Behavioral economics in the factors of production

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By John F. Sase
Gerard J. Senick, general editor
Julie Gale Sase, copyeditor


“In present popular usage, soul, and mind are not clearly differentiated and some people, more or less consciously, still feel that the soul, and perhaps the mind, may enter or leave the body as independent entities.”
—James M.R. Delgado, Spanish-born Neuroscientist, and Physiologist, Physical Control of the Mind; Towards a Psycho-Civilized Society (Fitzhenry & Whiteside Limited, 1969)

Last month, we presented our readers with a letter to the members of the U.S. Congress. Due to events of the past year as well as public attitudes that have surfaced during this time, we wanted to remind Congress about the values on which our humanity—as well as Law and Political Economics--are based.

This month, we will return to economic principles that all of us can use in our daily businesses. Since the original model of Land-Labor-Capital does not seem to address the needs of the Twenty-First Century for many of us, we will explore the Factors of Production in a new light. We hope that our updated model and brief comments on how to use it will benefit smaller businesses as well as larger ones, especially proprietary, partnership, and Limited Liability forms of Law practices.

The 2017 Nobel Prize  in Economics

On 9 October 2017, American Economist Richard H. Thaler won the Nobel Prize in Economics for upending the longstanding notion that individuals make rational decisions about their futures and finances as well as for his help in developing policies intended to nudge people toward altering their choices. In a takeaway from his research, Dr. Thaler has concluded that economic agents are humans and that economic models need to incorporate this fact. We recommend his most accessible book on the subject of Behavioral Economics to our readers, “Misbehaving: The Making of Behavioral Economics” (W.W. Norton, 2015).

The award to Thaler follows the 2013 Nobel Prize in Economics awarded to Detroit native Robert J. Shiller, an Economist who is well known for his work in Behavioral Economics. Shiller’s books on the subject include “Irrational Exuberance,” (Princeton University Press, 2000) and “Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism” with co-author George A. Akerlof (Princeton University Press, 2009). In recent years, Shiller, Thaler, and other Economists have focused on making economic thought more human and, as a result, more understandable to a wider audience.

Early writers of Economics addressed the humanness to which Behavioral Economists now turn their focus. For example, many students hail “An Inquiry into the Nature and Causes of the Wealth of Nations” (W. Strahan and T. Cadell, 1776) by Scottish Economist Adam Smith as the preeminent title on this subject. However, most of these students have ignored the book that Smith had written earlier, one that he intended as a prerequisite for fully understanding his concepts in “The Wealth of Nations.” He wrote “The Theory of Moral Sentiments in 1759” (two volumes, printed for Alexander Kincaid and J. Bell in Edinburgh and Andrew Millar in the Strand, London). In this book, Smith addresses the issues of human nature and morality that we now consider to have provided the ethical, philosophical, psychological, and methodological underpinnings of his later works, including “The Wealth of Nations.” Smith states, “[The rich] consume little more than the poor and, in spite of their natural selfishness and rapacity, … they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society and afford means to the multiplication of the species.” A review of work done by members of the current Behavioral Economics Movement as well as earlier works by Adam Smith and others leads us to rethink some of our principles of Economics and to re-conceptualize them.

The Factors of Production

The traditional model of the Factors of Production includes three primary categories of inputs: Land, Labor, and Capital. The diagram below shows those categories as well as their interrelationship.

We define the Factors of Production as resources and inputs that we use in the process of producing the output of finished goods and services. The balanced amounts of various inputs utilized determine the quantity of output according to a relationship known as the Production Function. Many of our concepts and models in Economics date back to the time in Europe when agriculture was the fundamental driver in many economies. Therefore, the three primary factors traditionally have included only Land, Labor, and Capital. Students in college classrooms around the world continue to recite the Land-Labor-Capital mantra. However, does this simplified model remain relevant in the Twenty-First Century or has this model become deficient in our post-agrarian economy?

The Landed Estate

Early Economic thought as we know it developed in Europe during the centuries when Land was the principal factor. Here is an example of Land. Before Highclere Castle in Hampshire, England, became a tourist attraction due to it serving as the filming location for the BBC television series “Downton Abbey,” the property had thrived as an agricultural estate from the Eighth to the Twentieth Centuries. During that period, agriculture considered the simple factor-set of Land, Labor, and Capital. During the Age of Serfdom, Labor had been legally and economically tied to the Land rather than to the owner of the title to the estate. Early Economists considered Capital as a matter of hard currency for trade purposes. Gradually, the introduction of paper currencies added a more portable marker-system for value. As we recognize it today, Capital was slow in materializing due to prohibitions in respect to the ownership of Land titles and to the laws on usury that forbade the lending of money in return for payments of interest. Since the Mid-Nineteenth Century, we crudely have modified our original primary-factor names in order to fit our post-agrarian economies. Now we recognize Land as part of Real Estate, which also includes buildings, fixtures, mineral rights, air rights, and other peculiarities of our Industrial and Post-Industrial Ages.

