factors of production

FACTORS OF PRODUCTION:

Labor, capital, land, and entrepreneurship used by society to produce consumer satisfying goods and services. Factors of production are also termed resources or scarce resources.

All four factors of production categories are important to the production of goods used in the wants-and-needs-satisfying process that keeps human beings alive from one day to the next and makes living just a little more enjoyable. Land provides the basic raw materials that become the goods.Labor does the hands-on work. Capital is the tools that makes the job easier. And entrepreneurship organizes the entire process.

Four Resource Inputs

The production of any good or service inevitably requires four types of inputs. To see these inputs, consider a house being built by the Clint Cobblemeyer Construction Company.

First, is a large number of workers. This includes the carpenters, electricians, concrete workers, plumbers, roofers, painters, and everyone else who hammers, saws, welds, digs, and performs the assorted tasks need in the construction process.

Second, is the tools used by workers. This includes hammers, electric saws, screw drivers, delivery trucks, scaffolding, paint brushes, shovels, and other equipment.

Third, is have materials. This includes lumber, nails, screws, concrete, paint, roofing shingles, carpet, wallboard, bricks, and everything else that becomes the house.

Fourth, is the organizer. This is the person, Clint Cobblemeyer, who makes the decision to build the house in the first place and then brings together the materials, workers, and tools needed to get the job done.

Let's get specific and formal for each of the four resource categories.

Labor

Labor is the mental and physical efforts of humans (excluding entrepreneurial organization) used for the production of goods and services. Labor includes both the physical effort of factory workers and farmhands often associated with labor, as well as the mental effort of executives and supervisors.

Capital

Capital is the manufactured, artificial, or synthetic goods used in the production of other goods, including machinery, equipment, tools, buildings, and vehicles. Capital is the produced factor of production. This factor must be produced using other factors of production, which means that society is often faced with the choice between producing consumption goods that satisfy wants and needs and capital goods that are used for future production.

Without capital, labor would do ALL production "by hand." The key role of capital in the production process is to make labor more productive. While a covey of construction workers might be able to fabricate a four-bedroom house with nothing but bare hands, an assortment of hammers, saws, and other tools is bound to make their work easier and more productive.

Land

Land is the naturally occurring materials of the planet that are used for the production of goods and services, including the land itself; the minerals and nutrients in the ground; the water, wildlife, and vegetation on the surface; and the air above. The natural resources and materials of the land become the goods produced. Without these materials of the land, there is no production. Production is, in fact, the basic process of transforming naturally occurring materials that provide little satisfaction in their natural state, to goods and services that provide more satisfaction.

Entrepreneurship

Entrepreneurship is the special sort of human effort that takes on the riskof bringing labor, capital, and land together to produce goods. Entrepreneurship is the factor that organizes the other three. Without someone to organize production, the other three factors do NOT produce. A key component of entrepreneurship is risk. This resource takes the risk of organizing production BEFORE anything is produced and with no guarantee that production will be successful.

Overlapping Categories

Economists have used the four general categories of labor, capital, land, and entrepreneurship since the days of Adam Smith. These categories made a lot of sense with the onset of the industrial revolution in the 1700s, because factors of production (and especially owners of the factors of production) were largely segmented groups.

Workers, for example, seldom owned capital or land, nor did they start their own businesses. Land owners, the "landed gentry," almost never did manual labor, nor did they get involved in starting or owning factories. In 18th century England, labor, capital, land, and entrepreneurship were not just four categories of factors of production, they were four distinct socio-economic groups.

That was then, this is now. The lines between these four resource categories are frequently blurred in the modern complex economy and society.

Ownership: The lines of resource ownership have become quite blurred. Many workers also own land (homes, farms) and capital (corporate stock). Some laborers also start and operate small businesses on the side. Traditional capital and land owners (corporate executives) do not just live off of stock dividends sipping Martini's at seaside resorts, but they spend long hours using their labor to keep the corporation afloat.

Conceptual: The conceptual lines separating resource categories have also blurred. One blur comes from human capital--the education and training that makes labor more productive.
Capital, for example, results from transforming a lump of iron ore into a more productive socket wrench. What do we have after transforming a lump of human being into a more productive chemical engineer? We call it human capital. But is this labor or capital? Yes and no! It is some of both and not exclusively either.
Farmland provides an example of the blur between land and capital. Is farmland land, or is it capital? While it is clearly land, most farmland has been cleared, terraced, augmented with fertilizers, and extensively modified such that it can hardly be considered a "natural resource." Farmland is as much a "factory" as any operated by General Motors.