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saq arT vel os mecn ier eba Ta erov nuli aka dem iis moamb e, t . 1 1, #4, 2 017
BU LLE TIN OF TH E GEOR GI AN N ATI ONA L A CA DE M Y OF SC IE NC ES, vol. 11,
no. 4, 20 17
© 2017 Bull. Georg. Natl. Acad. Sci.
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
foundations is not new. The most demonstrable criti-
cism of Economics appeared in the 1970s [1, 2] and
critical approach to the foundations of economics
has been the subject of many different research works
[3].
After the most recent global financial crisis in
2008, the criticism of Economics and the issue of the
rethinking of the theoretical foundations of modern
economy has become more and more crucial [4-6].
Among the debatable issues of Economics, the
issues of production factors, as a rule, are not nor-
mally discussed. Meanwhile, the issue of the expan-
sion of a circle of factors of production is also among
topical points [7].
It is very important to focus attention on the role
of information in the production process. No less
important is to study the features of the economic
activity of the government, even though its func-
tions have been studied rather closely in other differ-
ent economic theories.
This paper seeks to discuss some very important
aspects of the theory of production factors and ex-
plain why information cannot be a production factor
(which is a most frequent mistake) and why the inclu-
sion of the government’s economic ability into the
system of production factors is necessary.
On Production Factor Payments and why Infor-
mation cannot be a Production Factor. When econo-
mists consider production factors, they usually are
limited to three factors: labor, land and capital. Ac-
cording to the theory of production factors, each
factor corresponds to an appropriate factor payment:
to labor – wages, to land – rental income and to
capital – interest income.
According to management theorists, management
146 Vladimer Papava
Bull. Georg. Natl. Acad. Sci., vol. 11, no. 4, 2017
makes a specific contribution to the productive proc-
ess [8]. Managerial talent is the main component of
entrepreneurial ability as a production factor [9, pp.
23-24]. A corresponding factor payment to the latter
(i.e., entrepreneurial ability) is entrepreneurial income
which is called profits [9, p. 24].
It must be underlined that many publications sug-
gest considering information [7, 10, 11] or informa-
tion technology [12] as a factor of production. In
these publications, the authors, as a rule, studied the
salient characteristics of information, its special na-
ture and its impact on production. At the same time,
unfortunately, they forget about the most important
aspect of the theory of production factors according
to which any production factor has to have a theo-
retically proven appropriate factor payment. Discuss-
ing the impact of information on the production proc-
ess, the authors of these publications do not research
the factor payment for information. In this context, it
is necessary to take into account that each and every
item of expense cannot pretend to be converted or
reduced to production factors [13, p. 15]. So, it is
very important to always remember that according to
the theory of production factors, each of the factors
has its own specific factor payment.
The problem cannot be resolved if the royalty
will be considered as a factor payment for the infor-
mation in the capacity of the production factor. In
fact, two types of information are used in the produc-
tion – publicly available and commercial. Information
from open (publicly available) sources has no pay-
ment. At the same time, it is necessary to pay for
commercial knowledge. Consequently, it turns out
that not all information “participating” in production
has a payment. This contradicts the wholeness of
the theory of the production factors.
What is the main reason for the mistake of con-
sidering information as a production factor?
If we look through any manual of Economics, it is
not difficult to find out that, as usual and without
any justification, production factors are identified
with production resources when “factors” and “re-
sources” are used as synonyms. In fact, it is theoreti-
cally proven that there are essential distinctions be-
tween factors and resources when factors (labor, land
and capital) are qualitatively different from resources
(information, energy and matter) [14].
Therefore, information is a very important pro-
duction process resource [15] but it is not a produc-
tion factor.
On the Government’s Economic Ability as a Pro-
duction Factor. The income from the realization of a
produced good includes not only factor payments
(wages, rental income, interest income and profits)
but depreciation and indirect business taxes (value
added tax (VAT), general sales taxes, excise taxes,
property taxes, license fees and customs duties). In-
direct business taxes qualify as unearned govern-
ment income when the government is not contribut-
ing anything to the production process [9, p. 119].
Such an explanation of the appropriation of indirect
business taxes by the government calls into ques-
tion the integrity of the theory of production factors
(which divides the price of a produced good into
depreciation and factor payments) when there arises
a type of government income (indirect business taxes)
that does not have an economic basis. In order to
overcome this contradiction, we must answer the
question: have all production factors and their cor-
responding factor payments been taken into account?
For all appearances, the answer to this question
would be in the affirmative if all interrelations among
economic agents were determined on the basis of the
“laissez-faire” principle, characteristic of the free
market and of pure competition, and in the absence
of the government’s economic activity. In reality,
however, this is how matters stand.
If an entrepreneur undertakes the initiative to in-
clude land, capital and labor in the unified produc-
tion of a good or the performance of a service, the
government undertakes the initiative of regulating
the given entrepreneurial ability within the framework
of the national economy.
