Here are the basic factors of the production of wealth and their functions. One of the most important aspects of this course is its consistent definition of terms, and that is the focus of this lesson. Click here for an exercise on how useful clear definitions can be.

Political Economy is the study of how people get a living. What, then, is Economics? The two terms have sometimes been used interchangeably -- but there is a subtle distinction to be made between them. "Political Economy" is the older term, and it was used by Henry George and the classical economists. Most standard textbooks today define "Economics" as "The science of how people make choices for the allocation of scarce resources to satisfy their unlimited desires." That is a statement of the basic dilemma called "the problem of scarcity." Although the classical political economists recognized the problem of scarcity, they were preoccupied with the economic life of the entire community -- with the "wealth of nations." They sought to identify the principles that underlie the production and distribution of wealth. As it is most often taught today, modern economics pays little attention to the distribution of wealth. Why the change? That is a question we will ponder as we go through this course. Because wealth distribution is a central concern for us, we will continue to call our study Political Economy -- which we define as:

The science which deals with the nature of economic value and the production and distribution of valuable goods and services.

One of the central characteristics of this course is its steadfast insistence that land is a distinctive factor of production, which must be considered separately from the other two factors, capital and labor. This is a point that modern-day economics de-emphasizes, or even denies outright. Why is that? Could it be that land was the most important economic factor, way back when, but today's social complexity and advanced technology have freed us from dependence on land or nature?

Not one bit. Land is needed for all production, for all human life and activity of any kind. When most people think of "land", their mental picture is of farm land: crops, orchards, pastures. But in fact, our most valuable natural resource, by a very large margin, is urban land. In cities, activities take less land area per head, but more land value, because the price of city land is hundreds, sometimes thousands of times higher than the price of rural land, per unit area.

Radio and TV communications use the radio spectrum, a limited natural resource. Drivers of SUVs and other fuel-burning machinery use the earth's atmosphere as a dump for their greenhouse-gas wastes. To understand the meaning of land as a factor of production, we must conceive and define land broadly, as the entire set of natural opportunities -- or in Henry George's words, "all the material universe outside man and his products."

Having three factors of production facilitates our analysis, because

• All production requires* some of each
• They are mutually exclusive
• They are not convertible into each other.

Here, then, are the definitions of economic terms that we will use in this course.

Wealth.
All material things produced by labor for the satisfaction of human desires and having exchange value.

This means that wealth must have all of these characteristics:

1. Wealth is material. Human qualities such as skill and mental acumen are not material, hence cannot be classified as wealth.
2. Wealth is produced by labor. Land possesses all the essentials of wealth but one -- it is not a product of labor, therefore it is not wealth.
3. Wealth is capable of satisfying human desire. Money is not wealth; it is a medium of exchange whereby wealth can be acquired. Nor are shares of stock, bonds or other securities classifiable as wealth. They are but the evidences of ownership. None of these satisfy desire directly; if they are destroyed, the sum total of wealth is not decreased.
4. Wealth has exchange value. (More on this in a moment.)

Production includes not only the making of things but also bringing them to the consumer. An automobile, for instance, from the extraction of the ore, through the complex procedures of manufacturing and marketing, to the sale to the retail purchaser, is the embodiment of an extensive cooperative effort in production. The factors (makers) in the production of wealth are land, labor and capital.

The goal of production is the satisfaction of human desire. Services are direct satisfactions of human desire, not put into material form.

Value.
The quantity of labor or products of labor that people are generally willing to give in exchange for something.

In economics, value is not a personal judgment, but a social one. A thing's economic value is what it will exchange for under normal conditions. It does not depend on how much an individual may (or may not) value the thing; indeed it doesn't depend on any intrinsic quality of the thing -- only on what people are generally willing to give in exchange for it. Value also has nothing to do with the amount of labor that went into something. Some things have great value, yet were not produced by labor at all (urban land, for example). Other things were created with great amounts of labor, yet have little or no value -- such as a derelict building or a junked car.

The meaning of "economic value" is an important and contentious theme in political economy. Here's an essay on Why Theories of Value are Important.

Land.
The entire material universe exclusive of people and their products.

Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land. This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities. The trees in a virgin forest are land; in a cultivated forest they are wealth.

Labor.
All human exertion in the production of wealth and services.

Mental toil is labor as well as muscular effort. All who participate in production by their mental and physical effort are laborers in the economic sense. Thus entrepreneurs as well as blue-collar workers are included.

Capital.
Wealth used in the process of production, or in the course of exchange.

A machine is wealth. If used to produce shoes or other wealth, the machine is wealth that is capital. So also would a merchant's stock of goods in trade be capital. The same items in the hands of the ultimate consumer are wealth that is not capital; the exchange has been completed.

Distribution.
The division of wealth among the factors which produce it.

The economic term "distribution" does not refer to the transporting and merchandising of wealth. These processes are part of production. Distribution refers to the division, or apportionment, of the product among the factors of production. The avenues of distribution are rent, wages and interest.

Rent.
That part of wealth which is the return for the use of land.

We commonly speak of paying "rent" for building accommodations, or for hiring an office machine or an automobile. Because of the essential difference between land and capital, such payments are not economic rent. Only that which is realized from land can be properly termed rent.

Wages.
That part of wealth which is the return to labor.

Ordinarily wages are thought of as the compensation paid to an employee. Economically speaking, however, wages include the earnings of all whose labor has in some way produced wealth, including the manager of a business enterprise.

Interest.
That part of wealth which is the return for the use of capital.

In common parlance, a borrower pays "interest" to a creditor for money loaned to him or her. In economic theory, however, inasmuch as money is not capital, the meaning of interest is different. Reapers and silos are a part of a farmer's capital, which when employed in harvesting and storing wealth in the form of wheat, earn of their contribution to production a portion called "interest."

George defines his terms carefully in advance, and sticks consistently with his definitions. It is all too common for economists to muddy the waters by not defining their terms, then by using them in shifting, or even shifty, ways.

The three factors of production work together to produce a "pie" that we call "wealth." (Or to use more common terminonogy, we can say "the product," which includes all goods and services.) When we seek to identify the Laws of Distribution, we are looking for the principles that determine what proportional shares go to the three factors under certain conditions.

It is not Land itself that gets rent, of course, but those who own land. It is not Capital itself that gets interest, but the owners of capital. If someone owns both, and manages them himself, then that person gets an income, called “profit,” which contains all three elements: rent, interest, and wages-of-management. We don’t consider profits here,* because our job in this course is to analyze functional distribution — to show how wealth is distributed among the three factors that account for it. This is a study of patterns and relationships that affect the entire community. Individual or “personal” distribution is not concerned with the whole community, and uses terms differently, for different goals.

*We'll return to the subject of profits in the next lesson.

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