Monday, May 21, 2012

Updating the Factors of Production

If you recall high school economics or college freshman economics (both were the same, colleges just made you pay extra to re-learn what you did in high school) there were "The Factors of Production."
These factors were essentially the ingredients you needed in order for a business or an individual to "produce" something.  There were originally three of them:

Land - you can produce nothing without at minimum some kind of office space.
Labor - the machines will not only not take over the world, they'll just sit there unless a human spends his or her time running them
Capital - Nobody is doing nothing until they get paid.  And that includes the people who produce the tools and machines you'll need to get started.

A fourth one was entered as they realized even with the above three, nothing would get produced.  You needed a leader.  An innovator.  A man with the plan.

The entrepreneur.

Since there it was commonly accepted that there are three original, but most likely four real factors of production.

However, I would like to tender a fifth.

I'm doing this not to make things more complicated or to somehow be enshrined in the Economics Hall of Fame, but because our economy today practically proves there is a fifth and final factor of production that is required to produce, but is not accounted for in the current list.  That fifth component is:

A future.

Some would call it "political" or "economic certainty."  I'm calling it a future simply because if there is no hope an economy will be stable, MORE SO that you will be able to keep the majority of your gains, then you can have;

and an entrepreneur raring to go

nobody's producing nuthin' if (oh, I don't know)

the government is racking up debts that literally call into question the integrity and viability of the future economy

the government is spending so much that it's a guarantee tax rates will go through the roof in the future

the people are so anti-business, anti-capitalism, anti-rich, anti-success that you're afraid they'll simply vote to take the fruits of your hard labor away.

I could go into more detail, but the point is simple enough.  You see it not just in the economy (companies are sitting on trillions in capital, people are DESPERATE for jobs, enterprenuers can't wait to jump ship and move to Singapore...ooops, I mean...start businesses), but in the housing market (nobody new entrants in the market want to buy....well nobody can AFFORD to buy), and the stock market (the same).

It won't be until there are guarantees enshrined via constitutional amendments that the government cannot confiscate/tax beyond a certain level and that private individuals property and income rights are maintained, that you will get people to start investing in the US again.  And so you can go ahead and come up with all the Keynesian stimulus you want.  The vast majority of the United States' economic strength will remain dormant, or just outright afraid.

Enjoy the decline!


Ecclesiastes said...

"A Future"? I don't think so.

The Entrepreneur brings that with him, or makes it as he goes. Honestly, the sluggishness of the economy is because the entrepreneurs have already figured out what they would need to succeed:

A permission slip.

The disaster of TARP, of GM, Hell let's include Chrysler in the 80s, isn't whether the government foray into the private sector pays off, it's that it happened at all.

An entrepreneur can calculate the costs, the margins, the risks and make a determination. He CAN'T figure on the actions and agendas of people unfettered by costs, or margins, or risks.

So until the entrepreneur can know, KNOW, that the government will stay out of his field of business, he'll need a permission slip.

Simon Grey said...

You left off one other crucial factor of production: diversity.

I kid of course, but with the way B-schools preach the need for workplace diversity, you'd think it'd be impossible to run a business without it.

Mr. B said...

No,not necessarily a future. More like *faith*. As an entrepreneur I don't want a guarantee that I have a future so much as I have faith that the government will not tax or regulate me beyond my ability to overcome the drag it has on my productivity.

Furthermore, I want faith that the government will not limit me in the support of someone who "knows someone" in power.

As someone who is in the process of starting a business, I don't
want to know the future. I want to know that the law, including taxes, will remain constant. I also want to have confidence that other businesses are not gaming the system politically.

So yes, the future matters. But more than that, faith that the law will remain constant, I will argue, matters more.

Anonymous said...

I would have categorized this as it is hard to gamble when the rules are constantly changing...

However, you raise a great point. The level of spending and the fact the Chinese now can buy treasuries direct pretty much etch in stone the collapse.

The UK borrowed and borrowed money from US - in exchange the US demanded that the UK decommission much of its Navy. (how they really lost their empire.).
Ever wonder why we are now shrinking our Nuke arsenal by 70%?? Suppose China might have some influence in that??

Anonymous said...

Milton Friedman covered this under his discussions about the Rule of Law. In fact, without the Rule of Law, the other productive factors are moot.

Anonymous said...

Milton Friedman covered this under his discussions about the Rule of Law. In fact, without the Rule of Law, the other productive factors are moot.

Captain Capitalism said...

Damnit, has every economist before me discovered everything!

Just once I'd like to come to a conclusion or observation that Rand, Friedman or somebody else hasn't done before me.

Joseph Williams said...


I think you said it most clearly.

Yes rule of law or what the entrepreneur must hold within like hope, or permission from government are all correct.

However I think in today's circumstances the distilling out and identification of the critical component that is required for an entrepreneur, nay a country, is brilliant.

To explain to the sheeple about the need for rule of law or the idiotacy of permission takes 9 sentences which is eight sentences too many. I hate to give credit to a BS parade but the big O's 2008 campaign was effective and simple: "Hope".

Romney would in one way be wise to say that there will be no future under Obama, but the crap he is going to inherit will make a mockery of what ever business skills he has.

Thus Cappy's original trademark phrase of "enjoy the decline" rings so true. Could add a tail end - "there is no future".

Anonymous said...

"Damnit, has every economist before me discovered everything!

Just once I'd like to come to a conclusion or observation that Rand, Friedman or somebody else hasn't done before me"

Yer yet young,and recreating the thought processes of your elders independently. Chin up!

Remember the phrase, "I see further because I stand on the shoulders of giants?"

That could be you, young Economist.

Angus McThag said...

He's got to recreate the work because the information is pretty actively suppressed.

Orphan said...

I prefer your formulation, actually.

Not only is it pithier, I think it encapsulates the issue better than "Rule of Law," which requires further explication about the expectation that rule of law will continue.