Basic Principles: More Than Meets The Eye


Emile Woolf, Going Postal
“English countryside – Shrewton, United Kingdom – Landscape photography” by Giuseppe Milo ( is licensed under CC BY 2.0

Every primer on economics cites the familiar factors of production, land, labour and capital, as prerequisites for productive activity. Sometimes entrepreneurship is added to represent the gifted brain who brings the other three together in a commercial enterprise.

Land, of course, includes the entire unharnessed bounty of natural resources that lie within the earth and everything that grows upon its surface – which is rather more than the modest fenced plot we normally think of.  It is ubiquitous; production cannot take place without it.

[When Harry Secombe yells “What are you doing down here?”  Spike Milligan meekly responds: “Everybody got to be somewhere!” Your education is incomplete until you have listened to that final “Goon Show” recording.]

In the case of an individual business the land factor is represented by its exclusive occupation of a particular location. Land is therefore the “spatial” dimension of production. As communities develop, certain locations are favoured by entrepreneurs, usually because of their proximity to source materials, or transport, or simply potential customers, as in retail businesses.

But because ideal locations are in fixed supply, occupation of the most favoured locations commands a premium in terms of price (of freehold ownership) – or rent (in the case of leasehold). These premiums are differential, reflecting the values bestowed upon the occupation of different sites throughout the community. [Incidentally, since the premium exists only because of the community’s presence, it represents a natural source of tax revenue for that community.]

Labour is more than it seems

Labour may be taken to represent the entirety of physical and mental effort contributed by individuals and groups in any productive process. People are understandably protective of the need for their own work, which is why every technical innovation that threatens to replace human labour, from the use of steam to artificial intelligence (AI), is met by virulent opposition from workers, trade unions and their political representatives.

The idea that innovation destroys jobs arises in every generation but, as Matt Ridley shows in his excellent treatise “How Innovation Works”, it has been proved wrong every time. Enhanced productivity in agriculture found farmworkers moving to cities, taking jobs in manufacturing. Then greater productivity in manufacturing released huge numbers to work in services. When innovation in domestic appliances freed women from household drudgery, more millions joined the paid workforce, and yet there was still no sign of mass unemployment.

What many have failed to notice is the expansion of leisure that accompanies every leap in technological advancement. In 1900 the average lifespan in the USA was forty-seven. People started work aged 14, worked 60-hour weeks and enjoyed no possibility of retirement. The average man would spend about 25 per cent of his lifetime at work. Today, with an average lifespan of over 80, that figure is around 10 per cent.

Here’s the irony: scientific advances and accompanying practical innovation have created more, not fewer, jobs, higher wages, shorter hours and more recreational time. When business-owners lose employees to higher-paying jobs, they must invest more capital in productivity-enhancing technology. Economic freedom and technological inventiveness combine, hand-in-hand, to generate the growth that benefits us all.

Economic freedom and technological inventiveness combine naturally to generate the growth that benefits us all.

Equalising madness

This truth runs counter to states’ obsession with equalising everything in sight, be it people’s wealth, incomes, living standards – even enforcing massive inter-region subsidies and wealth transfers from “the prosperous South to the impoverished North” as if such differences symptomize nothing other than unfairness.

Having noticed that on-line business has been doing well during lockdown, these meddling fools are now advocating delivery charges (taxes) to “level the playing field” between bricks-and-mortar sellers and their on-line counterparts. If there were a way to equalise our natural aptitudes, they would find it.

This destructive ignorance is blind to the fact that in any meritocracy different aptitudes, whether personal, regional or national in scope, are reflected in different economic wealth-generation capabilities. Instead of getting out of the business of social engineering, government is hell-bent on stimulating this march towards mediocrity.

Capital – a hard-won factor of production

Finally, what comes to your mind at the mention of capital? Its nature is clearly different from other factors of production. Whereas land is “there” as a given, and labour exists in potential wherever there are humans, the most notable feature of capital is: it does not pre-exist. You can’t “find” or “discover” it; it doesn’t lie around; it is emphatically not to be confused with money, which simply facilitates the transition from production to consumption. So what is capital, and where does it come from?

When the earliest humans discovered that certain wild-growing fruits, herbs and nuts were edible and life-sustaining, productive cultivation became a possibility. The birth of capital might have been the moment when surplus seeds were gathered, dried and stored, ready for planting in the following season. Those people were intelligent enough to ensure that some seed from this season is saved, from which the new season’s crop may be grown – which is why capital is aptly referred to as “seed-corn”, reflecting the key role in the economy of savings.

Exactly the same principle applies to every other manifestation of capital. A fully functional factory doesn’t appear by magic. It must have been envisaged, designed, equipped, assembled and rendered fully operational – and paid for with resources retained from the fruits of previous production. The massive sums required might have been borrowed, of course, but that merely begs the question of where the lender got those resources. If the required sums have been raised by a stock exchange flotation, that too is a mere variation on the same theme. At some previous time, profits must have been saved rather than distributed or spent – and those savings (“reserves”) constitute the capital that has been used to pay for the new factory.

[If, however, there is no immediate use for those savings, they can be safely made available to a party who has a higher time preference for their use, and an interest charge arises quite naturally. Yet in this age of economic idiocy, governments attempt to placate disgruntled electorates by engaging in unbridled spending of money that bears no relation to any earlier production. It is unbacked and strictly phonus-balonus. It exists as an aberration beyond any true appreciation of the role of capital. As worldwide state borrowing has reached stratospheric levels, beyond the remotest possibility of repayment, it is to those states’ advantage to keep interest charges close to zero or lower.]

Conclusion: what’s it all for?

The focus of the land/ labour/ capital matrix is production, and the purpose of production, as recognised by the classical economists Adam Smith, Jean-Baptiste Say, James Mill and David Ricardo, is consumption. Your production must yield enough to enable you to buy the things you want.

According to Say’s law, production generates its own demand. Producers don’t generally make things for their own use: they make them so that they can exchange them for the products they do want. That “want” remains unfulfilled, however, if something of value to others was not created in the first place. That’s why Say’s law is referred to as the law of markets.

This is all pretty obvious, but John Maynard Keynes didn’t like the idea that productive work is an indispensable precursor to consumption in any functioning economy. He was, on his own admission, a mathematical statistician rather than an economist. He was also a political wrangler of the first order, dedicated to serving up rationale for exactly what governments wanted in order to justify the destructive policies they were pursuing anyway.

So when the economy was stagnating after WWII, Keynes recommended that the real problem was lack of demand: sufficient demand-stimulation would give the sluggish economy the kick-start it needed. And how better to stimulate demand than to throw money around. Governments loved it, and it’s what they have been doing ever since, despite all the painful evidence of its destructive consequences.

In 1936 Keynes applied his full array of linguistic contortions to debunk Say’s law.  But when his clever-clever theorems are stripped away, his logic amounts to a bald, unproven, refutation, a declaration that Say’s law “isn’t true”.

But it is true – and at last, late in the day maybe, we know it.

© Emile Woolf August 2020 (website)

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