factors of production - Developments and Alternative views

The providers of the services needed to produce the national income. These include labour, capital, land, and entrepreneurship. Labour can be classified by various levels and types of skill. The skill and experience which makes some forms of labour more productive than unskilled labour are referred to as human capital. Capital includes physical assets, including land, buildings, plant, and equipment, as well as inventories of materials, work in progress, and unsold output. It also includes financial assets, such as securities, credit extended, and cash and bank deposits which can be used to pay labour or to extend credit. It also covers intellectual capital, such as patents and know-how. Land includes mineral deposits as well as land whose climate and soil make it suitable for agriculture. Entrepreneurship provides initiative and risk-bearing. In small firms the entrepreneur is a person who also provides labour and some capital. In large firms the entrepreneurial function is divided between directors, shareholders, and creditors.

Factors of production are resources used in the production of goods and services in economics. Capital goods – human-made goods (or means of production) which are used in the production of other goods. Marx refers in Das Kapital to the three factors of production as the "holy trinity" of political economy.

Free trade laissez faire theory argues that economic efficiency is achieved in cases where free movement (laissez passer) of the "factors of production" is permitted. Karl Polanyi in "The Great Transformation", however, demonstrated that historically whenever laissez faire policies are adopted, legal moves to prevent the free movement of one of the factors of production always occurs (for example current neo-liberal attempts to free the movement of capital and resources are today increasingly tied to immigration controls).

In the classical analysis, working capital was generally viewed as being a stock of physical items such as tools, buildings and machinery. Modern economics has become increasingly uncertain about how to define and theorise capital (see capital controversy).

With the emergence of the knowledge economy, more modern analysis often distinguishes this physical capital from other forms of capital such as "human capital" and intellectual capital which require intangible management orientated techniques to manage such as Balanced Scorecard, Risk Management, Business Process Reengineering, Knowledge Management, and Intellectual Capital Management

Prior to the Information Age the land, labour, and capital were used to create substantial wealth due to their scarcity. Following the Information Age (circa 1971-1991), and the Knowledge Age (circa 1991 to 2002) and the current Intangible Economy (circa 2002+) the primary factors of production today are intangible. According to economic theory, a "factor of production" is used to create value and economic performance. As the four factors of production today are all intangible, the current economic age is called the Intangible Economy. Intangible factors of production are subject to network effects and the contrary economic laws such as the law of increasing returns. It is therefore important to differentiate between conventional (tangible) economics and intangible economics when discussing issues related to factors of production which change according to the economic era that society is experiencing.

Some economists mention enterprise, entrepreneurship, individual capital or just "leadership" as a fourth factor. This is when entrepreneurs think of ideas, organise the other three factors of production, and take risks with their own money and the financial capital of others.

In a market economy, entrepreneurs combine land, labor, and capital to make a profit. In a planned economy, central planners decide how land, labor, and capital should be used to provide for maximum benefit for all citizens. Normally though, capital means investment in goods that can produce other goods in the future.

Developments and Alternative views

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 is useful 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 " rights", to secure their reliable use.

In Real Estate

The factors in the production of wealth, income, or services which can be sold for money. The factors are: (1) labor, (2) management (coordination), (3) capital, and (4) land (or natural resources).