An introduction to economics - Lesson 1: Key Principles and Why can't I afford a house?

Article Index

Some Key Economic Principles

Everybody that is, ever has been, or ever will be, born into the world needs space in which to live and in which to sustain the life they have been given.

This, one might say, is the first ‘birthright’ and it pre-dates and supersedes any human right that society might from time to time declare.

Society by its laws cannot, in justice, abrogate this right since, along with every person’s need for air, water and sunshine in some form, it arises from the nature of what it is to be human.

Similarly, none of these elements may be enjoyed by anyone without they have free access to some land. We might thus see that a key responsibility of all societies, and of their governments is to ensure that the laws, regulations, customs and traditions that they honour, recognises this simple fact. This is not to say that all people have a right to live and earn their living freely ‘anywhere’ within a society’s domain but that they have such a right ‘somewhere’, and that a truly ‘free’ society would ensure this.

As a society and its population develops certain places are valued more highly than other places and there will be a need for society to develop just and equitable systems for allocating places to people. There will always be some places that are the least desirable, even though they are still capable of sustaining a living in response to human exertion. In economic terms, these sites are ‘marginal’.

The key economic principle that underlies the thesis outlined in this paper is the need for, and the benefits that arise from, ensuring that land is kept free to use at the margin. We capture this idea in the phrase ‘free land at the margin’.

More Economic Fundamentals: Factors of Production

In conventional economics it is frequently taught that the primary factors of production are land, labour and capital. Sometimes the term ‘entrepreneurship’ is also cited as a fourth ‘primary factor’.

We note that the term ‘capital’ as a factor of production refers to things, like tools, machinery, factories, offices and shops etc., that are produced by people to assist them or others in further production. We reason that, whilst capital is clearly of very great importance, if it is itself a product it is misleading to regard it as a ‘primary factor’ for the purposes of economic analysis.

We reason further that since the term ‘labour’ encompasses all productive human activity, ‘entrepreneurship’ only really expresses a particular form of labour, much as any other particular skill or talent might express a human capacity to labour.

We thus conclude that the starting point for proper economic analysis is the recognition that fundamentally all wealth is the product of non-human and human elements. ‘Land’, as an economic term, refers to the non-human elements, freely provided by nature. ‘Labour’ refers to all the human forces that are brought to bear in production. There are thus only two ‘primary factors of production’ i.e. land and labour.

Arising from these two primary factors of production we may identify two primary returns from production. The return to land is termed ‘Rent’. The return to labour is normally termed wages referring directly that which workers receive directly. In this article however we shall use the term ‘earnings’ since we need to accommodate the return that is due to capital also which as has been explained above is really labour which has been stored or crystallised in the form of tools and equipment etc so as to make future labour more effective. Using this term also makes it clearer that it is the ‘earnings’ of firms rather than merely the wages of their employees that is of significance for the purposes of economic analysis.

Clarifying Economic Terms: "Wealth"

From the above we may see how, if we are to be clear in our thinking, it is important to be clear and unambiguous in our use of important economic terms. Commentators on economic matters frequently misuse, what is probably the most important of all economic terms - ‘wealth’.

Economics, as a social science, is about the creation and distribution of wealth by and for people. However there is frequently confusion and ambiguity in the use of the term ‘wealth’ particularly in connection with other key economic terms such as ‘land’, ‘labour’ and ‘capital’. If the terms are to be used to aid understanding they must each have a clear meaning such that when we use any of the terms there is no danger of confusing it with another. We have referred to land, labour, capital and wealth already but it may be useful at this point to stress the distinctions between land and labour on the one hand and capital and wealth on the other. Land and labour are defined here as primary ‘factors of production’ since they are essential to all production.

Wealth refers to products or ‘goods’ that are valued by people either because they a capable of satisfying directly or indirectly, their needs or desires or because they may be used to aid in the production of other goods or services. Where wealth is used in the latter sense, i.e. ‘to aid in the production of other goods or services’, it is termed ‘capital’. Capital is then an important ‘factor of production’, but, since it is itself a product, it is not a ‘primary factor of production’.

Whilst both ‘land’ and ‘labour’ may be highly valued, neither can, or should, be regarded as ‘wealth’ or ‘capital’ for the purposes of economic analysis. This is because neither can be the product of economic activity since they are themselves fundamental to all economic activity. We should note that for the purposes of economic analysis ‘whilst all wealth is valued, not all that is valued is wealth’.

Spread the word: