Friday, March 10, 2006

Land, Labor, Capital and ....?

There seems to be a resurging discussion about whether or not entrepreneurship should be included as a "Factor of Production." Mark Thoma discusses the issue at The Economist's View. It is an interesting post. In it he excerpts from an article in The Economist which reviews a paper by William Baumol, who advocates studying the role of the entrepreneur in the productive process.

I must admit that I was originally taught only the "big three". At the time, my instructors saw entrepreneurship as one more part of labor, similar to management. Yet that always left "profit" as a return that was, in my mind unassigned. (Rent was return on land, interest was return on capital, wage was return on labor, profit was...?)

In my mind, the case for entrepreneurship being a factor hinged on the extent to which you viewed the "entrepreneur" as an innovator. What did they do that was new or different? Ostensibly, they combined land, labor and capital in innovative ways. But what if they "merely" brought an existing concept to a new place? This then led to thinking about whether innovation took place in great leaps or was incremental (or both.) As is pointed out in the article The Economist, Baumol's work hearkens back to the work of Joseph Schumpeter.

I eventually came around to view entrepreneurship as one of the factors, and was interested to see it fall off in importance in recent years. It is heartening to see the study of entrepreneurship reviving. How do you address the factors of production? Is it only those of us of a certain age who can remember "three factors." Or is there a younger group that was taught the same way, discounting entrepreneurship.

Your comments are welcome.

Posted by TSchilling at March 10, 2006 3:28 PM

Entrepreneurship is small, profits typically being only 10% of the economy, but they are really the most important, as they drive the economy forward. Without it, stagnation sets in quickly.

Posted by: Lord at March 10, 2006 8:33 PM

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