Capital (economics)

In economics, capital, capital goods, or real capital is factor of production used to create goods or services that are not themselves significantly consumed (though they may depreciate) in the production process. Capital goods may be acquired with money or financial capital. At any moment in time, total physical capital may be referred to as the capital stock, a usage different from the same term applied to a business entity.

Capital in narrow and broad uses

In classical economics, capital is one of three (or four, in some formulations) factors of production. The others are land, labour and (in some versions) organization, entrepreneurship, or management. Goods with the following features are capital:

• It can be used in the production of other goods (this is what makes it a factor of production).
• It was produced, in contrast to "land," which refers to naturally occurring resources such as geographical locations and minerals.
• It is not used up immediately in the process of production unlike raw materials or intermediate goods. (The significant exception to this is depreciation allowance, which like intermediate goods, is treated as a business expense.)

These distinctions of convenience have carried over to contemporary economic theory.^[1] There was the further clarification that capital is a stock. As such, its value can be estimated at a point in time, say December 31. By contrast, investment, as production to be added to the capital stock, is described as taking place over time ("per year"), thus a flow.

Earlier illustrations often described capital as physical items, such as tools, buildings, and vehicles that are used in the production process. Since at least the 1960s economists have increasingly focused on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital or knowledge capital, and investments in intellectual property can be viewed as building up intellectual capital. These terms lead to certain questions and controversies discussed in those articles. Human development theory describes human capital as being composed of distinct social, imitative and creative elements:

• Social capital is the value of network trusting relationships between individuals in an economy.
• Individual capital, which is inherent in persons, protected by societies, and trades labour for trust or money. Close parallel concepts are "talent", "ingenuity", "leadership", "trained bodies", or "innate skills" that cannot reliably be reproduced by using any combination of any of the others above. In traditional economic analysis individual capital is more usually called labour.

Further classifications of capital that have been used in various theoretical or applied uses include:

• Financial capital, which represents obligations, and is liquidated as money for trade, and owned by legal entities. It is in the form of capital assets, traded in financial markets. Its market value is not based on the historical accumulation of money invested but on the perception by the market of its expected revenues and of the risk entailed.
• Natural capital, which is inherent in ecologies and protected by communities to support life, e.g., a river that provides farms with water.
• Infrastructural capital is non-natural support systems (e.g. clothing, shelter, roads, personal computers) that minimize need for new social trust, instruction, and natural resources. (Almost all of this is manufactured, leading to the older term manufactured capital, but some arises from interactions with natural capital, and so it makes more sense to describe it in terms of its appreciation/depreciation process, rather than its origin: much of natural capital grows back, infrastructural capital must be built and installed.)

In part as a result, separate literatures have developed to describe both natural capital and social capital. Such terms reflect a wide consensus that nature and society both function in such a similar manner as traditional industrial infrastructural capital, that it is entirely appropriate to refer to them as different types of capital in themselves. In particular, they can be used in the production of other goods, are not used up immediately in the process of production, and can be enhanced (if not created) by human effort.

There is also a literature of intellectual capital and intellectual property law. However, this increasingly distinguishes means of capital investment, and collection of potential rewards for patent, copyright (creative or individual capital), and trademark (social trust or social capital) instruments.the word capital is what you have as a wealth.

Capital in classical economics and beyond

Some thinkers, such as Werner Sombart and Max Weber, locate the concept of capital as originating in double-entry bookkeeping, which is thus a foundational innovation in Capitalism, Sombart writing in "Medieval and Modern Commercial Enterprise" that:^[2]

"The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping. Capital can be defined as that amount of wealth which is used in making profits and which enters into the accounts."

Within classical economics, Adam Smith (Wealth of Nations, Book II, Chapter 1) distinguished fixed capital from circulating capital, including raw materials and intermediate products. For an enterprise, both were kinds of capital.

Karl Marx adds a distinction that is often confused with David Ricardo's. In Marxian theory, variable capital refers to a capitalist's investment in labor-power, seen as the only source of surplus-value. It is called "variable" since the amount of value it can produce varies from the amount it consumes, i.e., it creates new value. On the other hand, constant capital refers to investment in non-human factors of production, such as plant and machinery, which Marx takes to contribute only its own replacement value to the commodities it is used to produce. It is constant, in that the amount of value committed in the original investment, and the amount retrieved in the form of commodities produced, remains constant.

Investment or capital accumulation, in classical economic theory, is the production of increased capital. Investment requires that some goods be produced that are not immediately consumed, but instead used to produce other goods as a means of production. Investment is closely related to saving, though it is not the same. As Keynes pointed out, saving involves not spending all of one's income on current goods or services, while investment refers to spending on a specific type of goods, i.e., capital goods.

The Austrian economist Eugen von Böhm-Bawerk maintained that capital intensity was measured by the roundaboutness of production processes. Since capital is defined by him as being goods of higher-order, or goods used to produce consumer goods, and derived their value from them, being future goods.

See also

• Capital deepening
• Capital employee
• Capitalism
• Capitalist mode of production
• Factors of production
• Physical capital
• Means of production
• Venture capital
• Wealth (economics)

Lists

• list of economists
• list of management topics
• list of marketing topics
• list of accounting topics
• list of finance topics
• list of ethics topics

References

• F. Boldizzoni (2008). Means and ends: The idea of capital in the West, 1500-1970, New York: Palgrave Macmillan, 2008, chapters 4-8.
• K.H. Hennings (1987). "Capital as a factor of production," The New Palgrave: A Dictionary of Economics, v. 1, pp. 327-33.