Workers

In the early United States, the spirit of independence gave the message that anyone can own property. This translated to the desire for small family farms and businesses in the North. However, the large estate-system that mimicked Medieval Europe dominated the antebellum South. Through this division, the concept of Labor has grown more convoluted over time. Originally, Labor represented the work performed under the constraints of slavery and serfdom as well as commodity-money paid to freemen for their work. Fishers, hunters, and others, who traditionally have relied upon the open sea or on untamed wilderness in order to live and to prosper, fell beyond the limits of centrally controlled agricultural realms. In such domains, a ruling body assigned titles for the land to members of a well-defined hierarchy of the subservient Upper-Class. However, the underlying deeds to the land remained in possession of the Crown.

As our industrial culture began to dominate agrarian culture, Labor began to migrate from field-work and manor-work to wage labor in factories and shops in cities and towns. As a result, the economic importance of Land diminished as a factor. This paradigm shift left those who relied on their Labor and those who depended on Capital to vie for economic and political control. As large segments of the population took a stand either with Laborism or Capitalism, divisiveness became increasingly obvious. This division in the body politic led to the social polarization that has defined much of our modern society. However, as computerization and the Internet have developed and proliferated while traditional manufacturing industries have matured to the point of economic fossilization, our sense of how to define the Factors of Production has grown murkier. During the past Half-Century, we have struggled to identify and to define additional factors.

The Human Mind

If we look to the field of Humanities as well as to the other Social Sciences, which include Psychology, Sociology, and Anthropology, we encounter an important factor that has been ignored greatly in economic thought since the early Nineteenth Century. This factor is the Human Mind. In our revised model of the Factors of Production, let us position this factor at the center. The other six factors surround the Human Mind and are managed by it.

Our human mind serves as a cognitive faculty of consciousness and thoughts. Also, it acts as the base for our perception, judgment, and memory, which holds our powers of imagination, recognition, and appreciation. Our minds are responsible for processing our feelings and emotions that, in turn, result in our attitudes and actions. As addressed by philosophers and scientists throughout the ages, the primary conundrum presented by the concept of the Mind has been the Mind-Body Problem. The relation of the Mind to the physical brain and the nervous system continues to pose questions in many fields of study. Most thinkers agree that our Mind enables us to have consciousness, to practice subjective awareness and intentionality toward all that is beyond ourselves, to perceive stimuli and to respond to it, and, therefore, to have thought and feeling.

Throughout human history, the concept of Mind has been understood in many ways by various religious and cultural traditions. The speculations of earlier humans have treated Mind as identical to Soul or Spirit. However, the myriad views have varied in respect to contrasting theories of cosmology, life after death, and natural order. Furthermore, the debate as to whether Mind is exclusive to humans, to deities, to animals, to non-living entities, or to some combination of the preceding four has continued through the ages.    

Many philosophers and scientists have portrayed the phenomenon of the Mind as a stream of consciousness in which sense-impressions and mental phenomena change constantly. Over the past Half-Millennium, the generalized concept of what constitutes our Mind includes mental faculties, thought, volition, and feeling along with higher intellectual functions of memory and reason.

Current debate continues the focus on the relationship between Mind and Brain. In addition to philosophical questions, this debate involves a number of scientific inquiries, including “What is the relationship between mental activity and brain activity?”, “What are the exact mechanisms by which drugs influence cognition?”, and “What are the neural correlates of consciousness?”

The New Model


Keeping the focal point “in mind,” let us assemble our surrounding six Factors of Production. Over the past three-quarters of a century, Economists have put forth some suggestions for additional factors that influence current Economic thought. At present, the purpose of rebuilding this model is to synthesize one that remains relevant into the foreseeable future. Rather than throwing out the old, we concentrate on reshaping and redefining what we have, adding new concepts as needed, and assembling a new paradigm that makes sense for our current era. We have mounted Mind in the center because it serves to orchestrate and to balance the use and behavior of the other inputs. Furthermore, the remaining six Factors will impact and produce effects on one another. This set of actions/reactions is noted through the interconnecting lines in the diagram below.

Diagram key:

R – Real Estate

P – Profit Labor

W – Wage Labor

I – Intellectual Property

T – Technology

K – Capital

Real Estate

To commence, we carry over the primary three factors of Land, Labor, and Capital from the basic model that developed during the Eighteenth and Nineteenth Centuries. Nevertheless, we need to make some modifications. In respect to Land, let us describe it more properly as Real Estate. In the concept of Real Estate, no one truly owns the Land. Rather, a person only enjoys the benefits derived from the bundle of legal rights in the use of the Real Estate. As mentioned above, the concept of Real Estate includes other elements beyond that of the Land. We represent Real Estate on the updated model as the letter “R.”

