Factors of production

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

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• Land or natural resources - naturally-occurring goods such as soil and minerals. The payment for land is rent.
• Labor - human effort used in production. The payment for labor is a wage.
• Capital goods - human-made goods (or means of production) which are used in the production of other goods. These include machinery, tools and buildings. In a general sense, the payment for capital is called interest.

These were codified originally in the analyses of Adam Smith, 1776, David Ricardo, 1817, and the later contributions of Karl Marx and John Stuart Mill as part of one of the first coherent theories of production in political economy. Marx refers in Das Kapital to the three factors of production as the "holy trinity" of political economy.

Related Topics:
Adam Smith - 1776 - David Ricardo - 1817 - Karl Marx - John Stuart Mill - Political economy - Das Kapital

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

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With the emergence of the knowledge economy, more modern analysis often distinguishes this physical capital from other forms of capital such as "human capital" (economics jargon for education or training).

Related Topics:
Emergence - Knowledge economy - Physical capital - Human capital

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Also, some economists mention enterprise, entrepreneurship, individual capital or just "leadership" as a fourth factor. However, this seems to be a form of labor or "human capital." When differentiated, the payment for this factor of production is called profit.

Related Topics:
Entrepreneurship - Individual capital - Profit

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

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Factors of production: Developments and Alternative views ►