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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 utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function. There are three basic resources or factors of production: land, labour and capital. 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 resources above or below the soil. Recent usage has distinguished human capital (the stock of knowledge in the labor force) from labor.Entrepreneurship is also sometimes considered a factor of production. Sometimes the overall state of 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.
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 (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.
The classical economics of Adam Smith, David Ricardo, and their followers focus on physical resources 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:
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.
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, 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:
Ecological economics is an alternative to neoclassical economics). It integrates, among other things, the first and second laws of thermodynamics (see: Laws of thermodynamics) 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:
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.
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 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.
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. 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.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 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.
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
Exercise can be seen as individual factor of production, with an elastication larger than labor.A cointegration analysis support results derived from linear exponential (LINEX) production functions.
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” 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). Consequently, mankind does not have to keep "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, David Ricardo, and 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, costs and prices. 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.
Economics is the social science that studies the production, distribution, and consumption of goods and services.
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.
Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
In economics and sociology, the means of production are physical and non-financial inputs used in the production of economic value. These include raw materials, facilities, machinery and tools used in the production of goods and services. In the terminology of classical economics, the means of production are the "factors of production" minus financial and human capital.
This aims to be a complete article list of economics topics:
Ecological economics, also known as bioeconomics of Georgescu-Roegen, ecolonomy, or eco-economics, is both a transdisciplinary and an interdisciplinary field of academic research addressing the interdependence and coevolution of human economies and natural ecosystems, both intertemporally and spatially. By treating the economy as a subsystem of Earth's larger ecosystem, and by emphasizing the preservation of natural capital, the field of ecological economics is differentiated from environmental economics, which is the mainstream economic analysis of the environment. One survey of German economists found that ecological and environmental economics are different schools of economic thought, with ecological economists emphasizing strong sustainability and rejecting the proposition that physical (human-made) capital can substitute for natural capital.
In economics, capital consists of assets that can enhance one's power to perform economically useful work. For example, a stone or an arrow is capital for a hunter-gatherer who can use it as a hunting instrument; similarly, roads are capital for inhabitants of a city. Capital is distinct from land and other non-renewable resources in that it can be increased by human labor, and does not include certain durable goods like homes and personal automobiles that are not used in the production of saleable goods and services. Adam Smith defined capital as "that part of man's stock which he expects to afford him revenue". In economic models, capital is an input in the production function.
A price is the quantity of payment or compensation given by one party to another in return for one unit of goods or services. A price is influenced by production costs, supply of the desired item, and demand for the product. A price may be determined by a monopolist or may be imposed on the firm by market conditions.
Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. These economists produced a theory of market economies as largely self-regulating systems, governed by natural laws of production and exchange.
Use value or value in use is a concept in classical political economy and Marxian economics. It refers to the tangible features of a commodity which can satisfy some human requirement, want or need, or which serves a useful purpose. In Karl Marx's critique of political economy, any product has a labor-value and a use-value, and if it is traded as a commodity in markets, it additionally has an exchange value, most often expressed as a money-price.
A theory of value is any economic theory that attempts to explain the exchange value or price of goods and services. Key questions in economic theory include why goods and services are priced as they are, how the value of goods and services comes about, and—for normative value theories—how to calculate the correct price of goods and services.
The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow analysis is the basis of national accounts and hence of macroeconomics.
In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern, early modern and modern. Systematic economic theory has been developed mainly since the beginning of what is termed the modern era.
In economics, distribution is the way total output, income, or wealth is distributed among individuals or among the factors of production. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income. One use of national accounts is for classifying factor incomes and measuring their respective shares, as in national Income. But, where focus is on income of persons or households, adjustments to the national accounts or other data sources are frequently used. Here, interest is often on the fraction of income going to the top x percent of households, the next x percent, and so forth, and on the factors that might affect them.
The following outline is provided as an overview of and topical guide to economics:
In economics, factor payments are the income people receive for supplying the factors of production: land, labor, capital or entrepreneurship.
Criticisms of the labor theory of value affect the historical concept of labor theory of value (LTV) which spans classical economics, liberal economics, Marxian economics, neo-Marxian economics, and anarchist economics. As an economic theory of value, LTV is central to Marxist social-political-economic theory and later gave birth to the concepts of labour exploitation and surplus value. LTV criticisms therefore often appear in the context of economic criticism, not only for the microeconomic theory of Marx but also for Marxism, according to which the working class is exploited under capitalism.
Throughout modern history, a variety of perspectives on capitalism have evolved based on different schools of thought.
The Cambridge capital controversy, sometimes called "the capital controversy" or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that started in the 1950s and lasted well into the 1960s. The debate concerned the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution. The name arises from the location of the principals involved in the controversy: the debate was largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology, in Cambridge, Massachusetts.
Constant capital (c), is a concept created by Karl Marx and used in Marxian political economy. It refers to one of the forms of capital invested in production, which contrasts with variable capital (v). The distinction between constant and variable refers to an aspect of the economic role of factors of production in creating a new value.