Using economic theory to maximise your own life and personal wealth

Welcome to Finance and Fury. In today’s episode, we will be looking at a way to think differently about maximising your own life and personal wealth – We are going to do this by breaking down the economic factors of productions and rather than applying these to an economy, looking at using these principals in your everyday life

In economic terms there are things called Factors of Production – these generally look at how to maximise economic output for an economy at large, through maximising the inputs

1. This is where the factors of production are the inputs needed for creating a good or service
   1. No real steadfast categorization of these, as economic inputs have changed over time – but in general, in the modern era, these include land, labour, entrepreneurship, and capital
2. But throughout history, those who control more of the factors of production often enjoy the greatest levels of wealth in a society.
   1. In a free market – more factors of production are controlled by business owners and investors
   2. In socialist systems – the government, or those in charge of the government are the ones who control the factors of production
3. In this episode – I hope to explain each of these factors and different methods on how you can maximise these for yourself

To start – let’s look at the history of wealth accumulation from the perspective of factors of production and how this has changed over time

1. The original factor of production comes from physiocracy – Greek term for “government of nature” – an economic theory developed in 18th century France, by Enlightenment economists who believed that the wealth of nations was derived solely from the value of “land agriculture” or “land development”
   1. Land or natural resources — naturally occurring goods like water, soil to farm and minerals were used in the creation of products – those who occupied the land would make payments to a landowner as rent, along with loyalties, commission and goodwill.
   2. Therefore, to maximise economic output – owning more land and natural resources is the best way to increase your wealth, and the greater the level of agricultural products produced doesn’t hurt either
   3. Looking back through history – There was an economic class referred to as the gentry class – wealthy land owners, often from familial wealth passed down through generations – most of these French economists were part of this land-owning class
   4. Much of this land wealth can be dated back to the legacy from the Medieval Feudal system – before we as humans has freedom of choice as to where we worked, there was a serf class who was tied to the land – to work for the land owners with little to no freedom of choice – the wealthiest members of society, beyond members of the Royal Family were landed members of society – often some form lines of nobility themselves
   5. But through owning large swaths of land, other people would live on the land and owe a form of tax back to the land owner – who would then provide some of this wealth to the crown.
2. Then times started changing – Enter the classical economic theories of Adam Smith and David Ricardo – rather than just focusing on land – they introduced the “component parts of price” through looking at factors beyond land or natural resources – this was around the time of the enlightenment period, where individuals such as John Locke paved the way almost 100 years prior to these economic theories – the common view started to change to actually recognise those who weren’t in the select few in the gentry class
   1. Labour — measures the human effort used in production which also includes technical expertise – you can have all the land in the world, but if there is nobody to produce goods, or to sell those goods to, or pay for renting the land, land by itself doesn’t do much good
      1. introduced the concept of wages – i.e. the payment for labour as part of the physical or mental contribution to the production of the goods – this wage is what is use to purchase more of other goods, increasing economic output
   2. Capital— human-made goods which are used in the production of other goods – you can have a deposit of gold on your land and the labour to mine it, but if they only have their hands to do this, it is going to be hard to get to this deposit
      1. Capital in its early form includes machinery, tools, and buildings, along with cash or money in hand invested to purchase goods
      2. At this time though, money itself was not considered to be a factor of production in the sense of capital stock since it is not used to directly produce any good – this has changed in the modern era
   3. In the modern economy – The factors of production have expanded but the core principles are the same – and how to use this knowledge in your own life
   4. Today, land, capital and labour remain the primary inputs for processes and profits – but there is a fourth – being entrepreneurship – which encompasses intellectual capital and risk taking

To explain all of this and how to apply it to your own lives – lets revisit all factors of production in the modern economy 

1. Land has a broad definition as a factor of production and can take on various forms, from agricultural land to commercial real estate to the resources available from a particular piece of land
   1. In the context of wealth accumulation – land had a value to it – the demand for land does go up and down over time – but one of the best ways to accumulate long term wealth is to own land that is in high demand and will remain in high demand
   2. Not only is highly demanded land able to accumulate additional value, you can squeeze additional value out of land over time using either your own labour, capital, or entrepreneurship
      1. Labour – improvements on the land – you can use it to produce food and other foods of value
      2. You can invest your capital to purchase additional allocations of land as an investment, in the form of an investment property

• You can invest capital into a property to increase the value through renovations or be entrepreneurial to start a business from your own property

