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saqarTvelos mecnierebaTa erovnuli akademiis moambe, t. 11, #4, 2017
BULLETIN OF THE GEORGIAN NATIONAL ACADEMY OF SCIENCES, vol. 11, no. 4, 2017
Economics
On Production Factors
Vladimer Papava
Academy Member, P.Gugushvili Institute of Economics, Ivane Javakhishvili Tbilisi State University, Tbilisi
ABSTRACT. The paper discusses the main features of the theory of production factors, which is very
important in the context of the much needed revision of Economics. The paper shows why information,
which does not have a specific factor payment cannot be a factor of production. Further, it provides
reasoning why the government’s economic ability is a separate production factor. It is proven that indirect
business taxes are not unearned income of the government. They are the factor payment which belongs
to the government’s economic ability. Such an approach to the theory of production factors gives new
possibility to rethinking different parts of Economics. © 2017 Bull. Georg. Natl. Acad. Sci.
Key words: production factors, factor payments, information, government’s economic ability, indirect busi-
ness taxes
The issue of the rethinking of Economics and its activity of the government, even though its func-
foundations is not new. The most demonstrable criti- tions have been studied rather closely in other differ-
cism of Economics appeared in the 1970s [1, 2] and ent economic theories.
critical approach to the foundations of economics This paper seeks to discuss some very important
has been the subject of many different research works aspects of the theory of production factors and ex-
[3]. plain why information cannot be a production factor
After the most recent global financial crisis in (which is a most frequent mistake) and why the inclu-
2008, the criticism of Economics and the issue of the sion of the government’s economic ability into the
rethinking of the theoretical foundations of modern system of production factors is necessary.
economy has become more and more crucial [4-6]. On Production Factor Payments and why Infor-
Among the debatable issues of Economics, the mation cannot be a Production Factor. When econo-
issues of production factors, as a rule, are not nor- mists consider production factors, they usually are
mally discussed. Meanwhile, the issue of the expan- limited to three factors: labor, land and capital. Ac-
sion of a circle of factors of production is also among cording to the theory of production factors, each
topical points [7]. factor corresponds to an appropriate factor payment:
It is very important to focus attention on the role to labor – wages, to land – rental income and to
of information in the production process. No less capital – interest income.
important is to study the features of the economic According to management theorists, management
© 2017 Bull. Georg. Natl. Acad. Sci.
146 Vladimer Papava
makes a specific contribution to the productive proc- sources” are used as synonyms. In fact, it is theoreti-
ess [8]. Managerial talent is the main component of cally proven that there are essential distinctions be-
entrepreneurial ability as a production factor [9, pp. tween factors and resources when factors (labor, land
23-24]. A corresponding factor payment to the latter and capital) are qualitatively different from resources
(i.e., entrepreneurial ability) is entrepreneurial income (information, energy and matter) [14].
which is called profits [9, p. 24]. Therefore, information is a very important pro-
It must be underlined that many publications sug- duction process resource [15] but it is not a produc-
gest considering information [7, 10, 11] or informa- tion factor.
tion technology [12] as a factor of production. In On the Government’s Economic Ability as a Pro-
these publications, the authors, as a rule, studied the duction Factor. The income from the realization of a
salient characteristics of information, its special na- produced good includes not only factor payments
ture and its impact on production. At the same time, (wages, rental income, interest income and profits)
unfortunately, they forget about the most important but depreciation and indirect business taxes (value
aspect of the theory of production factors according added tax (VAT), general sales taxes, excise taxes,
to which any production factor has to have a theo- property taxes, license fees and customs duties). In-
retically proven appropriate factor payment. Discuss- direct business taxes qualify as unearned govern-
ing the impact of information on the production proc- ment income when the government is not contribut-
ess, the authors of these publications do not research ing anything to the production process [9, p. 119].
the factor payment for information. In this context, it Such an explanation of the appropriation of indirect
is necessary to take into account that each and every business taxes by the government calls into ques-
item of expense cannot pretend to be converted or tion the integrity of the theory of production factors
reduced to production factors [13, p. 15]. So, it is (which divides the price of a produced good into
very important to always remember that according to depreciation and factor payments) when there arises
the theory of production factors, each of the factors a type of government income (indirect business taxes)
has its own specific factor payment. that does not have an economic basis. In order to
The problem cannot be resolved if the royalty overcome this contradiction, we must answer the
will be considered as a factor payment for the infor- question: have all production factors and their cor-
mation in the capacity of the production factor. In responding factor payments been taken into account?
fact, two types of information are used in the produc- For all appearances, the answer to this question
tion – publicly available and commercial. Information would be in the affirmative if all interrelations among
from open (publicly available) sources has no pay- economic agents were determined on the basis of the
ment. At the same time, it is necessary to pay for “laissez-faire” principle, characteristic of the free
commercial knowledge. Consequently, it turns out market and of pure competition, and in the absence
that not all information “participating” in production of the government’s economic activity. In reality,
has a payment. This contradicts the wholeness of however, this is how matters stand.
the theory of the production factors. If an entrepreneur undertakes the initiative to in-
What is the main reason for the mistake of con- clude land, capital and labor in the unified produc-
sidering information as a production factor? tion of a good or the performance of a service, the
If we look through any manual of Economics, it is government undertakes the initiative of regulating
not difficult to find out that, as usual and without the given entrepreneurial ability within the framework
any justification, production factors are identified of the national economy.