If an entrepreneur organizes the production of a
On Prod uction Fa ctors 147
Bull. Georg. Nat l. Acad. Sci., vol. 11, no. 4, 2017
certain good or service, then the government organ-
izes the production of the entire mass of goods and
services wit hin the framework of the national
economy.
If an entrepreneur makes decisions (uses innova-
tions, assumes risks in the process of running his
own business), the government makes decisions on
the main avenues of developing the entire national
economy, uses innovations and assumes risks in its
own economic policy [16].
The conclusion is that the government’s eco-
nomic ability is the fifth factor of production [17-19].
Notwithstanding these parallels, the similarity
between entrepreneurial ability and the economic
ability of the government is purely external and there
is a fundamental difference between them internally:
1. The entrepreneur deals both with property
factors (land, capital) and with the human factor
(labor) which he unites in a single production proc-
ess; the government, however, primarily unites such
a human factor as entrepreneurs within the frame-
work of the entire national economy.
2. By making basic decisions in the conduct of
his business, the entrepreneur determines the course
of activity of a specific firm. The decisions made by
the government influence the strategy of the devel-
opment of all of the firms making up the national
economy.
3. As an innovator, the entrepreneur develops
the production of new products and introduces new
technologies and new forms and methods of busi-
ness organization. The government as an economic
innovator, on the other hand, primarily introduces
new forms and methods of economic policy, forms
new institutions and so forth.
4. In the process of operating his business, the
entrepreneur assumes the risk and, depending on
how justifiable the risk is, receives an appr opriate
“reward;” bankruptcy may be the most lamentable
variant of the development of events. The govern-
ment, which guides the economy, also assumes r isk
but of a somewhat different nature; the government
does not have the right to such “bankruptcy” when
it is subject to self-destruction (although h istory
contains a few examples of this). The receipt of as
much economic profit as possible or increasing the
value of the firm is the most significant reward for
the entrepreneur for his uninsured risk whereas the
reward for persons exercising government power is
victory in elections in order to retain power for the
next term.
Thus, if the government’s economic ability acts
as a production factor, it should bring in a certain
amount of factor payment. This factor payment is
what is currently called indirect business taxes.
It is known that indirect business taxes raise the
price of a product – a price which includes payments
based on production factors: labor, land, capital and
entrepreneurial ability. Accordingly, the new (i.e.,
increased) price is a result of the factor payment to
the government’s economic ability, that is, as the fifth
factor of production. The recognition of the govern-
ment’s economic ability as a factor of production
makes it possible to give indirect business taxes the
status of a factor payment.
In qualifying indirect business taxes as a factor
payment, a question may arise as to why the govern-
ment is receiving direct taxes in exchange for its eco-
nomic ability.
In reality, direct taxes are part of other factor pay-
ments and are subtracted from these payments after
they are collected by the government for the imple-
mentation of its traditional functions. Unlike direct
taxes, indirect business taxes are placed at the dis-
posal of the government directly in exchange for the
services reviewed above; indirect business taxes, like
other factor payments, are primary while direct taxes
are derivative incomes of the government.
The level of factor payment, which belongs to
the government’s economic ability; i.e., the revenue
from the indirect taxation of business, is determined
by the level of corresponding tax (VAT, general sales
taxes, excise taxes, property taxes, license fees and
customs duties) rates; they influence the growth of
148 Vladimer Papava
Bull. Georg. Natl. Acad. Sci., vol. 11, no. 4, 2017
these factor payments depending on the degree to
which they stimulate or inhibit business activity in
the country.
Recognition of the government’s economic abil-
ity as a production factor is a required reconsidera-
tion of many sections ofEconomics [20, p. 358].
Conclusions. According to the prevailing theory
of production factors, these factors are labor, land,
capital and entrepreneurial ability with each of them
corresponding to an appropriate factor payment:
wages, rental income, interest income and profits.
When discussing the possibility of recognizing in-
formation as a factor of production, it is necessary to
take into account that information as a very impor-
tant component of the production process does not
have any appropriate factor payment. This is the
main reason why information is a production resource
but not a production factor.
Indirect business taxes (VAT, general sales taxes,
excise taxes, property taxes, license fees, and cus-
toms duties) in some manuals ofEconomics are quali-
fied as unearned government income when the gov-
ernment does not contribute anything to the produc-
tion process. In effect, these taxes are a factor pay-
ment belonging to the government’s economic abil-
ity as a factor of production.
There are some similarities but more differences
between entrepreneurial ability and a government’s
economic ability.
Inclusion of the government’s economic ability and
its factor payment into the system of production fac-
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 iZleva
ekonomiksis
calkeuli nawilebis axleburi
gadaazrebis SesaZleblobas.
On Production Fa ctors 149
Bull. Georg. Nat l. Acad. Sci., vol. 11, no. 4, 2017
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Received September, 2017
