The classical categories of factors--land, labor, and capital goods--were recognized by Adam Smith and Jean-Baptiste Say and were a central element of classical economic thought. The neoclassical turn of the late 1800s melded land and capital goods into a homogenous variable, K. Textbooks still typically give pro forma recognition to the three factors but then proceed to ignore land in their applied topics, such as economic development, taxation, and macroeconomic policy. The near absence of land in mainstream economic analysis has been amply described (Foldvary 2005), but what has apparently also been lacking is an analysis of the complex taxonomy of the factors of production and its implication for policy.
The foundation for the taxonomy of the factors is the distinction between "nature" and nonnature. The relevant contrast to nature is what human beings produce, and therefore also the human action that produced the goods. The apt economic meaning of nature is therefore "everything that is prior to and apart from human action."
Human action was analyzed by Ludwig von Mises (1949) as purposeful behavior, persons acting to achieve ends. The definition above excludes as "nonnatural" any act that is consciously, deliberately, purposefully committed by a person. Nothing that human action does is "natural." The concept of an act as "unnatural" is thus meaningless for economics; phenomena are either natural or nonnatural.
Land in economics synonymously means "natural resources." Land can be divided into three categories: (1) space, (2) nonliving matter, and (3) biological natural resources. Spatial land (land #1) in turn consists of (a) territorial space: the surface spatial soft-shell envelope at the earth's surface in which life is located, including the space holding the waters; (b) spectral space, in other words, frequencies of the electromagnetic spectrum; and (c) routes for satellites and other spacecraft.
Material natural resources (land #2) can be categorized according to the states of matter: (a) solid substances such as minerals and coal, oil in solid substances such as shale and tar sands, and ice; (b) liquid substances such as water and oil; (c) gaseous substances such as air and natural gas, as well as properties of gas such as the capacity to carry soundwaves; and (d) other states of matter such as plasma. The last category (d) exists, but has little economic significance.
Biological natural resources (land #3) include (a) living beings; (b) the genetic base of life; and (c) the ecological relationships among living beings, including the habitat.
EACH OF THE THREE DIVISIONS of natural resources interacts differently with the other factors. Territorial space (1a) is, for practical purposes, a fixed resource. The earth does gain in volume and mass as meteors strike it, but the annual expansion is so tiny that it is irrelevant for economic analysis. As long as the earth exists, territorial space is, for economics, absolutely fixed in supply, as it can neither be created, destroyed, nor altered. Territorial space always remains land regardless of the matter or activity within some boundary.
Territorial space is the most important natural resource for human activity, as all activity must have a location, and productive locations are scarce. Although the fixed supply of this natural resource is often recognized in the economic literature, sometimes it becomes confused with capital goods, and land is claimed to be not really completely inelastic in supply. To understand the fixity of land, we must first clarify the other factors.
Human capital consists of the talents and capacities that human beings possess genetically and of an increase in a worker's productivity due to education, discovery, and innovation. When conceived, a human being is natural, but as the being develops during gestation and after birth, the outcome is also a product of human action, the ingestion of nutrients by the mother, the upbringing by the parents and guardians, and influences from peers and society, so that after conception, a human being is no longer a natural being and thus labor is not a natural resource. …