with production resources when “factors” and “re- If an entrepreneur organizes the production of a
Bull. Georg. Natl. Acad. Sci., vol. 11, no. 4, 2017
On Production Factors 147
certain good or service, then the government organ- does not have the right to such “bankruptcy” when
izes the production of the entire mass of goods and it is subject to self-destruction (although history
services within the framework of the national contains a few examples of this). The receipt of as
economy. much economic profit as possible or increasing the
If an entrepreneur makes decisions (uses innova- value of the firm is the most significant reward for
tions, assumes risks in the process of running his the entrepreneur for his uninsured risk whereas the
own business), the government makes decisions on reward for persons exercising government power is
the main avenues of developing the entire national victory in elections in order to retain power for the
economy, uses innovations and assumes risks in its next term.
own economic policy [16]. Thus, if the government’s economic ability acts
The conclusion is that the government’s eco- as a production factor, it should bring in a certain
nomic ability is the fifth factor of production [17-19]. amount of factor payment. This factor payment is
Notwithstanding these parallels, the similarity what is currently called indirect business taxes.
between entrepreneurial ability and the economic It is known that indirect business taxes raise the
ability of the government is purely external and there price of a product – a price which includes payments
is a fundamental difference between them internally: based on production factors: labor, land, capital and
1. The entrepreneur deals both with property entrepreneurial ability. Accordingly, the new (i.e.,
factors (land, capital) and with the human factor increased) price is a result of the factor payment to
(labor) which he unites in a single production proc- the government’s economic ability, that is, as the fifth
ess; the government, however, primarily unites such factor of production. The recognition of the govern-
a human factor as entrepreneurs within the frame- ment’s economic ability as a factor of production
work of the entire national economy. makes it possible to give indirect business taxes the
2. By making basic decisions in the conduct of status of a factor payment.
his business, the entrepreneur determines the course In qualifying indirect business taxes as a factor
of activity of a specific firm. The decisions made by payment, a question may arise as to why the govern-
the government influence the strategy of the devel- ment is receiving direct taxes in exchange for its eco-
opment of all of the firms making up the national nomic ability.
economy. In reality, direct taxes are part of other factor pay-
3. As an innovator, the entrepreneur develops ments and are subtracted from these payments after
the production of new products and introduces new they are collected by the government for the imple-
technologies and new forms and methods of busi- mentation of its traditional functions. Unlike direct
ness organization. The government as an economic taxes, indirect business taxes are placed at the dis-
innovator, on the other hand, primarily introduces posal of the government directly in exchange for the
new forms and methods of economic policy, forms services reviewed above; indirect business taxes, like
new institutions and so forth. other factor payments, are primary while direct taxes
4. In the process of operating his business, the are derivative incomes of the government.
entrepreneur assumes the risk and, depending on The level of factor payment, which belongs to
how justifiable the risk is, receives an appropriate the government’s economic ability; i.e., the revenue
“reward;” bankruptcy may be the most lamentable from the indirect taxation of business, is determined
variant of the development of events. The govern- by the level of corresponding tax (VAT, general sales
ment, which guides the economy, also assumes risk taxes, excise taxes, property taxes, license fees and
but of a somewhat different nature; the government customs duties) rates; they influence the growth of
Bull. Georg. Natl. Acad. Sci., vol. 11, no. 4, 2017
148 Vladimer Papava
these factor payments depending on the degree to main reason why information is a production resource
which they stimulate or inhibit business activity in but not a production factor.
the country. Indirect business taxes (VAT, general sales taxes,
Recognition of the governments economic abil- excise taxes, property taxes, license fees, and cus-
ity as a production factor is a required reconsidera- toms duties) in some manuals ofEconomics are quali-
tion of many sections ofEconomics [20, p. 358]. fied as unearned government income when the gov-
Conclusions. According to the prevailing theory ernment does not contribute anything to the produc-
of production factors, these factors are labor, land, tion process. In effect, these taxes are a factor pay-
capital and entrepreneurial ability with each of them ment belonging to the governments economic abil-
corresponding to an appropriate factor payment: ity as a factor of production.
wages, rental income, interest income and profits. There are some similarities but more differences
When discussing the possibility of recognizing in- between entrepreneurial ability and a governments
formation as a factor of production, it is necessary to economic ability.
take into account that information as a very impor- Inclusion of the governments economic ability and
tant component of the production process does not its factor payment into the system of production fac-
have any appropriate factor payment. This is the tors will give new possibilities to update Economics.
ekonomika
warmoebis faqtorebis Sesaxeb
v. papava
akademiis wevri, ivane javaxiSvilis saxelobis Tbilisis saxelmwifo universiteti, p. guguSvilis
saxelobis ekonomikis instituti, Tbilisi, saqarTvelo
statiaSi ganxilulia warmoebis faqtorebis Teoriis zogierTi aspeqti, romelTac
didi mniSvneloba aqvs ekonomiksis reviziis konteqstSi. statiaSi naCvenebia, rom
informacias ar gaaCnia specifikuri faqtoruli safasuri, ris gamoc is ver CaiTvleba
warmoebis faqtorad. garda amisa, statiaSi mocemulia imis dasabuTeba, Tu ratom aris
saxelmwifos ekonomikuri unari warmoebis damoukidebeli faqtori. dasabuTebulia, rom
iribi gadasaxadebi biznesze ar aris saxelmwifos mier aragamomuSavebuli Semosavali. es
gadasaxadebi aris saxelmwifos ekonomikuri unaris faqtoruli safasuri. warmoebis
faqtorebis Teoriisadmi amgvari midgoma iZlevaekonomiksis calkeuli nawilebis axleburi
gadaazrebis SesaZleblobas.
Bull. Georg. Natl. Acad. Sci., vol. 11, no. 4, 2017
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