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Factors of production

Classical economics distinguishes between three factors of production which are used in the production of goods:

  • Land - naturally occurring goods such as soil and minerals.
  • Labor - human effort used in production.
  • Capital - goods which are used in the production of other goods, such as machinery, tools and buildings.

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 the classical analysis, capital was generally viewed as being physical items such as tools and machinery. More modern analysis often distinguishes this physical capital from other forms of capital such as human capital. Some economists mention enterprise, individual capital or just "leadership" as a fourth factor.

The classical theory, further developed, remains useful to the present day as a basis of microeconomics.

Alternative views

A separate track of analysis, and a competing political economy, is most often attributed to Karl Marx and socialist parties. These 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.

This analysis did not substantially alter the idea of factors of production, although it put special emphasis on means of production, defined as the factors minus labor, which it sought to differentiate from human factors.

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 that inherited from the larger society, in the analysis of Baruch Lev[?].

When disputes arise regarding these fine distinctions, most economists will fall back to the classical factors. No major theory has yet substantially altered the foundation assumptions of either "left" (Marxist) or "right" (neoclassical) theory.

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 that was sharply criticized by Karl Marx 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.

See also : microeconomics, production, costs, and pricing

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