Factors of Production in Economy

The Three Factors of Production

One of the central characteristics of this course is its focus on land as a distinctive factor of production, which must be considered separately from the other two factors, capital and labor. This is a point that modern-day economics de-emphasizes, or even denies outright. Why is that? Could it be that land was an important economic factor, way back when — but today's social complexity and advanced technology have freed us from dependence on nature?

Not one bit. Land is needed for all production, for all human life and activity of any kind. When most people think of "land," their mental picture is of farm land: crops, orchards, pastures. But in fact, the most valuable natural resource in modern society is urban land. In cities, activities take less land area per head, but more land value, because the price of city land (per unit of area) is hundreds, sometimes thousands of times higher than the price of rural land.

The factors of production are:

LAND.
The entire material universe exclusive of people and their products.

Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land. This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities. The trees in a virgin forest are land; in a cultivated forest they are wealth.

Radio and TV communications use the radio spectrum, a limited natural resource. Drivers of SUVs and other fuel-burning machinery use the earth's atmosphere as a dump for their greenhouse-gas wastes. To understand the meaning of land as a factor of production, we must conceive and define land broadly, as the entire set of natural opportunities.

LABOR.
All human exertion in the production of wealth and services.

Mental toil is labor as well as muscular effort. All who participate in production by their mental and physical effort are laborers in the economic sense. Thus entrepreneurs as well as blue-collar workers are included.

CAPITAL.
Wealth used in the process of production, which includes wealth in the course of exchange.

Capital is a subset of wealth (see definition below). Any item of wealth could be used as capital; it could be sold or used in production. This is implied in our definition of production, when we note that production is not completed until wealth reaches the final consumer. If an item of wealth is to be used as capital, its owner foregoes consuming it for that time.

In political economy, we define capital as a factor of production. We should note that this is quite different from the way "capital" is defined in conventional economics courses. There, capital is generally considered to be any asset that will yield its owner a return. Such an asset could be "capital goods" (wealth used in production), or it could be land, or money, or the investments in education or skill that are commonly termed "human capital."

Distinguishing the three factors of production is crucial to our analysis. Our most important objective in political economy is to understand the distribution of wealth in society. In order to do that, we need consistent, mutually exclusive definitions of the factors of production. Labor is only human exertion; capital is only physical products of human labor; land is only things not created by human labor. They are not convertible into each other. (For example: something can be built on land, but if the building is destroyed, the value of the bare land remains.)