Productive Resources

Introduction

A resource is something we rely on or use to accomplish a goal. If you are trying to read a book, a dictionary is a resource you might rely on. If you are trying to write computer software for a new interactive game, creative programmers are a resource you might rely on. If you are trying to run a factory, labor and available land are resources you might rely on. If you are trying to heat your home or melt steel for car production, gas, oil, coal, and electricity are resources you might rely on.

People worry a lot about the resources on which they depend. They make decisions about what to do in advance and reasonably worry that the prices they are accustomed to might rise. They worry that an increase in population or even just more people living in the area in which they live, work, or trade could change what they take for granted or rely on. They worry that in a worst-case scenario, the resources they rely on might disappear or run out entirely.

In economics, it is most common to divide productive resources into three categories--land, labor, and capital--which are sometimes called the basic factors of production. An alternative division is to think of resources as either natural or produced. Both approaches offer good ideas.

The economic study of resources is the study of how resources we sometimes take for granted--the people, land, natural endowments of our countries and the earth--also respond to incentives. The size of the population and the size of reserves or resources are more flexible than you might first think.

Definitions and Basics

Factors of production, at Answers.com

The requirements for production, usually represented as capital, labour, and land. Capital covers all man-made aids to future production; fixed capital stays put, and includes the physical plant, buildings, tools and machinery, while circulating capital includes raw materials and components.

Labour includes all human resources. It may be unskilled, semi-skilled, or skilled....

Population, from the Concise Encyclopedia of Economics

Lower birthrates and longer life lead to "population aging" (i.e., more elderly people and fewer children). Population aging is most rapid, and has gone farthest, in the developed world....

Natural Resources, from the Concise Encyclopedia of Economics

The earth's natural resources are finite, which means that if we use them continuously, we will eventually exhaust them. This basic observation is undeniable. But another way of looking at the issue is far more relevant for assessing social welfare. Our exhaustible and unreproducible natural resources, if measured in terms of their prospective contribution to human welfare, can actually increase year after year, perhaps never coming anywhere near exhaustion. How can this be? The answer lies in the fact that the effective stocks of natural resources are continually expanded by the same technological developments that have fueled the extraordinary growth in living standards since the industrial revolution....

Human Capital, from the Concise Encyclopedia of Economics

To most people capital means a bank account, a hundred shares of IBM stock, assembly lines, or steel plants in the Chicago area. These are all forms of capital in the sense that they are assets that yield income and other useful outputs over long periods of time.

But these tangible forms of capital are not the only ones. Schooling, a computer training course, expenditures of medical care, and lectures on the virtues of punctuality and honesty also are capital. That is because they raise earnings, improve health, or add to a person's good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital....

Investment, from the Concise Encyclopedia of Economics

What is investment? By investment, economists mean the production of goods that will be used to produce other goods. This definition differs from the popular usage, wherein decisions to purchase stocks or bonds are thought of as investment....

Research and Development, from the Concise Encyclopedia of Economics

Research and development (R&D) is the creation of knowledge to be used in products or processes....

In the News and Examples

Think Globally, Act Irrationally: Recycling, by Mike Munger. Econlib, July 2, 2007. Also: Munger on Recycling, EconTalk podcast.

"These two bottles. Suppose you value earth stewardship, and want to use the fewest resources. What if you want to minimize the negative impact on the environment? With that as your goal... should these bottles be made of recycled glass? Should anything be recycled? How would we know?"...

"There is a simple test for determining whether something is a resource (something valuable) or just garbage (something you want to dispose of at the lowest possible cost, including costs to the environment)...."

Immigration, from the Concise Encyclopedia of Economics

Immigration is again a major component of demographic change in the United States. Since 1940 the number of legal immigrants has increased at a rate of 1 million per decade....

Are we running out of resources? Youtube video with Prof. Steve Horwitz. LearnLiberty.org.

Prof. Steve Horwitz addresses the common belief that the world is running out of natural resources. Instead, there are economic reasons why we will never run out of many resources. In a free market system, prices signal scarcity. So as a resource becomes more scarce, it becomes more expensive, which incentivizes people to use less of it and develop new alternatives, or to find new reserves of that resource that were previously unknown or unprofitable. We have seen throughout history that the human mind's ability to innovate, coupled with a free market economic system, is an unlimited resource that can overcome the limitations we perceive with natural resources.

Grab Bag: Munger and Roberts on Recycling, Peak Oil and Steroids, podcast on EconTalk. Sep. 24, 2007.

Mike Munger, of Duke University, and EconTalk host Russ Roberts clean up some loose ends from their previous conversation on recycling, move on to talk about the idea of buying local to reduce one's carbon footprint and then talk about the idea of peak oil. They close the conversation with the Rick Ankiel story and the implications for the Barry Bonds saga.

Avent on Cities, Urban Regulations, and Growth. EconTalk podcast

Ryan Avent of the Economist and author of The Gated City talks with EconTalk host Russ Roberts about The Gated City and how cities have restricted access to land and housing. Avent argues that restricted access has raised housing prices artificially on both the east and west coast of the United States, reducing urban populations and restricting access to labor markets. He argues that this in turn has artificially depressed growth in the United States by keeping workers from their most productive opportunities. The conversation closes with a discussion of possible policy changes that might make cities more accessible to development and growth.

