The Missing Factor of Production: Power
A How-To Guide for Inequity and Exploitation
Economics considers any product or service to be the summation of the Factors of Production. These factors are classically:
- Labor—the labor that went into producing a product or service, as well as the labor that went into developing the recipe for the product or service. Often measured as the salaries paid.
- Land—the land on which the product or service was produced. Often quantified as rent.
- Capital—any tool or machine used to produce the product or service. Capital is usually synonymous with interest paid on loans for the money to purchase these tools and machines. Since interest can be defined simply as renting money.
If we stop there classical economics allows us to make chart outlining how the price of a firm that makes 1 product is the summation of these three parts for all the units they produce.
However, if we, for example, estimate that an entrepreneur is paying an interest rate of 10%, a rent of somewhere around 20%, and we only pay about 10% of the production in salaries for labor, then there is a mystery ~60%. This 60% is chalked up to a 4th factor of production called Risk.
Since the time of Adam Smith, it has been known that labor, land, and interest account for far less than half of factors of production. Risk is by far the most lucrative part of the factors of production. Risk is what makes up the profit of the company.
If you ask someone on the street about this economic identity of the 4 factors of production, most of us will just say “Of course that’s how it works”. We take this all at face value without blinking. Middle class, even poorer people will say “The owners of businesses risked their money and time to even start the business, that’s why they get the fruits of that risk when their company succeeds”. What’s fair is fair.
However, recently this explanation started not to sit well with me.
While I am aware of the Marxist and neo-Marxist theories of exploitation that attack this exact belief, I am not compelled by those either because their solution is to simply claim that labor deserves more of the pie. That may or may not be the case.
Let’s look at this fourth mysterious factor of production Risk through the lens of four different economic agents:
- An uninsured migrant farm worker who picks the tomatoes that go into a commercial pizza sauce.
- One of the major shareholders in the agro-business that makes the tomato sauce and owns the subsidiary that hires the migrant farm worker,
- A teenager who works part time at an independent pizza parlor and puts the tomato sauce on the pizza.
- The owner of that pizza parlor that uses the tomato sauce.
What are each of these agent’s level of risk?
- Farm Worker—Critically High—they are basically risking their entire life every day they work because they could be injured. Their work is hard and they will only be able to do it until perhaps their 40’s at which point they will become a burden on their family until they start to receive social security in their 60's.
- Shareholder—Very Low—if the entire agro-business failed, they would still be millionaires with multiple homes.
- Part Time Pizza Maker—Low—if they lost their job, it would mean some economic hardship for them while they found another job.
- Pizza Parlor Owner—High—most small business owners are highly dependent on their business for their jobs and to pay for their mortgages. Losing the parlor would mean some serious economic hardships.
Now, who is paid the most?
- Farm Worker—$20k/year
- Shareholder—100x the Farm Worker
- Part Time Pizza Maker—$20k/year
- Pizza Parlor Owner—10x Farm Worker
It seems that Risk cannot explain the differences in pay, since the Farm Worker is taking the most risk, but they are paid the least, and the Shareholder is taking the least risk and are paid the most.
There is an alternative to Risk as a factor of production, and that is Power.
Let’s look at the relative power of each
- Farm Worker—Virtually Powerless
- Shareholder—Enormously Powerful
- Part Time Pizza Maker—Very Minor Power
- Pizza Parlor Owner—Some Parochial Power
Now it is clear to see that the Shareholder is only getting more earnings from the production of tomato sauce because of their position of power, and likewise the economic deserts of production are not distributed rationally due to an invisible hand of the market, but instead are distributed tribally directly down the lines of power.