How Many Factors of Production Are There?

Scientists originally believed that there were only 5 senses: touch, taste, smell, sight and hearing. To this day, most people would name these 5 if asked how many and which senses they have. Over time, however, scientists realised that there were far more ways in which we interacts with the world around us, such as balance, pain, and numerous internal senses that coordinate our organs. By now it is agreed that there are at least 9, and perhaps as many as 20 senses. I believe that economic factors of production are in the same stage the senses were when there were only thought to be 5 – some are excluded, some are lumped in with others, and generally there is no coherent definition by which to distinguish them.

At its most basic level, neoclassical theory only includes two factors of production: capital and labour. But this formulation is incomplete – first, aggregating the mysterious substance known as capital leads us into all sorts of problems. Second, it outright ignores many things that could be considered factors of production.

Even within what most people would commonly imagine to be ‘capital,’ there is a clear divide: between machinery, which can be combined with labour and materials to produce commodities, and the materials themselves. Consider the production of apple juice. Does it really make sense to define the juicer as the same type of factor of production as the apple? The apple is destroyed in the production process, whilst the juicer is not; the the apple is a running cost whilst the juicer is a fixed cost; the apple is essential to the production of the apple juice in question, whilst the juicer can be replaced by a more labour intensive or more capital intensive technique.* This distinction has been highlighted in some areas of economics, and is generally known as ‘working’ versus ‘fixed’ capital.

Another factor which can be separated out is land. As Georgists try to stress, land is fundamentally different from capital, in that it exists independently of people, is impossible to avoid using, and has a fixed supply. Hence, taxing land has completely different effects to taxing capital, because you cannot discourage the production of land. Furthermore, the returns to land are not ‘earned,’ because the landowners don’t actually have to do anything in the production process. Lumping land and capital together creates economic and moral problems.

According to Michael Hudson, the American School of Economics considered public enterprise a separate factor of production, which had the effect of decreasing costs for the other factors of production. This seems to make sense – infrastructure allows for cheaper and quicker transportation of goods and labour; education lowers hiring and training costs for firms; healthcare eliminates the cost of firms providing insurance for employees; basic security also greatly lowers or eliminates the need for firms to defend themselves from marauding thieves. Public enterprise also differs from other factors of production in that its funding is (obviously) public, rather than private. Overall it doesn’t seem to make sense to consider it the same as private capital, from which a direct profit is earned.

Finally, many have argued that an important factor of production is knowledge. After all, we cannot just throw land, labour and various types of ‘capital’ at each other; we have to know how to combine them. Different production techniques lead to different levels of efficiency (less time, more stuff). As the paper linked argues, knowledge differs from other factors of production for several reasons: it can be both ‘bad’ and ‘good;’ it is only useful in a specific time and place, and it generally comes ‘attached’ to other factors of production, and hence cannot always be separated out. Knowledge could also potentially be disaggregated into technological knowledge, the knowledge of each ‘factor of production’ (how to hold a spade) and knowledge of the production process or economy as a whole.

I’m sure one could argue there are many other factors that are required for, or help determine, the success of a production technique or entire economy: trust (if each factor of production thinks the other will just run away with the produce, growth will suffer), motivation (if nobody wants to produce anything, obviously nothing will be produced), natural resources (to commodities as land is to capital – exists independently of people, ultimately fixed in supply).

So how do we define a factor of production most coherently? Like the senses, there is some crossover between them and it is something of a judgement call as to when we should draw the line between different types. The criteria for the factors I have named seem to be that they are both necessary for almost any type of production to take place, and that each has something of a unique effect on production.  But perhaps there are alternative definitions that could be more illuminating.

*You can replace the apple with concentrate but this alters the commodity being produced. If you replace the juicer with, say, a labourer crushing the apples with a fruit crusher, in theory it shouldn’t matter for the nature of the final product.

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  1. #1 by Stefan on August 19, 2012 - 8:23 pm

    I stumbled across this to. I wondered l, for example, wheather ‘organization’ is a factor of production. Certainly firms couldn’t produce anything without some kind of management system. It seems to be a hybrid of your ‘trust’ and ‘motivation’, but not exclusively so. Another example would be ‘insurance’. Some kinds of businesses definately need insurance in order to function. I’ve come to abandon this mode of thinking. One may list all kinds of properties a production has, but it’s not particulary useful for a broad view of the economy. Thanks for your post.

    • #2 by Unlearningecon on August 20, 2012 - 5:01 pm

      It’s partly ‘knowledge,’ too, but yes it potentially deserves its own category.

      Insurance as in ‘risk protection’ is an interesting one. Limited liability laws obviously encourage risk protection, and consumer protection and safety nets probably have a similar effect on consumers and workers. But is it a factor of production? It isn’t directly ‘inputted’ into the production process like others.