2. Labour refers to the effort expended by an individual to bring a product or service to the market – this can take on many forms – from a construction worker that builds a restaurant, to the chef who cooks in the kitchen
   1. In return for labour, workers are paid for their time and effort in wages that depend on their skill and training – i.e. their market demand versus supply – a highly supplied industry with low demand will have lower wages than a highly demanded with low supplied industry – it also relates to time in hours worked to the wages that can be generated
   2. From a position of increasing your own labour demand – it can help to look at areas that are in high demand, with limited supply of this labour – either way, your hours worked can translate into additional income in for form of wages
   3. Some forms of labour can also go unpaid – such as the time that you spend learning a new skill, or putting into efforts to generate additional capital or improve your land that isn’t directly generating a wage – but the idea is that this labour doesn’t go unrewarded in terms of increasing another factor of production
3. Capital – In the modern economy, capital often refers to money that can be invested for inputs to produce other goods – but traditionally, money itself is not a factor of production – as it is not directly involved in producing a good or service but instead facilitates the processes used in production by buying land, physical resources or paying wages
   1. As an individual, you can use capital to invest, increasing your capacity for earning additional forms of income
   2. You can use it to purchase more land, or other types of investment – labour for other people to work for you – to build additional wealth through them creating value beyond what is paid
4. Entrepreneurship is the secret sauce that combines all the other factors of production into a product or service for the consumer market
   1. This is a combination of risk taking an intellectual capital – i.e. knowing what to do with the other factors of production
   2. While large companies can make for excellent examples of the very rare cases of extreme entrepreneurship, such as an Elon Musk or Jeff Bezos, the majority of individuals and companies are not in this league – however the vast majority of businesses are started by entrepreneurs as they are vital for economic growth
      1. Which is why we are lucky to live under an economic system that has the necessary framework and policies to facilitate private property rights
   3. As a general rule of thumb, in countries with higher levels of entrepreneurship, the greater the potential for total levels of economic outputs
   4. At the individual level – you can be entrepreneurial in your own lives – taking some informed risks and using your own intellectual capital, i.e. your knowledge to generate additional wealth through investing or planning your career paths

Connecting the factors – We thankfully don’t like in a Marxist economy – so all factors are relevant beyond labour 

1. But at the individual level – we should aim to maximise our total economic output from these inputs of land, labour, capital and entrepreneurship all working together
2. As an individual – firstly you can focus on labour – how you spend your time in production to earn a wage, or increase your intellectual capital or physical capital –
   1. There are options to increase this over time – through experience, additional skills, or focusing on highly demanded industries – the more your labour is demanded, the higher the remuneration will be
   2. This additional income from wages is the capital that you have at hand to invest in land, or take a risk through entrepreneurship
   3. You can take some risks to purchase additional investments in property, i.e. land, ownership in other companies that produce goods and services, such as those listed on the share market, or starting your own business to generate an income from fulfilling a need that is present in the market
   4. This may not be able to be applied universally depending on under which economic system you live under –
      1. When strong property rights exist – private enterprises and individuals own most of the factors of production
      2. Where these do not, such as under socialism – land and capital, are owned and regulated by the community as a whole under socialism – and your labour is controlled as well
   5. In the modern economy – the role of technology shouldn’t be ignored
      1. While not directly listed as a factor, technology plays a vital role in influencing production and wealth accumulation – technology has a fairly broad definition and can refer to software, hardware, or a combination of both used to streamline organizational or manufacturing processes – but it is the measure of efficiency
         1. Just like capital – it is a facilitator of the factors of production, such as making labour more efficient
         2. So if you can use technology in this, to spend less time researching, or have greater access to the job market through remote working, this can help increase your total economic output

In summary – The factors of production are an important economic concept outlining the elements needed to produce a good or service in economic outputs – but they can be applied to your own life to maximise your own wealth

1. As we have gone through, the four elements are: land, labour, capital, and entrepreneurship – but thankfully times have changes from physiocracy where owning land, which was restricted to most people, was the only way to build wealth
2. Now you can own physical land, such as the acres used for a farm or the city block on which a building is constructed and rented
3. Unlike with communism, your labour is your own – so you can choose where you work and if you choose, focus on areas in higher levels of demand for higher wages – and earn a wage in the first place
4. These wages can be turned into capital, to invest in other public companies that are part of this equation, to provide and economic output to maximise the benefit of those in society, obviously at a profit to increase the value of the enterprise
5. And the final piece of the puzzle that unlocks all other factors is entrepreneurship – the initiatives taken individuals to create additional wealth beyond what a traditional wage paying role can provide –
   1. These individuals typically begin as the first workers in their firms and then gradually employ other factors of production to grow their businesses – this was the case for myself
6. If you choose to take this route or not is up to you – but thankfully the three other major routs of land, labour and capital are at your disposal