REFERENCE BASE
ECONOMICS

O.T. FORD

A product is something created that is desirable or valuable to at least one person. Economists typically divide products into goods (objects) and services (actions); some products, however, are apparently both, or not clearly one or the other. The creation of products can include their manufacture, but it can also include the conversion of potential resources (such as “natural resources”) into personal or institutional resources.

Economics is about products in a system of value and utility. In a common conventional definition, economics concerns itself with the production and distribution of goods and services. These basic definitions can obviously be interpreted very broadly — and everything covered by that broad interpretation can fairly be understood to have an economic component. Conventionally, economics excludes explicitly cultural or political activities, though it makes more sense to consider the three as having meaningful overlap.

Wealth is the exchange value of alienable resources. In other words, wealth is a measure of what a person, organization, or institution could get by sharing or trading its alienable resources.

A firm, or company, is an organization, frequently an institution, for economic activities. A business is a firm for the purpose of increasing the wealth of its owners. Businesses are a particular focus of conventional economics.

A firm must offer at least one product, and a business must be a firm. This excludes organizations that pursue wealth without offering products — those that are organized simply to take wealth through force or fraud, for instance. While a business offers a product, the business exists for profit, not the product.

A firm functions as an interest group, among other things. In rare circumstances, it can function as a government (the Dutch East India Company, for example); but most firms are not even subordinate governments, because they function under civil laws created by superior institutions and do not add appreciably to those laws, particularly where persons are concerned.

Trade is the exchange of value, in the form of products and alienable resources. An economy is a regional system with a particular economic situation and environment, which functions as a unit in global trade. The conventional view of economics simply adopts the country model; each country is an economic unit for all purposes. Because countries are imaginary places, countries as such never function as the units of global trade. Every state, on the other hand, is an economy, because states create legal environments which regulate internal and external trade. But economies exist in multiple, parallel layers. On a different level, or for a different purpose, economies can be identified otherwise. Even independent states are not always the appropriate units; it depends on the matter at hand, and any situation should be understood in its own terms, rather than being forced into a conventional framework that just happens to be more familiar. To use a well-known example, the European Union should be treated as a single economy for most purposes. But there are many, many lesser-known examples. (Of course, many of the world’s countries are also states; the important distinction is that the countries that are not states should never be considered as economies.)

A division of labor is a form of economic specialization. Two or more parties with collective needs divide the necessary tasks among themselves, each doing a different mix of the tasks, and sharing in the collective products. This is significant element of modern economies; but as far as we know, division of labor has been a feature of human economy from the beginning, when we were hunters and gatherers, and some specialized in hunting while others specialized in gathering. (To the best of our current knowledge, this was based on sex: men hunted and women gathered.)

Rent is wealth derived from social property whose value is not due to any act of the owner. Land rent is derived from social property in land and its elements (natural resources). All wealth derived from land is rent. Product rent is derived from a social-property stake in a product where that stake is not the result of any act of the owner. If a person contributed a portion of the labor to create a product but owns the entirety of the proceeds, then the ownership is partially labor income and partially product rent. Rentseeking is the pursuit (including the preservation) of rent.

Money is an alienable resource whose value is standardized and conventional. A currency is a particular system of money, or the unit in that system. Money is a key element of market exchange, the dominant system of economic integration in the modern world, in which all products are valued in and exchanged for money. While traditionally it has been believed that there was a previous stage of market exchange involving barter of products directly (e.g., X raises chickens, Y grows corn, and X trades Y a chicken for five bushels of corn), that is perhaps an unwarranted assumption. Rather, what we read historically as barter may have been a division of labor with an understanding of communal reciprocity — X gives Y a chicken when she needs one, with the understanding that Y will give X corn when he needs it.

Currencies can be discussed in nominal terms, in which we consider each unit as fixed; a dollar bill is worth a dollar, just as expected. Historical discussions of currencies are often done instead in real terms, where the value of a currency in the past is adjusted to account for the currency’s change in value due to inflation or deflation, or the rise or fall in prices within economies; a dollar bill in the past is worth (usually) more than a dollar in real terms, because it would buy more product than a dollar of today would buy at today’s prices. Someone making $50,000 a year today is middle class. Someone making $50,000 a year in 1915 is rich; this is the equivalent of more than a million in 2020 dollars.

Taxation is the involuntary taking of alienable resources under provision of civil law. By contrast, theft is the involuntary taking of alienable resources without provision of civil law. Taxation, by this definition, is thus not just takings by the government itself, but takings by others that the government sanctions. While this contrast between taxation and theft sounds like an ideological anti-tax statement, taxation is clearly necessary for a functioning government; what matters is not the similarity between taxation and theft, but the difference.

Factors of production are the inputs needed to produce a product. Traditionally, they have been classified into three main categories: land, labor, and capital. Some add a fourth, technology, but that traditionally falls under capital. Any inputs to the production process are factors, though, including more specific inputs. Land as a factor category includes not just the land itself, as used in agriculture, but things found on the land, such as trees (lumber), and under the land, such as oil and coal. Water is found both on the land (surface water) and under the land (groundwater), and in both cases is used in production. Labor as a factor category tends to be used when the labor in question is largely substitutable. Investment banking and graphic design, for example, are done by individual persons, but the major contribution those persons make is specialized knowledge, which is capital.

Factor intensity is a property of products; a given product is intensive in a factor if it requires that factor disproportionately. For example, the major input to most agriculture, in terms of value, is land, so agriculture is land-intensive. Specific types of agriculture can be labor-intensive or capital-intensive, though. We can also speak of more specific factor intensities; gasoline is oil-intensive. And we can speak of intensities as being relative — traditional rice farming is more labor-intensive than modern wheat farming, which is more capital-intensive, relying as it does on machinery.

Factor endowments are the inherent resources of a place (in all its elements). As usual, most economists treat countries as units, and will thus speak of the factor endowments of countries; for instance, Canada’s chief factor endowment is land, and Bangladesh’s is labor. But we can speak of the endowments of non-country places as well. For example, the chief factor endowment of Manhattan is capital.

Both factor intensity and factor endowments, as well as the categorization of specific factors into the broader categories of land, labor, and capital, can sometimes be unclear or debatable.

The most common measure of the size and scope of an economy is gross domestic product, the total value of all products produced within a given region over a given length of time (generally a year). While the most relevant GDP in any discussion is the GDP for the most appropriate economies, which can be states, substate regions, or trading blocs, for example, most economists will consistently use GDP for countries. While, again, a country cannot be an economy if it is merely an idea, even countries that are merely ideas count as regions; that is, they are identifiable two-dimensional areas on the surface of the Earth. And we can actually calculate GDP for any region, even one that only exists as an idea.

Comparing the GDP year-on-year for the same economy is a valuable approach to understanding economic activity. Comparing the GDPs of different economies at any given point in time is only useful in limited circumstances. For example, knowing which economies are the largest can tell us something about the global trading system; China’s large GDP overall makes it an attractive business partner, which gives the state of China greater influence in trade talks. And a state with a larger economy overall can, generally speaking, harness greater revenue for its priorities. The size and technical sophistication of the US military is partially due to the fact that the US government can afford it.

But for most purposes, it is more useful to speak of the size of the economy per capita — that is, divided by the number of persons. GDP per capita is to some degree a measure of economic development. The United States and the Netherlands are at comparable levels of economic development, and this is reflected in their GDPs per capita, even though the US GDP overall is much, much larger. There are examples (Qatar is typical) where GDP per capita is very high but so, too, is income inequality; Qatar’s high GDP per capita is a function of a small number of phenomenally wealthy individuals, not a generally wealthy society.

© O.T. FORD