The Factors of Production

Roy A. Foulke

[Excerpted from the pamphlet, Land in Our National Economy, published by Dun & Bradstreet, Inc. 1958. Mr. Foulke held the position of Vice President at the time this pamphlet appeared]

Land, Labor, and Capital

The classical and now "old fashioned" economists of the nineteen century followed the reasoning first laid down by Adam Smith that there were three and only three factors in the production of wealth. Those three factors were land, labor, and capital. To these early economists, who followed Plato both in defining their terms and using rigor in their reasoning, this was like saying to the mathematician that two and two makes four. Here was one of the underlying, basic postulates of what they called the "science of political economy" and which we call the "science of economics" although there is increasing wonderment today where the "science" really is.[1]

One must keep in mind that "production" in economics means not merely the making of things, it also includes the increase in value gained by the transportation or the exchange of things. There is a production of wealth in a purely commercial community as there is in a purely agricultural or manufacturing community; and in the one case, as in the others, some part of this produce will go as a return to capital, some part to labor, and some part, if land has any value, to the owners of land. The production of all wealth thus naturally flows into three streams as returns to land, labor, and capital or as Adam Smith wrote, these are "the three original sources of all revenue as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.'' There was, however, some "puzzling ambiguity and confusion" in the description of these three factors and their inter-relations as explained by the classical economists until Henry George examined them one by one and "reasoned away" their illogical statements and confusions.

In 1879, Henry George explained the laws of distribution[2] with the most logical reasoning and the clearest of statements. His conclusions and the basis for his conclusions are as sound today as they were when he wrote them. He explained and defined: "Land, labor, and capital are the factors of production. The term land includes all natural opportunities or forces; the term labor, all human exertion; and the term capital, all wealth used to produce more wealth. In returns to these three factors is the whole produce distributed.''[3] The eight fascinating chapters in Book III of Progress and Poverty are concerned with clearing up the "puzzling ambiguity and confusion" which were made by economic writers up to that time in the description of the factors of the production of wealth.

In contrast to what John Dewey would term the "warranted assertability" that there were three and only three factors in the production of wealth, it is the unusual volume on economics of the mid-twentieth century which deigns to point out that this elementary, all important, central, basic truth is one of the blocks upon which, it would seem, a science of economics would need to be built. Today, as we have already explained, our economic writers seem to be more concerned with the interpretation of the aggregate figures of a nation, that is, macro-economics, than with natural laws which explain the factors producing wealth and how wealth is distributed into three streams as a return to those factors.

It would seem to be no accident that the factors in production are quite generally mentioned in the order of land first, labor second, and capital third. There is a natural logic in this order. Land was here ages before man arrived on the scene, and land will be here ages after man has disappeared. Labor came along as man was evolved, and in time was exerted on land and the products of land to produce wealth. Capital, that is, wealth used to produce more wealth, could be made only after wealth had been produced by the application of labor to land. There is a natural sequence, a natural order in time in which these three factors came into being, an order which emphasizes the very importance and timelessness of land.

Naturally there can be no production without labor. Likewise there can be no production without land. That is self evident in agriculture, cattle raising, forestry, and the mining of natural resources. But it also holds just as true in commerce, industry, transportation, banking, insurance, and other service activities. For all business activity requires land, a place, a spot, a site, a location, so many acres or square feet of the earth's surface on which to operate. The factory, the office building, the loft building, the retail store, the railroad, the bank, need land on which their structures may be located and their activities may be pursued. Without land no human being can live; without land no human occupation can be carried on. As all wealth is in the last analysis the resultant of land and labor, so is all production in the last analysis the expenditure of labor upon land.

