10/12/2020

Islamic Banking & Finance BS Accounting & Finance

FACTORS OF PRODUCTION

Rehan Waheed

Factors of Production Outline of the Presentation

 Factors of Production
 Capitalism
 Characteristics
 Issues
 Socialism
 Characteristics
 Collapse
 Capitalism Vs. Socialism
 Islamism
 Characteristics

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Factors of Production Capitalism

The Capitalist View

 Capitalism affirms an absolute and unconditional right to private property
 The capitalist theory can be summarized as follows:
“Wealth should be distributed only among those who have taken part in producing it, and who are
described in the terminology of economics as the factors of production”
Characteristics
 Private Property
 Capital Accumulation
 Capital Concetration
 Free Market & Competition

Factors of Production Capitalism - Capital

Capital
 The produced means of production and their operation for interest
 A commodity which has already undergone one process of human production
 It will be used again as means of another process of production
 According to Marshall, “Capital consists of all kinds of wealth, other than free gifts of nature,
which yield income.”
 Every type of wealth other than land which helps in further production of income is called capital
 It includes physical tools, plants, and equipment that allow for increased work productivity
Compensation
 Interest

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Factors of Production Capitalism - Capital

Characteristics of Capital
 Man Produces Capital
 Capital is a Passive Factor of Production
 Capital is a Produced Means of Production
 Capital is Variable
 Capital is more Mobile than other Factors of Production
 Capital Depreciates
 Capital is Destructible

Factors of Production Capitalism - Land

Land
 The term ‘Land’ in economics is often used in a wider sense
 It includes all those natural resources which are the free gifts of nature which are used as means of
production without having previously undergone any process of human production
 It includes (i) surface of the land i.e. rivers, forests, mountains and oceans;
(ii) above the surface of land i.e. heat of sun, light, climate, weather, rainfall etc;
(iii) under the surface of the earth i.e. minerals such as iron, coal, copper, water, etc.
 According to Marshall, “By land is meant… materials and forces which nature gives freely for
man’s aid in land, water, air, light and heat.”
Compensation
 Rent

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Factors of Production Capitalism - Land

Characteristics of Land
 Free Gift of Nature
 Fixed Quantity
 Land is Permanent
 Land is a Primary Factor of Production
 Land is a Passive Factor of Production
 Land is Immovable
 Land has some Original Indestructible Powers
 Land Differs in Fertility

Factors of Production Capitalism - Labor

Labor
 Labor actually means any type of physical or mental exertion
 In economics, labor is the efforts exerted to produce any kind of goods or services
 It includes all types of human efforts – physical exertion, mental exercise, use of intellect, etc.
 The efforts must be done in exchange for an economic reward
Compensation
 Wages

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Factors of Production Capitalism - Labor

Characteristics of Labor
 Perishable in Nature
 Labor is Inseparable from the Laborer
 Human Effort
 Labor is Heterogeneous
 Labor has Poor Bargaining Power
 Not Easily Mobile
 Supply of Labor is relatively Inelastic

Factors of Production Capitalism - Entrepreneurship

Entrepreneurship
 Enterpreneurship refers to those who “undertake” the risk of new enterprises
 An enterprise is created by an entrepreneur
 The process of creation is called “entrepreneurship”
 An entrepreneur is a person who always remains in search of something new and exploits such
ideas into gainful opportunities by accepting the risk and uncertainty
 It brings together the other three factors, exploits them and bears the risk of profit and loss in
production
Compensation
 Profit

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Factors of Production Capitalism - Entrepreneurship

Characteristics of Entrepreneurship
 Economic and Dynamic Activity
 Related to Innovation
 Profit Potential
 Risk Bearing
 Idea Generation
 Feasibility Study
 Development of Managerial Capabilities
 Creation of Organizations

Factors of Production Capitalism - Issues

Inequality

Environmental Economic
degradation Instability

Irrational
Monopoly
self-interest Problems
of
Capitalism

Unemployment Short-termism

Disruptive
Wealth
Financial
disparities
Crises

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Factors of Production Socialism

The Socialist View

 Socialism totally denies the right to private property
 Everyone in society equally owns the factors of production
 It could also be a cooperative or a public corporation where everyone owns shares
 These factors of production are valued only for their uselfulness to people
 Socialists take into account both individual needs and greater social needs
 They allocate resources using central planning
 Examples include transportation, defense, education, healthcare etc.
 Some also define the common good as caring for those who can not directly contribute to
production such as elderly and children etc.

Factors of Production Socialism

Capital
 Instead of being private property, capital is considered to be national or collective property
Land
 Instead of being private property, land is also considered to be national or collective property
Entrepreneurship
 Enterpreneur is not an individual but the state itself
Labor
 Labor is considered to have a right to wealth, which it gets in the shape of wages

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Factors of Production Socialism

Characteristics of Socialism
 Public Ownership
 Economic Planning
 Egalitarian Society (Equal / Classless)
 Provision of Basic Needs
 No Competition
 Price Control
 Social Welfare
 Minimal Exploitation and Class Struggle

Factors of Production Socialism - Collapse

No
motivation
for Profit

Collapse
of
Socialism

Can’t be
enforced Lack of
without Efficiency
compulsion

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Factors of Production Capitalism Vs. Socialism

Factors of Production Islamism

The Islamic View

 From Islamic view point, there are two kinds of people who have right to wealth
 Primary right: For those who take part in the process of producing some wealth
 Secondary right: For those who have not taken direct part in process of production but it has
been obligatory on producers to make them co-sharers through Sadaqat
 In Islamic theory the factors of production are not specified or technically defined
 Nor their share in wealth is determined in exactly the same way as is done under capitalism
 From the Islamic point of view, the factors of production are three instead of four
 Capital
 Land
 Labour

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Factors of Production Islamism – Capital

Capital
 The means of production that cannot be used in the process of production until and unless during
this process it is either wholly consumed or completely altered in form, and which, therefore, cannot
be let or leased
 Example: liquid money or food stuffs etc.
Compensation
 The share of capital is in the form of profit and not interest

Factors of Production Islamism – Land

Land
 Means of production which are used in the process of production in a way that their original and
external form remains unaltered, and which can hence be let or leased
 Example: land, houses, machines etc.
Compensation
 Thee share of land comes in the form of rent

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Factors of Production Islamism – Labor

Labor
 That is, human exertion, whether of the bodily organs or of the mind or of the heart
 This exertion thus includes organization and planning too
Compensation
 The share of labor comes in the form of wages

Factors of Production BS Accounting & Finance

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