Factors of production

Factors of production are resources used in the production of goods and services in economics. Classical economics distinguishes between three factors:

* Land or natural resources – naturally-occurring goods such as soil and minerals that are used in the creation of products. The payment for land is rent.

* Labor – human effort used in production which also includes technical and marketing expertise. 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.

Free trade laissez faire theory argues that economic efficiency is achieved in cases where free movement (laissez passer) of the "factors of production" is permitted. Karl Polanyi in "The Great Transformation", however, demonstrated that historically whenever laissez faire policies are adopted, legal moves to prevent the free movement of one of the factors of production always occurs (for example current neo-liberal attempts to free the movement of capital and resources are today increasingly tied to immigration controls).

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).

With the emergence of the knowledge economy, more modern analysis often distinguishes this physical capital from other forms of capital such as "human capital" and intellectual capital which require intangible management orientated techniques to manage such as Balanced Scorecard, Risk Management, Business Process Reengineering, Knowledge Management, and Intellectual Capital Management

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. This is when entrepreneurs think of ideas, organise the other three factors of production, and take risks with their own money and the financial capital of others.

In a market economy, entrepreneurs combine land, labor, and capital to make a profit. In a planned economy, central planners decide how land, labor, and capital should be used to provide for maximum benefit for all citizens.