  2. #3 by kjr63 on August 19, 2012 - 8:26 pm

    Just my 5 cents:

    land = the whole material universe outside of humans themselves.
    labour = knowledge, time, capital goods (tools, machines)
    capital = money used for production of goods and services (yields investor a revenue M-C-M)
    fictitious capital = money that yields via monetary inflation on asset prices.

  3. #4 by yorksranter on August 19, 2012 - 9:58 pm

    Also, “land” needs unpacking. Obviously, there is X amount of iron in the earth’s crust. But pretty much every land resource beyond that is to some extent influenced by human action and mediated by technology. The productivity of agricultural land, and exactly what is produced, is hugely susceptible to how we manage it. The ecosystem services, usually considered free goods, are heavily influenced by land use. Anything that involves water involves engineering. Infrastructure changes stuff. Think of the Fens, all that superb agricultural land – that we built.

    The Soviets had a concept of the “permanently-operating factors” which might help, but it’s not like they did so well with it.

    • #5 by Unlearningecon on August 20, 2012 - 5:17 pm

      You are absolutely right. The economy’s interaction with the ecosystem(s) around it needs far more attention and ‘the environment/land’ will not cut it as a factor of production. Your comment reminds me of this video.

    • #6 by QP on August 24, 2012 - 12:36 pm

      No, it doesn’t need further unpacking. The key is to differentiate LOCATION from RESOURCE. In talking about “land” as a factor of production we are really talking about location. Diamonds, oil etc can be collected and moved about as “stuff” but locations are fixed.

      Also, if I dump 50 million tons of earth off the edge of Poole Harbour I am not creating new land, I am simply making an existing *location* (what was the sea bed) more usable, accessible and hence more desirable and valuable. N.B doing the same thing off the edge of Shetland would not create as much added value because of the different *location*.

      • #7 by Unlearningecon on August 24, 2012 - 4:31 pm

        So land needs unpacking between location and resource, right?

      • #8 by QP on August 28, 2012 - 9:43 am

        Ok semantics here I think. I argue that in economic terms land = location. Anything that can be moved from a location = resource. (LVT should specifically stand for location value tax.)

  4. #9 by Roman P. on August 19, 2012 - 10:52 pm

    It’s a pity that only a minuscule number of economists know about Cambridge Capital Controversies. Those debates uncovered a lot of important problems of the neoclassical theory, like re-switching, but I think the problem of aggregating factors of production is more important still.

    There is a consensus amongst Post-Keynesians that you couldn’t aggregate capital but you could easily aggregate labour. It is (mathematically proven) untrue. Leontief’s theorem (1947) forbids aggregation of x1 abd x2 in G(x1,x2,x3) unless the marginal rate of substitution between x1 and x2 is independent of x3. This theorem means that aggregating over capital is possible if and only if the MRS between every pair of capital items is independent of labour. But the same is true for labour! If we admit that capital items and workers’ skills are specialized, then we could no longer throw around K’s and L’s!

    There are other problems with aggregating. (Felipe & Fisher 2003, “Aggregation in Production Functions: What Applied Economists Should Know”)

    I think that concludes with certainty that the use of production functions of the form Q=F(K,L) is wrong, but I am not sure if this critique is equally as disrupting for Sraffian models of production of commodities by the means of commodities. After all, Post-Keynesians were mostly concerned with the possibility of aggregating physical entities and hence their assumotion that labour could be presented as idealized man-hours that could be multiplied by the skill coefficient, and neoclassical school looks upon K and L as more of value sums. I wonder if I’d be able to research this question…

    • #10 by Unlearningecon on August 20, 2012 - 5:35 pm

      That’s a very interesting comment, and ties in somewhat with SR819 that the whole idea of ‘factors of production’ may be a worthless exercise. That paper also looks very interesting.

      I’m so glad I made this post – the comments have given me a feeling that factors of production are something else that needs to be unlearned.

  5. #11 by Blue Aurora on August 20, 2012 - 2:12 am

    Have you actually read anything by Henry George, Unlearningecon?

    • #12 by Unlearningecon on August 20, 2012 - 5:22 pm

      I have not, no! Have you?

      • #13 by Blue Aurora on August 23, 2012 - 2:35 am

        No, I haven’t read Henry George, but I hope to in the future.

      • #14 by Will on August 23, 2012 - 3:54 am

        You can get the gist of it without much of a time commitment:

        http://econlib.org/library/YPDBooks/George/grgPP.html

        George was a talented writer and polemicist. I think that he tended to overplay his hand, and so he promises rather much from the land value tax, and also tries a bit too hard to tie every economic and moral ill to the institution of land ownership. Still, his criticisms of Malthusianism and the wages-fund theory mark him as an able questioner of conventional wisdom.

