society at large.

Land has become natural capital, imitative aspects of Labor have become instructional capital, creative or inspirational aspects or "Enterprise" have become individual capital (in some analyses), and social capital has become increasingly important. The classical relationship of financial capital and infrastructural capital is still recognized as central, but there is a wider debate on means of production and various means of protection, or "property rights", to secure their reliable use.

When disputes arise regarding these fine distinctions, most economists will fall back to the three classical factors. While no major theory has yet substantially altered the foundation assumptions of either "left" (Marxist) or "right" (neoclassical) theory, Georgism is one syncretic system of thought incorporating both a nominally socialist moral basis (everyone has an equal right of access to nature) while strictly maintaining a solid "libertarian" philosophy on the absolute right of private ownership of the products of all human labor.

See also

• microeconomics
• production theory basics
• production, costs, and pricing
• labor theory of value
• cost of production theory of value
• optimum factor allocation

List of Marketing Topics	List of Management Topics
List of Economics Topics	List of Accounting Topics
List of Finance Topics	List of Economists

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