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Factors of production

From Academic Kids

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 John Stuart Mill as part of one of the first coherent theories of production in political economy.


In the classical analysis, capital was generally viewed as being physical items such as tools and machinery. 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.

Developments and Alternative views

Marxist and socialist economists also employ the concept of factors of production. But they tend to treat labour very differently from the other factors, seeing it as the conscious and active input which converts physical raw materials and other inputs into use-values wanted by consumers and businesses. Their analysis does not substantially alter the idea of factors of production, although it puts special emphasis on means of production, defined as the factors minus labor, which it sought to differentiate from human factors. Further, Marxian political economy differentiates between the transhistorical concepts of the "factors of production" and the role that these play under capitalism: in that socio-economic system, labor becomes " variable capital" seen as the source of surplus-value or profits, while the non-human means of production become " constant capital" which does not contribute to surplus-value except indirectly, by making labor more productive.

Others focus on the central role of human capital, in particular the social capital (community trust) and instructional capital (actual worker's skills and instructions) that became increasingly important through the 20th century.

Most modern analyses usually cite four to seven types of capital, as in Natural Capitalism or the theories of intellectual capital. Brands have also been considered "brand capital", a special form of intangible firm-specific social capital distinct from tht inherited from the larger society, in the analysis of Baruch Lev.

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


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