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Capital (economics)

Capital has a number of related meanings in economics, finance and accounting.

In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. Initially, it is assumed here that other styles of capital, e.g. physical capital, can be acquired with money or financial capital, so there is little need here for any further analysis of the latter. So below, the word "capital" is short-hand for "real capital" or "capital goods" or means of production. Also to be ignored will be the problems of aggregating capital and the capital controversy.


Capital in classical economic theory

In classical economics, capital is one of three factors of production, the others being land and labour. 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 is human-made, 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 third part of the definition was not always used by classical economists. The classical economist extraordinaire David Ricardo would use the above definition for the term fixed capital while including raw materials and intermediate products are part of his circulating capital. For him, both were kinds of capital.

Karl Marx adds a distinction that is often confused with 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, ie, 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 act of producing increased capital. In order to invest, goods must be produced which are not to be 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 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.

Broadening the definition of capital

Traditional economic theory generally viewed capital as physical items, such as tools, buildings and vehicles that are used in the production process. Other economists have focussed on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital.

Some theories use the terms intellectual capital or knowledge capital which lead to certain questions and controversies discussed in those articles.

In general, intellectual capital is that which produces new " intellectual property rights", and that in turn is "whatever one can get paid royalties for". Further, one can create intellectual property rights simply by taking someone else's ideas and then patenting them. So intellectual capital need not be used.

Classifications of capital that have been used in various economic theories include:

  • Financial capital which represents obligations, and is liquidated as money for trade, and owned by legal entities.
  • Natural capital which is inherent in ecologies and protected by communities to support life, e.g. a river which provides farms with water.
  • Infrastructural capital is non-natural support systems (e.g. clothing, shelter, roads, PCs) 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.)
  • Human capital, arising from investment in skills and education. Human development theory recognizes it as being composed of clear and distinctive social, imitative and creative elements:
    • Social capital is the value of trusting relationships between individuals in an economy.
    • Individual capital which is inherent in persons, protected by societies, and trades labor 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 labor.

Although it is still possible to calculate the macro economic idea of "human capital" as payments (like salary), it is rarely or not used when discussing the process of planning investment: for this it is broken down into the more specific styles, which are distinct when one considers the means of identifying them, investing in, and exploiting them. The term "human capital" may thus do more harm than good.

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.

See also


Last updated: 06-01-2005 22:45:23
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