PhD students seminar: Yannick Mangold

Abstract

Considering the importance of agriculture for pre-and early industrial economies, it is no surprise that the Physiocrats and classical economists like Ricardo and Malthus stressed the crucial role of land as a factor of production. Not only for it provides the “free gift of nature” and is thus the reason for surplus, but also as it was understood to be an important element in the explanation of (macroeconomic) distribution.

Some authors of the late 18th, and 19th century, like Smith and Marx, proclaimed that some factors of production, like land or labour are of special importance for production. Although they asserted a strict separation of the three principle agents of production, the “classical triad” of landowners, capitalists and workers and their equivalent incomes (rent, profit and wages), their contribution to production and their added value was not believed to be equal. According to Schumpeter (1953, p. 533), Marx, for example, was opposed to the idea of an economically justified return to all three agents due to their proclaimed contribution as it diminished the importance of the class struggle and the believed fact that value stemmed mainly from labour and that all other incomes are paid out of its product. Other authors challenged this idea, claiming all three factors to be of equal importance. Authors like Jean- Baptiste Say, as early as 1803 even deluded the sharp separation of those factors of production. Although he in general subscribed to the triad, he asserted that an infinite subdivision of those three branches of industry was imaginable and that no factor of production should be seen as original as the overarching principle was that of utility: “wealth consists, not in matter, but in the value of matter; because matter without value is no item of wealth“ (p. 27). Ricardo gave land a special role in his theory, but championed another organising economic principle when he argued that the cultivation of a limited and heterogeneous factor land would lead to a differential rent and thus introducing the economic rationale that would inspire marginalism.

Authors like Walras, Clark and Wicksteed turned away from the conception of land as a special and distinct factor of production and argued on grounds of the marginal principle that all factors of production are alike – the marginalist argument should not be reserved for land alone. Wicksteed acknowledged the diversity of factors, but introduced the idea of a formally stated production function that saw an infinite amount of factors of production comparatively contributing to the total product according to the marginal principle.

Those early marginalist authors used differing arguments and had diverse conceptions of nature and production but nevertheless promoted the idea that capital and profits could be analysed in the same manner as (homogeneous) land and rent. Following discussions on the nature of capital lead to the radical solution of subsuming land under capital and the slow marginalisation of land as an important factor of production was finalised in the neo-classical production functions. At the beginning of the 20th century natural resources were treated in arenas outside of macroeconomics and capital theory and the aggregate production function without land and the two inputs of labour and capital became canon for neoclassical economists, completing the shift from a physical conception of heterogeneous factors of production to a generalised, economically homogeneous conception.

This paper investigates this analytical shift and its related arguments, mainly focussing on the contributions of authors that shaped neoclassical economics and the emerging macroeconomic “mainstream” of the 20th century. It therefore explains how the production theory embedded in neoclassical models of economic growth and distribution neglects the role of land as a distinct factor of production and natural agents in general.