Wage and Profit Labor

Over the past two centuries, the concept of Labor has grown more complex. Labor originally was defined by hours and energy of work exchanged in the market for coin or other payment of like value. However, the defining number of persons for a large business concern has grown from twenty-five in the age of Adam Smith to corporate structures of more than 250 employees. Meanwhile, the entrepreneurial skill-set has risen in expectation to a level that reflects the standard curriculum of an MBA program. The payment to this variation of the Labor factor is Profit, the positive difference between Revenue and Costs. Adding further to the complexity is the fact that many of us work for a combination of Wage and Profit. The latter may take the form of bonuses and stock options within a corporate structure or for independent professionals such as Attorneys and Economists who teach for wages and who practice their professions for profit. For the sake of clarity, we will settle for a duality in the form of Wage Labor and Profit Labor. In our diagram, Wage Labor is represented as “W” and Profit Labor is represented as “P.” 

Useful Tools


The concept of Capital has changed over the centuries from hard currency in the form of gold and silver; to paper money dripping out of the coat pockets of J.P. Morgan in a widely-circulated newspaper cartoon; to the world of today in which mortgage-backed derivatives, electronic transfers, and bitcoins have emerged. If almost anything can serve as Capital, then how might we define it? The definitions among Economists include broad generalities such as “Any useful tool” or “If it’s not Labor or Land, then it must be Capital.”

Delineation has offered a solution in the assignment of Technology and Intellectual Property to two separate categories. Representing Technology as (T), we can place it next to Capital (as “K” from the German spelling traditionally used by economists). Capital continues to include primary tools used to manufacture modern-production machine instruments (Technology). However, since Intellectual Property includes Copyrights and Patents that hold the legal rights to build and to use Technology or other Intellectual Property, we represent it as “I” in our diagram and place it next to Wage Labor and Profit Labor. Summarily, Technology is the product of the human mind of a Wage-Labor person who may have created it as work-for-hire or a Profit-Labor person who has created it as part of entrepreneurial speculation.

We now have our complete set of the Factors of Production. This set includes the Human Mind as well as the more mundane conceptualizations of the mind--Real Estate, Profit Labor, Wage Labor, Intellectual Property, Technology, and Capital. One hope for this exercise is that it may lead to a diminishment of the economic-political standoff that has grown since the dawn of the Industrial and Post-Industrial Ages. Rather than working intelligently in balance, Capital and Labor have off-sided one another in the form of opposing teams battling along the fifty-yard line. This ongoing battle muddies the involvement of the four remaining mundane factors that must function as parts of a harmonious unit in order for the whole to prosper.

In the political context, we might use the analogy of an eagle attempting to fly. Labor has moved toward the tip of the ideological left-wing while Capital has done likewise on the right. This growing extremism has weakened the cohesiveness of the central body as opposing wings attempt to fly the bird separately. In such an analogy, we humans appear rather clueless if we do not comprehend that we need to use our collective mind to govern the body as we use both of our wings to fly like one.

The Mediator

In this updated model of the Factors of Production, the mind orchestrates six hands that must work together in harmony. A culture succeeds through such means. However, we need to add one more element in order to make the model human. A title card from Metropolis, the classic silent film from Germany, released during the years of the Weimer Republic, states: “Head and hands want to join together, but they don’t have the heart to do it…. The mediator between the head and hands must be the heart!” (“Metropolis,” novel, and screenplay by Thea von Harbou, film directed by Fritz Lang, Universum Film [UFA], 1927).

Takeaway

For our takeaway this month, let us consider the universal application of our updated model, which gives a contemporary spin through a more holistic approach to the Factors of Production. We have brought the nature and morality of humanity back into the mix through the inclusion of Mind and Heart. Also, we have a model explainable by laying six coins of the same denomination onto a table or desk in a way that any human being in any part of the world can understand.

To bring this model home to the professional lives of Attorneys, Economists, and others, we have created a view that works well for mentally organizing and managing a wide variety of practices. For Attorneys, this approach will serve sole proprietorships, general and limited partnerships, and limited-liability companies as well as “S” and “C” corporations. Use it in good health.

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Dr. John F. Sase teaches Economics at Wayne State University and has practiced Forensic and Investigative Economics for twenty years. He earned a combined M.A. in Economics and an MBA at the University of Detroit, followed by a Ph.D. in Economics from Wayne State University. He is a graduate of the University of Detroit Jesuit High School (www.saseassociates.com).
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication (www.senick-editing.com).
Julie G. Sase is a copyeditor, parent coach, and empath. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. Ms. Sase coaches clients, writes articles, and copyedits (royaloakparentcoaching.com).

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