The factors of production

The factors of production

The factors of productions correspond to the tangible and intangible inputs required to produce or manufacture a good or provide a service, as well as in directing and maintaining productivity in a particular economy. In other words, these inputs are used and converted into an output.

The Factors of Production According to Classical Economics

Proponents of classical economics, particularly Adam Smith and David Ricardo, as well as their followers, have limited the factors of production into three major categories. These categories demonstrate the focus on physical and tangible resources. Take note of the following:

• Land: The concept “land” encompasses anything found in nature to include agricultural land or real estate, as well as other natural resources such as water, air, minerals, and vegetation and animals or flora and fauna.

• Labor: Human effort used in production is called labor. This effort includes the physical and mental expertise of individuals that are used to produce a good or provide services. Note that labor also means the people involved in the production.

• Capital: These are human-made resources used in production. There are two types of capital: fixed and working. Examples of fixed capital include equipment or machines, and tools, while examples of working capital include liquid cash or money, as well as raw materials.

The Means of Production as Factors of Production

The means of production are the physical non-human and non-financial inputs used in the production of economic value. In other words, based on classical economics, the means of production are also the factors of product minus labor or human capital and financial capital.

Note that there are two categories of means of production that are based on Marxism or the “elementary factors of the labor process” or “productive forces” introduced by economist Karl Marx. Take note of the following:

• Subjects of Labor: Examples include facilities and infrastructures, equipment and machinery, and other tools.

• Instruments of Labor: Examples include natural resources such as land, water, and minerals, as well as raw materials.

Essentially, based on the labor process described by Marx, people operate on the subjects of labor using the instruments of labor to produce a product or provide a service.

The Factors of Production According to Neoclassical Economics

Similar to classical economics, neoclassical economics consider land, labor, and capital as factors of production. However, it expounds the concept of capital to provide specific capital-based factors of production. Take note of the following:

• Fixed Capital: Corresponds to facilities and infrastructures, equipment and machinery, tools, as well as technologies such as computers, automated machines, and software or applications designed and used not only to produce but also increase or supplement productive potential.

• Working Capital: Refers to the stock or inventory of finished and semi-finished products deemed to be consumed in the near future or will be used or made further into final outputs in the near future. Liquid assets are also working capital, particularly if they are directly linked to production expenses, such as to pay for salaries, interests, taxes, and rent.

• Financial Capital: The financial capital is the money used by an individual or group of individuals used to initiate and finance the operation of a business organization. This type of capital is often based on the net worth of the business or the total amount of its assets minus its liabilities. Borrowed money is sometimes referred to as financial capital as well.

It is worth mentioning that technological progress is also a factor of production under neoclassical economics. This represents the developments or innovations that account for growth, particularly economic growth. Note that neoclassical economics argue that capital and labor do not account for all economic growth alone.

Other Factors of Production from Modern Thought

The subfield of ecological economics provides an alternative view of the factors of production by integrating the first and second laws of thermodynamics, thus differing to classical economics and neoclassical economics and providing a more realistic concept of the production process by adhering to fundamental physical limitations. Take note of the following:

• Matter: These are material inputs of production. Under ecological economics, these materials cannot be created or destroyed but can be reused or recycled through refining and reforming. In addition, the subfield considers the fact that these materials are available at a fixed amount and once they are used up, nothing more can be produced without reusing or recycling.

• Energy: These are physical but non-material inputs of production. The prime example is electricity used to run equipment or machinery. However, during the operation of these materials, electricity is converted to a less useful form of energy called heat. Under ecological economics, energy cannot be created or destroyed, thus placing a limit to its usable amount.

• Design Intelligence: These are the knowledge, creativity, and efficiency used in production. The better the design, the more beneficial the product is. Design intelligence improves over time through the accumulation or improvement in knowledge, creativity, and efficiency, thus corresponding to the neoclassical concept of technological progress.

Modern economists have introduced other and more specific factors of productions that render the factors from classical economics and neoclassical economics generic. Take note of the following:

• Entrepreneurship: The process of combining other factors such as land, labor, and capital to produce a good or provide a service for the purpose of making profits. Effective and efficient entrepreneurship result in high-quality production.

• Information: The collective knowledge obtained from the collection and processing of data or information is another factor of production because of its critical role in decision-making, particularly in formulating strategies and shaping competitive advantage.

Takeaway: Pointers on the Factors of Production

It is important to stress the fact that the discussion above encompasses the microeconomic and macroeconomic dimensions of the factors of production. The factors identified by classical economics and neoclassical economics are applicable to both microeconomic and macroeconomic dimensions, specifically at the organization-level and the greater-economy-level. The factors defined under ecological economics lean toward a macroeconomic dimension while novel factors, particularly entrepreneurship and information lean more toward a microeconomic dimension.