Meaning of Production:
A carpenter makes a table. He has produced wealth. But he has not produced wood; it was already there.
What, then, has he really done? He has changed the form of wood and given it utility which it did not possess before. He has thus created what is called ‘Form Utility’.
Conversion of cotton into cloth and sugarcane into sugar are some other examples of form utility. In fact, we can notice this type of utility in all manufacturing industries.
If the carpenter sends the table to a big city for sale, it will letch a higher price. Now it acquires additional utility. Its transportation to the city means the creation of ‘Place Utility’. Transportation of goods from the places where they are cheap to places where their prices are higher is creating a place utility. It gives the commodity an additional value.
In case the carpenter keep the table with himself till tables are in greater demand, he may further add to its price. This storing creates ‘Time Utility’. Fruits and vegetables are kept in cold storages to be sold for consumption in the offseason.
Wheat may be kept in go-downs to be sold when paces rise in the lean season. These are some examples of time utility. It is time which gives them more value. In all these cases, wealth has been produced, out not matter. Just as man cannot destroy matter, so he cannot create matter. In the above cases he has simply created utilities.
Thus, there are three types of utilities:
(i) From utility,
(ii) Place utility and
(iii) Time Utility.
In the examples cited above, utilities have been created and physical goods or wealth produced. However, this may not always be the case. A utility may be created which cannot be sold in the market. For example, a tube of oxygen will find no market in the plains as there is abundance of it in the air; The provision of such utility—and oxygen has a big utility—cannot be considered production A thing may possess utility; but it may have no value, e.g., air. Production Economics means production of wealth or value, and not merely utility.
Thus Production is best defined as the creation or addition of value or of wealth it may consist not only of goods but also of the services such as of doctors, teachers, etc. Production, in short, does not mean creator of all utilities, but only such utilities as have value-in-exchange.
From the above, it is clear that the act of production is not complete till the commodity reaches the hands of the consumers. A table cannot be considered as ‘produced’ just when it has been made. It must pass through various agencies and reach the final consumer before it can be so considered.
In Economics, we are not concerned with the technical processes of production; we do not study how cloth is actually woven. We do not lean the art of making it. That is the work of spinners, weavers, and dyers. The student of Economics has simply to note the various stages through which cotton passes—ginning, carding, spinning, weaving, bleaching, etc.—till it reaches the hands of the final consumer. We are concerned with economic aspect, i.e., cost, price, profit, etc., and not the technical aspect.
Factors Affecting Production:
There are several factors which go to determine the volume of production in a country.
(i) Natural Factors:
The amount and nature of production in a country depends on its climate, nature of the soil, rainfall, etc. Production is diminished by natural calamities like earthquakes, floods, droughts and hailstorms.
(ii) Political Factors:
The form and character of government have a great deal to do with the volume of production in a country. In Russia, the Soviet Government has brought about tremendous increase in production through planning. For a long time, the foreign Government in India encouraged the production of raw materials and discouraged manufacturing industry in the country.
(iii) Technical Progress:
Production largely depends on the state of scientific knowledge and technical progress in the country. Discovery of new materials, new processes and new machines is bound to increase the volume of production. This is what is happening in India at present.
(iv) Development of Credit and Banking and Means of Transport and Communication:
In the absence of a sound banking system and efficient and cheap means of transport and communication, production is bound to Sutter. These are the prime needs of a country if production is to be increased. They are known as infrastructure.
(v) Character of the People:
Inhabiting a country also exerts a powerful influence on the nature and volume of its production. Hard working, educated and disciplined people can always produce relatively more and better goods than those who do not possess such qualities.
Factors of Production:
The production of wealth needs the co-operation of several factors. For the making of cloth, for example, we need the services of land to supply us with cotton as well as the services of spinners and weavers to transform it into cloth; we also need money to buy machines and tools. Above all, an organiser is needed to organise the whole business and co-ordinate the work of the various factors employed.
These factors have been called by economists Land, Labour, Capital and Organisation (or Enterprise) respectively. These factors are also called ‘inputs’ and the production is called output
By land we mean, not merely soil, as is commonly understood, but all the natural resources on land, in water and air available to man. It stands for natural resources.
Labour means not merely the work of a coolie or of an unskilled labourer but all type of work, mental and manual, undertaken to getting an income. Thus, any type of work undertaken for earning an income is called ‘labour’ in Economics.
Capital means not only cash used in business but it also includes tools, machinery and appliances used in production.