Over the centuries from the days when Jamestown was settled three hundred and fifty years ago to comparatively recent years, little thought has been given to acquiring the maximum benefits from our natural resources. Like Schliemann in his excavation at Ilois, we have ruthlessly exploited our soil, our forests, and our mineral resources, "the contents of the earth" as explained in Resources for Freedom. Moreover, the level of consumption over the past fifty years has levied a severe if more normal drain on these contents. Minerals, forest, soil, and water -- all have felt it. By 1950 -- in comparison with the year 1900 -- we were taking from the earth two and one-half times more bituminous coal, three times more copper, five times more zinc, and thirty times more crude oil. While this particular drain was a natural one, the fact remains that we have been using our resources at an accelerating pace as well as with reckless wastefulness. Here is the explanation of the President's Materials Policy Commission:

. . . there is scarcely a metal or a mineral fuel of which the quantity used in the United States since the outbreak of the First World War did not exceed the total used throughout the world in all the centuries preceding. The minerals increase is compounded partly out of the needs that rise with growing populations, partly out of a per capita consumption which has increased threefold in the same time, and is still growing. Fundamentally it reflects the increasing mechanization of modern society. As a result of the turret lathe and tractor, the automobile and airplane, the submarine and tank, the electric washing machine and vacuum cleaner, we have been drawing down our most exhaustible resources even faster than the resources that can, in theory at any rate, be renewed. A ton of ore removed from the earth is a ton gone forever; each barrel of oil used up means one less remaining. This mounting strain upon resources that cannot be replaced has become the most challenging aspect of our present-day economy.

But "renewable" resources have also felt the strain. Ninety per cent of our virgin timber stand in the commercial forest area has been cut, and thus far we have done a poor job of growing replacement crops. …As a Nation we have long lived and prospered mightily without serious concern for our material resources.[4]

Only now, when it has become a little late in the day, is serious consideration being given to the absolute necessity of conserving, as far as we reasonably can, "the contents of the earth." This very viewpoint emphasizes the all importance of land in its many aspects to economic life. "Physically we are air-breathing, light-requiring land animals, who for our existence and all our production require place on the dry surface of our globe. And the fundamental perception of the concept of land -- whether in the wider use of the word as that term of political economy signifying all that external nature offers to the use of man, or in the narrower sense which the word usually bears in common speech, where it signifies the solid surface of the earth -- is that of extension; that of affording standing-place or room."[5]

In his autobiography, Baruch, My Own Story, Bernard M. Baruch mentions that his professor of political economy at the City College of New York was the man who made the deepest impression on him in his college life. He tells the following story:

The professor who made the deepest impression on me was George B. New comb of the Political Economy Department. He wore gold-rimmed glasses and looked like an old-fashioned Englishman. In a squeaky voice, which he tried to improve by sucking sugar, he used to say, "Those gentlemen who wish to play chess may sit on the back seats. Those gentlemen who wish to hear me may have the front seats." Although I was a chess player, I always took a front seat and missed little of what the professor said.

Much of my later success can be attributed to what I learned from him. Professor Newcomb never would have agreed with some popular present-day economic theories. He plugged away at the law of supply and demand and taught us to believe in it. It was in his class that I first heard:

"When prices go up two processes will set in -- an increased production and a decreased consumption. The effect will be a gradual fall in prices. If prices get too low two processes will set in -- decreased production because a man will not continue to produce at a loss and, second, increased consumption. These two forces will tend to establish the normal balance." Ten years later I became rich by remembering those words. Professor Newcomb taught not only political economy, but philosophy, logic, ethics, and psychology -- all in one course. Today these subjects would be fragmented among several professors. I believe there was considerable advantage in being taught all these subjects by the same man. Too many educators seem to have forgotten that you cannot teach good economics, good politics, good ethics, or good logic unless they are considered together as parts of one whole.

When Baruch attended the City College of New York there was no elective system. He explained, "I also believe it a mistake that Greek and Latin are no longer subjects that all students must take. …My study of both languages gave me an appreciation of the cultural background of our civilization which I never would have had otherwise." Although the author of this autobiography, so filled with fascinating incidents of daily life, does not say so, there is every indication that he is a most sincere believer in the liberal tradition of education in contrast to the modern specialized program of education. "I even opposed the introduction of the elective system," he writes, "maintaining that unpopular courses are good for young people because of their disciplinary value. In life we do not always do what we wish. But the elective system rolled over me like a locomotive. If I were a trustee today, I would fight to cut out snap courses and would try to restore the 'dead languages' to their old importance.''

