DEFINITION: The phrase “factors of production” refers to the various elements required to produce a good or service. Typical examples of factors of production include capital, labor, land, and entrepreneurship.
Individuals in a society who own or otherwise wield authority over the factors of production are often able to amass the most wealth in that society.
In the capitalist style of economic organization, it is usually those who own or invest in important companies who control the factors of production.
In contrast, in the socialist style of economic organization, it is the government which exercises majority (or exclusive) control over the factors of production.
ETYMOLOGY: The phrase “factors of production”is attested from the early nineteenth century, notably in the work of the English economist David Ricardo. The concept itself, however, probably extends back to Antiquity.
The English noun “factor” is attested from the fifteenth century. It derives from Middle English factor, meaning “agent” or “representative,” which derives from Middle French facteur, with the same meaning. The latter word derives from Medieval Latin factor, meaning “doer,” which, in turn, comes from the past participle factus of the classical Latin verb facio, facere, meaning “to do” or “to make.”
The English preposition “of” derives from the identical Middle English form, meaning “off” or “of,” which, in turn, derives from the identical form in Old English. The latter is akin to Old High German aba, meaning “off” or “away.”
The English noun “production” is attested from the fifteenth century. It is made from the related noun “product,” which itself derives, via Middle English, from Medieval Latin productum, meaning “product.” The latter word derives from the past participle prōductus of the classical Latin verb prōduco, prōducere, meaning “to bring forward” or “to produce.”
USAGE: The theory of factors of production in contemporary economics may be traced back to classical, nineteenth century political economy. Today’s ideas integrate previous economic perspectives, including older conceptions of land or labor as the primary factors of production, into a unified conceptual framework.
One of the landmark achievements of so-called “neoclassical” theory was the realization of the crucial role that capital—in the form of savings, investment, and entrepreneurship—plays in modern industrialized economies.
During the twentieth century—and continuing until today—capital and labor came to be seen as the most important inputs for generating goods, services, and income. The manufacturing sector’s performance, for instance, can be assessed using specific indices, including the ISM manufacturing index.
The term “capital” may seem to denote primarily the concept of money—think of the iconic figure of the capitalist with his round belly and top hat on the Monopoly board game.
However, in the present context, the concept of “capital” must be understood to include more than just money in the bank, since money by itself does not directly bring about the production of goods or services.
Rather, in this context, “capital” is understood to comprise the things that money pays for. It is a factor of production on account of the types of productive activity it makes possible, such as the acquisition of land and equipment or the remuneration of labor.
For these reasons, according to contemporary mainstream economic thought, capital holds the central role in determining value, which is what makes it a principal factor of production.
Nevertheless, capital is not the only factor of production. Other factors, such as land, entrepreneurship, and labor also play a significant role in the creation of vale. Hence, they too count as factors of production.