Gender Gap, from the Concise Encyclopedia of Economics

When economists speak of the "gender gap" these days, they usually are referring to systematic differences in the outcomes that men and women achieve in the labor market. These differences are seen in the percentages of men and women in the labor force, the types of occupations they choose, and their relative incomes or hourly wages. These economic gender gaps, which were salient issues during the women's movement in the 1960s and 1970s, have been of interest to economists at least since the 1890s....

A Little History: Primary Sources and References

The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines, by William Stanley Jevons. First economics work to express concern about running out of resources.

"The expression 'exhaustion of our coal mines,' states the subject in the briefest form, but is sure to convey erroneous notions to those who do not reflect upon the long series of changes in our industrial condition which must result from the gradual deepening of our coal mines and the increased price of fuel. Many persons perhaps entertain a vague notion that some day our coal seams will be found emptied to the bottom, and swept clean like a coal-cellar. Our fires and furnaces, they think, will then be suddenly extinguished, and cold and darkness will be left to reign over a depopulated country. It is almost needless to say, however, that our mines are literally inexhaustible. We cannot get to the bottom of them; and though we may some day have to pay dear for fuel, it will never be positively wanting...."

An Essay on the Principle of Population, by Thomas Robert Malthus. First economics work to explore the relationship between population--including birth control--and land in order to produce sufficient food from those two resources.

"I said that population, when unchecked, increased in a geometrical ratio; and subsistence for man in an arithmetical ratio...."

"Impelled to the increase of his species by an equally powerful instinct, reason interrupts his career, and asks him whether he may not bring beings into the world, for whom he cannot provide the means of subsistence. In a state of equality, this would be the simple question. In the present state of society, other considerations occur. Will he not lower his rank in life? Will he not subject himself to greater difficulties than he at present feels? Will he not be obliged to labour harder? and if he has a large family, will his utmost exertions enable him to support them? May he not see his offspring in rags and misery, and clamouring for bread that he cannot give them? And may he not be reduced to the grating necessity of forfeiting his independence, and of being obliged to the sparing hand of charity for support?..."

"These considerations are calculated to prevent, and certainly do prevent, a very great number in all civilized nations from pursuing the dictate of nature in an early attachment to one woman...."

Capital and Interest: A Critical History of Economical Theory, by Eugen von Böhm-Bawerk

It is generally possible for any one who owns capital to obtain from it a permanent net income, called Interest.

This income is distinguished by certain notable characteristics. It owes its existence to no personal activity of the capitalist, and flows in to him even where he has not moved a finger in its making. Consequently it seems in a peculiar sense to spring from capital, or, to use a very old metaphor, to be begotten of it. It may be obtained from any capital, no matter what be the kind of goods of which the capital consists: from goods that are barren as well as from those that are naturally fruitful; from perishable as well as from durable goods; from goods that can be replaced and from goods that cannot be replaced; from money as well as from commodities. And, finally, it flows in to the capitalist without ever exhausting the capital from which it comes, and therefore without any necessary limit to its continuance. It is, if one may use such an expression about mundane things, capable of an everlasting life....

Advanced Resources

Resourceship: Expanding 'Depletable' Resources, by Robert L. Bradley Jr.

Mineral resources, not synthetically producible in human time frames, are fixed in the earth. As each is mined, less supply remains, suggesting that cost and, thus, price must increase as production cumulates.

Yet, for virtually all minerals, the opposite seems to be true: As more is mined, more is discovered to be mined. Prices and costs do not inexorably rise. What was high-cost yesterday has become lower-cost, undercutting the perennial complaint that "the easy stuff has been found." Overall, there seems to be little difference between minerals and general goods and services.

The mineral paradox is explainable if we recognize that human ingenuity in market settings is the ultimate resource, as Julian Simon stated. Entrepreneurial discovery is open-ended. Applied to minerals, resourceship can and does find supply that, before, no one knew existed--or that no one considered exploitable. But incentives and, thus, institutions can make all the difference between potential and plenty.

Labor, from Lalor's Cyclopedia of Political Economy

LABOR is the voluntary exertion of human beings put forth to attain some desired object. We say human beings, for the toil of beasts is but the agency of an instrument, reckoned a part of capital....

Frank Knight, biography from the Concise Encyclopedia of Economics

Knight's final contribution was his work on capital theory in the thirties. Knight criticized Eugen Böhm-Bawerk's view that capital could be measured as a period of production, and is widely thought to have won the debate over the Austrian concept of capital.

The Positive Theory of Capital, by Eugen von Böhm-Bawerk

There is scarcely a system or a text-book of Political Economy which does not, at some point or other, bring in discussions of matters belonging to the physical sciences. Usually these are introduced in the chapter on Production. There we are taught that to create new goods does not mean to create new material, since matter is constant and cannot be increased. We learn what nature contributes to the work of production in the shape of materials and powers; what is done by the mechanical, what by the chemical, and what by the organic powers of nature; what importance climate, heat, moisture have on the development of production; on what physical and technical foundations the working of machinery rests; and many things of this sort....

Related Topics

Producers
Supply
Productivity
Environmentalism
Income Distribution
Profit
Scarcity
Incentives
Saving and Investing