Factors of production and
of economic value

A synergy between physical and cultural resources
build production and economic value


The production of goods and services is done to satisfy economic needs.
This makes it economic value.
It rests on the convergence of economic resources called factors of
production.
Some are largely physical (natural resources, workforce, investment in
equipments...).
Others are more cultural, deeper-seated, as related to the Human spirit
(knowledge, creative / innovative / adaptive capabilities, adequate
institutions, trust and reputations...)

What makes production and economic value ?
It could be summed up in one word :"initiatives".

Or better said "initiatives that satisfy needs"

But that oversimplifies something much more complex.
So better detail it with a "systemic" approach:


To create gem riches,
convergence pont  (synergy) is the game

The production of economic riches supposes to
combine various
factors
with the result to create and supply something (goods, services,
assets...) that satisfies users (customers), as offered to them in
in
conditions they find acceptable (see economic utility).

Yes, to produce is to create synergy, blending things in a smart and creative
way that brings and end-product or service that has more value than
those of the components
.
If not, why bother to produce ?

This is the difference between cost and value.

Traditional quantitative / physical factors

With the hard / physical or at least the quantitative resources /
inputs
, we have the three "classical" factors (*) that were recognized by
the economists in the 18th and 19th century
to produce goods and services
and contribute to their economic value (**):
This is equity, (and also long term lending), invested in production or
production-related activities
.
Without investment, no economic development!

Its three main sources are not only
1) individual savings and 2) profit reinvesting, but also the
3) creation of a goodwill thanks to a position of strength in the market.

Because of the risk in any business and project, a sane proportion
has to be found between "true" capital (equity) and debt. (see
overleverage)

A differentiation can be made between

* equipment Physical equipments,
* bulb    "Soft" productive investments / assets (as detailed
                below)
*
sous    Financial capital (that might not always finance
                
production only).
Here appears a small misconception about capital, the idea that it is just
"accumulated".

Asset markets show that capital is also created or destroyed everyday,
as based on economic performances and even, via market quotes, on
human perception of its value.
Marxism saw the person clock manpower time devoted to work as the only
source of value, a quite reductive approach.

It even saw work and value as equivalent.
This is denying that value is in the eye
of the buyers / users
of the product o
r service's user and can widely differ from the
production inputs
,
that are just factors (we can say "costs") to try
to reach the purpose of
bringing such value to the user.

Also, as shown below, knowledge and other soft elements are changing
the nature of work as a factor of production.
Physiocrats saw them (and among them actually focused only on
 
backyard land) as the only source of production, a reductive approach
also.

Nowadays neo-Malthusians consider natural factors as a limit to
production
, but this can address only goods and some services that
are material-intensive or energy-intensive and that tend to become
less and less dominant in our "post industrial economy" or "society
of information".
Of course the demand of natural resources tend to rise anyway as
long as
emerging economies did not catch up. But this is essentially
a transition phase.

(*) Even if the capital took a rather long time to be recognized as a factor by
      economists.

(**) Well, as already mentioned, the value of a production is not just an
      
addition (or better said a needed synergy) of factors.

       It is actually what people consider the product or service to be
       worth
, according to the relative satisfactions it gives them among
       other goods and services.
      
=> Some productions are worth less than the physical inputs, some
               others are worth much more.


See the "
Value, utility, price: what differences? " and Economic utility articles

Thus physical factors are not the whole story,
Other factors (soft factors) contribute to make a production
that "gives value" by providing the required satisfactions
.
What are those less visible, often underground strengths, that the chapter
below tries to elucidate.

Qualitative / cultural factors

Let us be soft !

We can add at least five soft / cultural factors, even if they are less visible
than
more "material" assets
Nowadays, in a changing and complex word (a dynamical system),
enlarged by globalization, their importance grows compared to other factors.

Those soft components are more recently recognized (thanks to Schumpeter,
Drucker, Solow...) although often wrongly confused with "quantitative" work
(basic work hours).
Without them the physical factors could be wasted
(producing goods
and services that would be worth less than the inputs).