Here is an individual on whom economics, or as it was then termed, political economy, made a deep impression, and one who put his knowledge to a practical and profitable use when he entered the world of business. It would be interesting to know whether, in the recess of his mind, he feels that he would obtain as much vital knowledge and essential background from a study of economics with its current emphasis on national aggregates as from economics as taught in "his day" with its emphasis on land, labor, and capital, and the law of supply and demand. Baruch does, however, touch on the subject of economics in a broader way, "Colleges as a rule teach economics badly,'' he says. "With overspecialization has come a tendency to mistake information for education, to turn out 'quiz experts,' who are crammed full of useful detail but who have not been trained how to think."

Man truly lives off land, taking from it materials and forces. Man also lives on land; in truth, his very life depends on land. It is because these simple facts are so utterly essential that it does seem that they need to be understood fully as much today as when the classical economists used Socratic logic in building a science of economics upward from central basis truths. As one economist carefully wrote three-quarters of a century ago, "...land is the habitation of man, the storehouse upon which he must draw for all his needs, the material to which his labor must be applied for the supply of all his desires; for even the products of the sea cannot be taken, the light of the sun enjoyed, or any of the forces of nature utilized, without the use of land or its products. On the land we are born, from it we live, to it we return again -- children of the soil as truly as is the blade of grass or the flower of the field. Take away from man all that belongs to land, and he is but a disembodied spirit."[6]

In this study we have examined the place of land in the life of the individual, and in the life of our own national economy, and then contrasted the ideas of classical economists with their emphasis on land, labor, and capital as the factors of production with the ideas of present-day economists with their emphasis on macro-economics. To say the least there would seem to be a very marked difference in emphasis. To the "early" economists there seemed to be a recognition of the all importance of land and that it came first in the hierarchy of land, labor, and capital. Our present-day economists seem to have little or no concern with this one ultimate all-embracing reality but to be concerned with national mathematical aggregates and their breakdown. What a revealing contrast! Strange as it may seem, the contrast is now being brought home to us in a most striking manner, not by economists, but by engineers who are concerned with our future well-being as our needs multiply and as our known resources, they forecast, will shrink in the years ahead.

The land was here before the economist came. It will be here after he is gone, and his statistics are rusting in the limbo reserved for commercial prophets. Where does land belong in our estimates of social and economic survival? The question of land and land values cannot be limited to deeds, tax bills, front footage, riparian rights, or mineral or timber privileges. We are dealing with man's primary birthright, to which he is anchored by gravity, of which his physical frame is a part, and from which he obtains all of his sustenance and all of his wealth. This attachment to the land is not easily translated into statistical equivalents.

There is an ancient proverb, "All else passes away, the land only remains." How simple and basic a truth it is.

NOTES

1. For the expanding literature on this subject which questions seriously the theory, explanations, and bases of economics as currently provided in popular text-books see Reconstruction of Economics by E. C. Harwood (American Institute of Economic Research, Great Barrlngton, Mass., 1955); The Failures of Economics by Sidney Schoeffler (Harvard University Press. Cambridge, Mass.. 1955); Bias Against Business by Waddill Catchings (Privately Printed, 1956).
2. George, Henry, Progress and Poverty. Bk. III, Chap. 1-8, pp. 153-224, 1879 (Robert Schalkenbach Foundation, New York, N. Y., 1955 edition)
3. Ibid., p. 162.
4. Resources for Freedom. Vol. I. p. 5.
5. George, Henry. The Science of Political Economy, p. 352, 1897 (Robert Schalkenbach Foundation, New York, N. Y., 1946 edition).
6. Baruch, Bernard M., Baruch, My Own Story, pp. 55-56, (Henry Holt and Co., New York, N. Y., 1957).
7. George, Henry. Progress and Poverty, pp. 295-296, 1879 (Robert Schalkenbach Foundation, New York, N. Y., 1932 edition)