The Three Factors of Production


One of the central characteristics of this course is its focus on land as a distinctive factor of production, which must be considered separately from the other two factors, capital and labor. This is a point that modern-day economics de-emphasizes, or even denies outright. Why is that? Could it be that land was an important economic factor, way back when — but today's social complexity and advanced technology have freed us from dependence on nature?

LAND: The entire material universe exclusive of people and their products. Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land. This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities. The trees in a virgin forest are land; in a cultivated forest they are wealth.

LABOR: All human exertion in the production of wealth and services. Mental toil is labor as well as muscular effort. All who participate in production by their mental and physical effort are laborers in the economic sense. Thus entrepreneurs as well as blue-collar workers are included.

CAPITAL: Wealth used in the process of production, which includes wealth in the course of exchange. Capital is a subset of wealth (see definition below). Any item of wealth could be used as capital; it could be sold or used in production. This is implied in our definition of production, when we note that production is not completed until wealth reaches the final consumer. If an item of wealth is to be used as capital, its owner foregoes consuming it for that time. It's worth noting that capital is a secondary factor of production. Only the two primary lactors, labor and land, are absolutely necessary. We know that wealth can be created without the use of capital, because capital is wealth. Wealth had to be created before people could choose to use some of it as capital.

Distinguishing the three factors of production is crucial to our analysis. Our most important objective in political economy is to understand the distribution of wealth in society. In order to do that, we need consistent, mutually exclusive definitions of the factors of production. Labor is only human exertion; capital is only physical products of human labor; land is only things not created by human labor. They are not convertible into each other. (For example: something can be built on land, but if the building is destroyed, the value of the bare land remains.)

Angelina Matthew,

Journal Coordinator,

Global Journal of Agricultural Economics and Econometrics
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