The Fallacy of Three Productive Factors. The most
important defect in the traditional theory is that its
“factors” are unreal. Persons (as productive) and “nat-
ural agents” both largely qualify as “capital goods.”
They have been produced at a cost and require main-
tenance and replacement. Natural agents cost invest-
ment in exploration and development, a distinctly
speculative activity; the classical “land” as “original
and indestructible” is unknown on the market, and
these qualities pertain separately, in different ways and
degrees to all concrete productive agents—even in-
cluding human beings. And all kinds, however distin-
guished, are mutually complementary in use. Differ-
ences economically significant for classification may be
alleged first in the conditions of supply, by investment
affected by luck. These involve varying durability and
the possibility, and cost, of reduplication or production
of agents equivalent or more or less similar in function;
also differences in transferability among a range of uses,
but this is largely a matter of obsolescence and re-
placement, i.e., transfer of the “investment in” the
agents, without moving these themselves. Typical in
a progressive economy is mobility, in effect, through
differential increase. No general classification by eco-
nomic qualities is realistic, since differences are a mat-
ter of indefinite detail. Laborers in a free society are,
in human and social terms, a category distinct from
“property,” i.e., “capital goods”; but further classifica-
tion depends on law and morals, or on technology.
The principle of “decreasing returns” relates to any
kind of productive agent applied in increasing propor-
tions to any combination of kinds. And all “means”
are means of production. There is no corresponding
law of “increasing returns” except, rigorously speaking,
for a short threshold on a minimal dosing of one kind
of means onto others. The expression “increasing re-
turns” is confusingly used for an increasing ratio of
output to inputs with an expanding scale of units in
organizations, due to increasing specialization so made
possible. The “unit” in production has various mean-
ings. The subject calls for mention because the two
expressions falsely suggest antithesis; but more espe-
cially because of the tendency of many people, and
some economists, to think that increasing returns with
larger scale is also a general law. It holds only for an
early stage in a hypothetical expansion of a “unit,”
beginning at zero. The gains from more minute spe-
cialization are soon offset by increased difficulty of
coordination, unwieldiness, and costs of management.
And if the market conditions do not call for a large
number of units of roughly the size of greatest effi-
ciency, competition is impossible; the result will be
monopoly, or “oligopoly.” The one gives rise to an
abstractly simple price problem, while the other term
may stand for a group of vague monopoloid situations,
given inconvenient Greek names by Edward H.
Chamberlin (The Theory of Monopolistic Competition,
Cambridge, Mass. [1933], and revisions).
Greater output from equal resources results from use
of better technology, which calls for mention of a
pivotal fact: that new technology is usually created
by investment. Such investment, however, is very
different from the production of more productive
agents of kinds already in use, or kinds already known.
It calls for “invention,” a creative act, perceiving and
solving a problem. Here the end cannot possibly be
known in advance, and so the activity cannot be “eco-
nomic” in the strict meaning; in many cases such efforts
fail outright. The fact of technological progress sug-
gests that on the whole, the results of research and
development are worth more than they cost. But much
cost is unrecorded and unknown, and this holds in part
for the results also. For progress is no definable equi-
librium position, and the product value may exceed
or fall below its cost in particular cases.
What is true of invention holds also for exploration
for natural resources; the significance of this hardly
needs detailed explanation, or in particular its bearing
on the “classical” theory of rent. Statistics—grouping
cases—may reduce the error or “chance” but never
remove it. And all economic activities are affected by
some uncertainty, with general consequences that must
be taken up later. (It is somewhat puzzling that statis-
tics and probability theory apply to real “error,” and
even crime, as well as purely chance events, but the
fact is familiar.)
