Natural, human and man-made factors used in the production of goods and services

In economics, factors of production, resources or inputs are what is used in the production process to produce output—that is, finished goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function. There are three basic resources or factors of production: land, labor and capital. The factors are also frequently labeled "producer goods or services" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods". All three of these are required in combination at a time to produce a commodity.

  • Capital Goods - Tools, machinery and other man-made elements used to produce goods and services
  • Entrepreneurship - Managerial skills and willingness to take risks in the production of goods and services
  • Labor - Human physical and mental skills available to produce goods and services
  • Land - Natural resources available for producing goods or delivering services


Biography of Carl Menger: The Founder of the Austrian School, by Joseph Salerno
Biographical and bibliographical essay, discussing his life and work and delving into various aspects of Austrian economic theory as presented by Menger
"In Menger's words, 'the causal connection between bread and the satisfaction of one of our needs is ... a direct one.' Factors of production, on the other hand, are 'goods of higher order,' having only 'an indirect causal connection with human needs.' For example, flour and the services of ovens and bakers' labor are second-order goods whose goods-character stems from the fact that, when they are combined in the process of production to yield a quantity of bread, they operate as an indirect cause of the satisfaction of the human want for bread. Likewise wheat, grain mills and millers' labor constitute third-order goods ..."
General Observations Concerning the Theory of Rent, by Ludwig von Mises, Human Action, 1949
Chapter 22 "The Nonhuman Original Factors of Production", section 1; explains that the differential rent concept, formulated by David Ricardo, can in general be accepted within modern economics, whereas the residual rent idea is incorrect
"The modern theory of value and prices is not based on the classification of the factors of production as land, capital, and labor. Its fundamental distinction is between goods of higher and of lower orders, between producers' goods and consumers' goods. When it distinguishes within the class of factors of production the original (nature-given) factors from the produced factors of production (the intermediary products) and furthermore within the class of original factors the nonhuman (external) factors from the human factors (labor), it does not break up the uniformity of its reasoning concerning the determination of the prices of the factors of production."
Related Topic: Land
Give Me Liberty, by Rose Wilder Lane, 1936
Originally published as an article titled "Credo" in the Saturday Evening Post; describes her experiences in and history of Soviet Russia and Europe, contrasting them with the history of the United States, emphasizing the individualist themes
"Americans have been exploiting the natural resources of half a continent. And this exploitation is continuing now and should resume its accelerating rate of speed, for our unused natural wealth is enormous. ... But natural resources alone do not explain our relatively greater wealth, for while Americans have been exploiting America, Europeans have been exploiting Asia, Africa, South America, the Ease Indies, the West Indies, Australia and the South Seas."
UpdJulian Simon, Lifesaver, by Donald J. Boudreaux, The Freeman, Apr 1998
Reflections on the passing of Julian Simon; opening quote: "The real issue is not whether one cares about nature, but whether one cares about people", The Ultimate Resource 2 (1996)
"... Julian showed that ours is not a world of fixed resources. Instead, he rightly taught that the quantity of resources available at any given time is determined by how creative and energetic we are in extracting resources from the earth, as well as by how creative and energetic we are in devising ways of getting more and more output from each unit of resource. His massive and masterful documentation of how free people unfailingly use resources with increasing efficiency is the single most potent intellectual weapon available today for doing combat against the anti-people puritans of both the left and the right."
UpdNatural Resources Aren't Finite, by Julian Simon, Cato Institute Commentary, 4 Mar 1997
Discusses losses incurred by commodities traders and investment managers who believed that prices of commodities must rise because there is a "finite" stock of natural resources on Earth
"Why do sophisticated traders believe that the prices of commodities will rise rather than fall? Because they believe that our economy must eventually use up the fixed stocks ... why do they believe that commodities will grow more scarce? For many people, the idea that resources are finite is at the source of this belief. But the idea of finiteness is a prejudice and it is not supported by available facts. ... 'finite' is not only inappropriate, it is downright misleading when applied to natural resources. The mathematical definition of 'finite' is quite different from a useful economic definition."
Related Topic: Technology
Simon, Julian (1932-1998), by Donald J. Boudreaux, The Encyclopedia of Libertarianism, 15 Aug 2008
Biographical essay
"Simon argued there are no resources without human creativity to figure out how to use them and human effort to actually do so. Petroleum, for example, is certainly not, by its nature, a resource. If it were, Native Americans would long ago have put it to good use. But they did not. Petroleum did not become a resource until creative people determined how it could be used to satisfy some human desires and other people determined how it could be cost-effectively extracted from the ground. An implication of this realization, that humans are 'the ultimate resource,' leads to the conclusion that a high and growing population ... is desirable."
