How Would Professor Rothbard Respond If Asked “Which of the Factors of Production Is Truly Productive?”

Does one of the factors of production allow for an output whose value exceeds the combined values of the factors of production? If such a factor exists, it would be productive in a very special sense. This factor would produce surplus value. If the search for the source of a supposed surplus value is confined to questions concerning the nature of the individual factors of production, the possible answers are few in number. A survey of the different positions taken, however, is revealing. Without digging very deep into the history of economic thought, we can find four points of view that, collectively, exhaust the possibilities.

Francois Quesnay believed that only land was capable of producing a surplus. The inherent productive powers of the soil allow for a given quantity of corn—employed as seed and worker sustenance—to be parlayed into a greater quantity of corn. The notion of land's natural fecundity lies at the root of Physiocratic thought.

Karl Marx believed that only labor can produce surplus value. Without labor, nothing at all can be produced. This one factor, then, is the ultimate source of all value. Income received by other factors represents not the productivity of those factors but the exploitation of labor.

Frank Knight believed that there is only one factor of production and that it should be called capital. Rather than argue in terms of a factor that yields a surplus, he argued in terms of a stock that yields a flow. Capital consists of all inputs that have the dimensions of a stock (land, machines, human capital); the corresponding flow is the annual output net of maintenance costs. This net yield is a consequence of capital productivity. The net yield divided by the capital stock is the rate of interest.

Joseph Schumpeter, following Leon Walras, denied that there was any surplus to be explained. In long-run general equilibrium, the sum of the values imputed to the several factors of production must fully exhaust the value of the economy's output. Schumpeter insisted that in the long run, the interest rate must be zero; the positive rate of interest that we actually observe is to be understood as a disequilibrium phenomenon.

We can pause at this point for a midterm exam: Which of the factors of production is truly productive? (a) Land; (b) Labor; (c) Capital; (d) None of the above. Quesnay, Marx, Knight, and Schumpeter would answer (a), (b), (c), and (d), respectively. Professor Rothbard would reject the question. The notion of productivity in this sense—and hence the issue of the source of such productivity—vanishes once we take adequate account of the temporal pattern of inputs and outputs and of the effects of time preference on their relative values.

—Roger W. Garrison, “Professor Rothbard and the Theory of Interest,” in Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, ed. Walter Block and Llewellyn H. Rockwell Jr. (Auburn, AL: Ludwig von Mises Institute, 1988), 46-47.