Sunday, February 24, 2013

Is Land a Third Production Factor?

It is customary to speak of land and of the products of nature as a third factor of production besides labor and capital. It is equally customary to assume that land and its services can generally be rented for “rent”—as capital is borrowed for interest.
This approach is unrealistic and leads to analytical difficulties. It cannot be denied that land, such as coal and oil fields, is often rented for use or exploitation. Machines, too, are sometimes rented. However, it is far more general for entrepreneurs to buy and not to rent the land where they intend to build their plant, just as they buy their machines rather than hire them.
If we treat land in principle as being rented rather than bought, then we neglect in our analysis the fact that land has to be carried through time just as other capital goods, that it takes credits to do so and that, therefore, an entrepreneur buying land with borrowed money thereby influences interest rates.
Entrepreneurs themselves make no distinction of principle between buying labor, machines or land. Their calculations distinguish only between two totally different kinds of costs: on the one hand the annually recurring interest they pay for the money they borrow, and on the other hand the prices they pay, once only, for labor, capital goods or land bought with the borrowed money. There is for an entrepreneur no difference between a machine in his plant and the land of the site of his plant, just as there is no difference of principle between labor and machines. Machines are labor of previous production periods. Nor can in many cases the land component be distinguished in practice from the labor component.
We shall thus treat land as a sort of capital good, provided by nature rather than by man. We shall consider only two factors of production: first labor, including land as a carrier of services, for which the entrepreneur has to pay a price; and second money capital or credit, for which he has to pay interest.

Common Sense Economics

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