Related Topic: Julian Simon
TANSTAAFL, There Ain't No Such Thing as a Free Lunch, by David R. Henderson, 3 Mar 2014
Explains the two meanings of TANSTAAFL: the scarcity of economic resources (and the need for tradeoffs) and the expectation of some kind of reciprocity when something is offered for "free"
"What is a scarce resource? You could count the pineapples in Hawaii, the Mercedes Benzes in Beverly Hills, and the steel in South Korea, and you still wouldn't know whether they are scarce. Here's how you would know: At a zero price (and not a price set at zero by government regulation or caused to be zero by a government subsidy), is there enough of the good to satisfy everyone's demands? If not, the good is scarce. This means that the vast majority of goods are scarce. There are a few non-scarce goods, which economists call 'free goods.'"
The Austrian Economists, by Eugen Böhm von Bawerk, The Annals of the American Academy of Political and Social Science, 1891
Explains some of the major tenets of the Austrian school -just two decades after publication of its seminal treatise, contrasting them with the views of classical economics and the historical school; paper solicited by the editors of the magazine
"Since several factors of production -- soil, capital, hired labor, and labor of the employer himself -- cooperate in the production of a common product, the question as to what share of value shall be assigned to each of the factors, in compensation for its assistance, is obviously a special case of the general problem."
The Brilliance of Turgot, by Murray Rothbard, 1986
Biography and review of Turgot's major writings; introduction to The Turgot Collection
"First, Turgot examines an isolated man, and works out a sophisticated analysis of his value or utility scale. By valuing and forming preference scales of different objects, Crusoe confers value upon various economic goods and compares and chooses between them on the basis of their relative worth to him, not only between various present uses of goods but also between consuming them now and accumulating them for 'future needs.' Like his French precursors, Turgot sees that the subjective utility of a good diminishes as its supply to a person increases; and like them, he lacks only the concept of the marginal unit to complete the theory."
UpdThe Doomslayer, by Ed Regis, Wired, Feb 1997
Lengthy essay about Simon, his research and writings, as well as critical views on his positions
"... people are fruitful and they multiply but the stores of raw materials in the earth's crust certainly don't, so how can it be possible that, as the world's population doubles, the price of raw materials is cut in half? ... resources, for the most part, don't grow on trees. People produce them, they create them, whether it be food, factories, machines, new technologies, or stockpiles of mined, refined, and purified raw materials. 'Resources come out of people's minds more than out of the ground or air,' says Simon. 'Minds matter economically as much as or more than hands or mouths. ...'"
The Idea of a Private Law Society, by Hans-Hermann Hoppe, Mises Daily, 28 Jul 2006
Discusses the problem of social order, i.e., rules to regulate the use of "everything scarce so that all possible conflicts can be ruled out"
"Suppose ... all external goods are available in superabundance. They are 'free goods,' just as the air that we breathe is normally a 'free' good. ... Hence, it is impossible for there ever to be a conflict between Crusoe and Friday concerning the use of such goods. A conflict is only possible if goods are scarce. Only then will the need arise to formulate rules that make orderly, conflict-free social cooperation possible."
The Nature and Significance of Economic Education, by Israel Kirzner, The Freeman, Oct 1998
Explains why economic education of both the general public and politicians/legislators is needed and why a teacher, such as Mises, must remain scientifically detached (value free) even if passionate about the teaching goals
"Economic understanding requires one to see the 'objects' with which economic activity is concerned—the money, the natural resources, the capital equipment, the flows of half-finished goods, the fully produced goods ready for delivery to the consumer—from a subtly different perspective from that to which the layperson has been accustomed. ... the rewards to owners of scarce resources express those resources' respective relative productive values, as judged by consumers, and thus stimulate these owners to place their resources and talents in the efficient service of consumers."
UpdThe State of Humanity: Good and Getting Better, by Sheldon Richman, Julian Simon, 11 Nov 1996
Contrasts the pessimistic 1980 prediction, made in the Global 2000 Report to the President, about the probable state of the world in the year 2000 with the actual state in the mid-1990's.
"Since antiquity, people have worried about running out of natural resources. Yet, amazingly, all the historical evidence shows that raw materials — all of them, even oil — have become more abundant rather than less. And there is no reason why that trend should not continue forever. The evidence is particularly strong that the trends in food production and nutrition are benign despite rising population. The long-run price of food is down sharply, even relative to consumer products, as a result of increased productivity. And per person food consumption has risen during the last 30 years."
Related Topic: Life

The introductory paragraph uses material from the Wikipedia article "Factors of production" as of 20 Oct 2018, which is released under the Creative Commons Attribution-Share-Alike License 3.0.