What are the factors of production?

Factors of production are resources that are considered the basic building blocks of production in an economy. Land, labor and capital are widely considered to be the three main factors of production. Factors of production are considered as basic inputs which are absolutely necessary for the production of any product or service useful to the final consumer. Take the case of something as simple as a burger. Producing burgers requires real estate and raw materials (land), the efforts of many workers (labor), and cooking equipment (capital). Indeed, such a mix of land, labor and capital occurs at various stages of the production process of any good in a modern economy. More recently, entrepreneurship is also considered by many as the fourth factor of production. It is considered to be the most important factor of production which combines the other three factors. In fact, many believe that without entrepreneurship the other factors of production would become useless.

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Some heterodox economists, however, consider land, labor and time as the three main factors of production. They believe that capital and entrepreneurship are secondary factors of production in the sense that these factors first originate from the combination of land, labor and time. In the modern economy, physical capital, such as machines, is first produced by a mixture of land and labor over a period of time. Only after this happens do we see capital being brought to life and used to produce other intermediate or final goods and services. Similarly, these economists argue, entrepreneurship, which involves an element of uncertainty, can also be seen as the product of a combination of the three primary factors of production, namely land, labor and time. Remember that the entrepreneur’s role involves dealing with uncertainty that plagues the production process. This element of uncertainty is brought into the picture by time, which is necessarily involved in the production of any product or service. Some individuals or groups of entrepreneurs typically risk investing money in the present moment and then wait to reap the rewards of the investment some time in the uncertain future. The concept of an entrepreneur can also be considered fundamentally as a form of labor. And real estate and other materials that the entrepreneur personally uses for work can be classified as land.

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Private or public ownership

Ownership of the factors of production has been a matter of intense debate for centuries among thinkers belonging to different schools of economic thought. For example, Marxist economists have long argued that the factors of production need to be collectively owned by the state. This was behind centrally planned economies like the former Soviet Union, as opposed to economies like the United States where the factors of production were largely owned by private individuals or groups. Marxists believe that private ownership of the factors of production leads to the exploitation of labor supplied by the working class and the mismanagement of scarce resources. They argue that stale planners, on the other hand, can overcome both of these problems by formulating a sound collective economic plan. Economists of various free market schools of thought, however, strongly believe in private ownership of all factors of production in an economy. They argue that private ownership gives resource owners incentives to use the factors of production most efficiently, both to avoid unnecessary waste and to extract maximum value from limited resources.


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