Organisation or enterprise is the work of bringing the above three factors together and making them work harmoniously. This also includes the process of rewarding them to their labour. Thus, it means not merely organising a business but also taking its risk. The factors are supplied by landlords, labourers, capitalists and organisers (or entrepreneurs). Their respective incomes are called rent, wages, interest and profit.
Are These Four Factors Reducible to Two?
Some economists put forward the view that there are not four factors but only two original or basic factors. They argue that capital is not an original or independent factor, but is the result of saving. Labourers work on land and produce more than they immediately consume. Thus a part of what is produced is saved and changed into those forms of wealth which aid further production, I his is capital; it has no independent existence and should therefore be included in land and labour. It is the product of land and labour.
As for organisation or enterprise, it is pointed out that it is only a form of labour. Economists include in labour all types of work, mental and manuual. Why not Organisation too? We are thus left only with two factors, viz., Land and Labour, or Nature and Man. The other two factors, capital and enterprise, are included in them.
The above position is quite logical, but not realistic enough. Capital in modern times is of tremendous importance. It has thrown labour in the background and overshadowed land in importance. Who can deny that the capitalist dominates the business world today? Production without capital would be negligible. Owing to its intrinsic importance, capital must be assigned an independent place among the factors of production.
Further, although organisation is a type of mental work, yet this work must be considered distinct from ordinary mental labour. It is of a specialised type. It not only consists in initiating, directing, controlling and supervising the entire process of production but, above all, in taking risk. Risk-taking is not mere labour.
In modern times, when the other three factors of production lie scattered, and production is so very complicated and costly, the importance of the services of the organiser or entrepreneur cannot be over-estimated. He must have a place of his own, and a very high one too among the factors of production. We thus come back to the view that there are not two but four factors of production: land, labour, capital and organisation.
Economic thinkers of today, like Benham, contend that the factors of production are neither two nor four but millions. Anything which goes into production is a factor. Every acre of land is a factor by itself, and so is every worker, each rupee, and each individual entrepreneur.
There is millions of each of the factor. Indeed the number is incalculable. The utmost we can do is to group together all similar acres of land, all similar workers, all similar machines and all entrepreneurs in the same line and count each group as one factor. But even thus the number of factors would run into thousands.
The modern economists also object to the traditional classification on the ground that dissimilar things are grouped together. For example, they ask, how can the work of a mason and the work of a typist be put under the same abe’labour’? They also say that, as these factors are subject to the same economic principles, there is no point in keeping them separate.
The argument is plausible but we shall adhere to the old fourfold classification of the factors of production. It makes for a convenient and clear study of the department of production. We do not want to confuse the student with niceties at an early stage of his study.
Relative Importance of the Factors of Production:
It is very difficult to say which factor of production is more important and which less. It is just like asking whether hands are more important or the eye: human body. All of them seem to be equally necessary and important and each has a special function to perform and makes available to us the tree gilts of nature; it supplies space for economic operations; it provides in raw materials.
Everything that we use can be traced ultimately to land; Human life without land is inconceivable.But what can land do alone? Without man’s aid it can produce but little, a few wild strawberries here and a few hard, stony plums there. Wild growth cannot sustain present human population.
Man must work on land in order to increase production. Labour, therefore, is equally essential. Through man’s efforts production has been immensely increased and diversified. As a matter of fact, everything that we see or use bears the stamp of human effort. Labour is, therefore, undoubtedly of great importance. What about capital? Capital fulfills a real need. Unaided by tools, man cannot produce much. If man has today mastered nature, if he can fly in the air, span the ocean, dive deep into the sea or penetrate into the bowels of the earth, it is all due to the aid that he receives from machinery.
A community mainly depending on land and its materials is condemned to appalling poverty forever, mechanization is the order of the day and for this capital is essential. It is therefore not without reason that production of today is described as capitalistic production. Importance of capital cannot be exaggerated. The entrepreneur, or organiser, also plays a very essential part in production. It is he who is responsible for setting the Production machinery in motion. It is under his leadership that production goes ahead and breaks new ground.
We thus realise that all factors are necessary for modern production. But they have not been equally important always. The importance of a particular factor depends on the stage of economic development in the country. In the hunting and pastoral stages, land was undoubtedly an -important. In the agricultural stage, labour disputed with land for domination, but not wholly successfully. Today capital and the entrepreneur seem to carry everything before them; other factors have been eclipsed.
Besides, the relative importance of the factors of production varies fern industry to industry. In manufacturing industries, where raw material costs are very heavy, we might say that land is more important and where costly machines the used, capital is more important, and so on.