Question

What do economists mean when they refer to administration as the 4th factor of production? Is this factor necessarily complementary to the others? Does it demonstrate diminishing marginal returns? How can a manager tell?

Answer 1

The fourth factor i.e. Entrepreneurship is the driving force behind the creation of a business. An entrepreneur finds ways to combine the other factors of production – land, labor and capital – to produce a product and make a profit. The most successful ones are the innovators who create new products to bring to consumers. Henry is an innovator who is bringing a new product to market. Without these innovative entrepreneurs, many products and services we take for granted in our everyday lives would not exist. Innovators look at the other three factors of production and find new ways to use them. They are willing to take risks to bring their ideas to fruition.

Yes, the factor is complementary to others as markets grew, entrepreneurship would lead to innovation, which would lead to an increasing division of labor and increased productivity.

He economist like Cantillon, Say, Schumpeter, Knight, Mises say no it don’t have marginal returns, treating entrepreneurship as a factor of production, earning a return we label profit, but it poses some challenging problems. They treat entrepreneurship as ubiquitous, an attribute of the market mechanism that can never be absent.