  6. #15 by SR819 on August 20, 2012 - 9:39 am

    I hate the way economists simply lump “labour” as a factor of production, and is one of the reasons us sociologists think the discipline is simply an ideological instrument for the 1% to undermine the cause of collective labour. Labour is not simply like a machine, which can be used to produce output, labour consists of people, who have lives independent of capitalist production, and do not live in a social vacuum, getting up at 9:00 am to act as a “factor of production”, getting home at 6:00pm, and then continuing the same routine the next day. People have friends, family, social relations that go beyond the economic, and by reducing people to simply a factor of production, economists ignore the dehumanising effect that commodification of labour has had on people. Community values have been sacrificed at the altar of the “free” market, all to satisfy capital accumulation which, according to the religion of economic “science” is the road to prosperity.
    In fact, the idea of “factor” of production as used in economics is another pseudoscientific concept. You’re right to highlight the mass idiocy of thinking there are only 3 factors (and like I said I think considering Labour a factor of production is morally abhorrent). In fact, you could argue there are an infinite amount of “factors of production” if we use the economist’s definition. You could argue a monetary system is needed, because workers require remuneration for working, and without a functioning monetary system that is impossible. Perhaps team-work/cooperation is another factor of production, because without it the production process would falter. What about food, without which the workers wouldn’t have the nutrients needed to work for 8 hours a day?
    Some of these examples are perhaps ludicrous, but they’re ludicrous because the whole concept of “factors of production” as defined by economists is nonsense. Moreover, given that we’ve established there are more than 3 factors of production, this obviously completely messes up the economic theories of production that are based on isocosts, isoquants, marginal product, etc. And yet economists will still be arrogant enough to believe their subject is a science, while degrading the other social disciplines that are actually in touch with reality.

    • #16 by Unlearningecon on August 20, 2012 - 5:28 pm

      Yes I completely agree and almost put a caveat at the top of this post that said something like ‘warning: I will have my economist hat on for most of this post.’ And yes, once we establish the perhaps infinite possibilities with factors of production, each one having a marginal product becomes an incoherent idea.

      Great comment/rant.

    • #17 by Draco T Bastard (@DracoTBastard) on August 21, 2012 - 8:50 am

      You could argue a monetary system is needed, because workers require remuneration for working, and without a functioning monetary system that is impossible.

      No, you don’t need money. You do need an accounting system but there’s been many societies throughout history that didn’t use money.

      And yet economists will still be arrogant enough to believe their subject is a science,

      It is a science but it’s part of the social sciences and not a hard science and the economists have tried to paint it as one of the latter. To do this they’ve actually had to strip out all the important stuff about economics – the ethics and morality, it’s purpose (yes, the economy has a greater purpose than just making a few people rich) and, most amazingly, the actual economy (the physical resources, the environment etc) focussing solely upon money and how to make a profit.

  7. #18 by kjr63 on August 20, 2012 - 12:00 pm

    I elborate my suggestion a little bit:

    land = the whole material universe outside of humans themselves. (FREE LUNCH)
    labour = knowledge, time, capital goods (tools, machines)
    capital = money used for production of goods and services (yields investor a revenue M-C-M)
    fictitious capital = money that yields via monetary inflation on asset prices. (FREE LUNCH)

    • #19 by Unlearningecon on August 20, 2012 - 5:24 pm

      I don’t think you can lump labour in with knowledge because capital uses knowledge as well, as do policymakers. Also knowledge in the form of technology doesn’t seem to fit into that category.

      £ Capital isn’t really a ‘factor of production’ in that it doesn’t actually contribute anything directly to the production process; it is just used to purchase other factors. I do think you could make a case that availability of credit, or something like that, is a factor of production.

  8. #20 by kjr63 on August 20, 2012 - 7:03 pm

    #13
    I don’t think you can say capital “thinks.”

    Capitalist “thinks”, policymaker “thinks”, they do labour as well. Also technology is knowledge of the labour that manufactures and uses these “tools.”

    Capital is really a problematic concept. But if it is in the end really just “money,” there is no what so ever scarcity of it anywhere in the world. It is simply created on a computer keyboard. Same does not happen with land or labour.

    • #21 by Unlearningecon on August 20, 2012 - 7:08 pm

      Yes, absolutely. But I guess when I am speaking about ‘factors of production’ I am really speaking about the ‘owner’ of that particular ‘factor.’ But the more I talk about it the more it just seems as if factors of production are a qualitatively and quantitatively incoherent way of thinking about things (see SR819 and Roman P.’s comments).

  9. #22 by kjr63 on August 21, 2012 - 8:46 pm

    I just add here that if “capital” is freely available, then all gains in income are capitalised into wages and rents and other property rights. Labour does not need to beg for capital, but they have to beg for land. So the real class contradiction is between land and labour, not capital and labour. So, Henry George was on the right track in his core argument!

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