Those soft economic advantages includes
* forms of personal capital that can foster the economic capabilities of an
   individual
* and forms of social capital explaining the strength of a group a business,
   an institution or a whole society.

Here are some decisive ones :
the accumulated knowledge as well as the aptitude to create and learn
new knowledge, and even sometimes to "delearn" obsolete / flawed /
counter-productive knowledge.
the capabilities do things better, with a better judgment or more
artfully / efficiently (not to confuse with the quantity of work).
a specific talent in taking initiatives / risks, in creating, innovating (*)
and adapting to changes.


Innovation (which is not only invention but also implementation)
is more and more considered as the #1 key to economic development :
see the related section below.

Also J.B. Say insisted on the role of the "entrepreneur" in gathering
and combining the various factors of production so as to create value.
Without trust there would be not much teamwork, very few exchanges
and scarce other economic activities.
Also people tend to buy an "image" more than the product or service
itself.
(legal, institutional, organizational, educative).
That is what makes some economic systems, some countries, regions
and/or cities, and some periods, proner than others to economic
development.
An immigrant from an underdevelopped country can make more
money in
a developped country that all along the time has built a
more productive level
of organisation and equipment.

Also, the internal organization and practices of a group is
normally designed to enhance individual efficiency and adaptation
to the world
This is a behavioral economics site.
This allows to say that all cultures
that respect human values are
themselves respectable, but that those that are in favor of individual
creation and efforts
have a better chance to reach the economic
podium

(*) A special note
       about innovation as an economic capital

In a fast moving word, with a highly uncertain future in most areas,
innovative and adaptive capabilities are crucial for
survival.

They are key economic assets even if they are not directly visible.
This is true not only for every organization but also for the planet.

"Sustainable development" should more be based on innovation than
on dogmatic restrictions

What is innovation is often misunderstood:
* Innovation is not only research and development, however
   needed they are.

* Innovation also goes much further than invention:
   the implementation is often the most important (and arduous)
   phase.

* It is not only about new products and services but about the whole
   business model
  
The innovative spirit should permeate all activities / processes /
   factors of production.

* It is not only improving things but is a quest for drastic changes
   that create new riches sometimes by destructing old ones. To be
   afraid to cannibalize" old productions just because we invested a lot
   in them is giving a boon to new competitors.

* It is a matter of risk taking.
   It can either bring fantastic results or end in a complete loss.
  
   Its financing needs more equity capital than credit which supposes

   rather predictable refund prospects.
   This the job of venture capitalists and equity investors.

Innovations are triangles that associate three factors of 
production : initiative, (creative) talent and equity capital

* The general consequences of innovation can not be fully known
   in advance, experience will come later (return of experience).

   In that sense the precautionary principle is pure fantasy and a
   symptom of status quo bias
Also, Innovation is crucial not only on the economic / business field.
The world is facing many challenges, and innovations have to permeate all
areas to answer them.
A drastic upheaval of global institutions is one of those key aspects.

A few remarks and side aspects

In the same line of thoughts, the mix between those various factors
will depend of course on the type of business or economic unit.
Last but not least, it will depend on the business model it chose.
They might have a negative impact on economic performance
(and on other social fields).

This is specifically explored in the
behavioral economics article.
(To be translated)
Sans doute pas, en effet :

* They need de large spending in talents and capital, dont la
   rentabilité est aléatoire si elles sont mal ciblées.
   Toutes les tâches ne sont pas robotisables

* Une économie robotisée est beaucoup plus flexible pour produire
   massivement de nouveaux produits et services, pour de nouvelles
   demandes potentielles.

    Elle n'apporte pas seulement un allègement de la charge de travail,
    mais aussi accroit l'activité, ce qui parallèlement est favorable à
    l'embauche.
    D'ailleurs, parmi ces activités nouvelles se situent aussi les besoins
    robotiques ou numériques des consommateurs


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M.a.j. / updated : 29  Aug.  2015
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