In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...
, capital goods or capital are "those durable produced goods that are in turn used as
productive inputs for further production" of goods and services. At the
macroeconomic
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy
An economy is an area of the production, distributio ...
level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year."
A typical example is the machinery used in factories. Capital can be increased by the use of the
factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rela ...
, which however excludes certain
durable good
In economics, a durable good or a hard good or consumer durable is a good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be consi ...
s like homes and personal automobiles that are not used in the production of saleable goods and services.
Adam Smith defined capital as "that part of man's stock which he expects to afford him revenue". In
economic model
In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework desi ...
s, capital is an input in the
production function
In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define ...
. The total
physical capital
Physical capital represents in economics one of the three primary factors of production. Physical capital is the apparatus used to produce a good and services. Physical capital represents the tangible man-made goods that help and support the pro ...
at any given moment in time is referred to as the capital stock (not to be confused with the
capital stock
A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. "Share capit ...
of a business entity).
Capital good
The economic concept of a capital good (also called complex product systems (CoPS),H. Rush, "Managing innovation in complex product systems (CoPS)," IEE Colloquium on EPSRC Technology Management Initiative (Engineering & Physical Sciences Researc ...
s, real capital, or
capital asset
A capital asset is defined as property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or i ...
s are already-produced,
durable good
In economics, a durable good or a hard good or consumer durable is a good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be consi ...
s or any non-financial asset that is used in
production of
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not ...
or
services.
In
Marxian critique of political economy,
capital is reproduced by social relations, and could not exist without labour.
[Marx, Karl, Grunddragen i kritiken av den politska ekonomin i urval av Sven-Eric Liedman, 91 29 41310 9 , 1971 p.66,104] Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
himself stated it: "Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks."
In narrow and broad uses
Classical and
neoclassical economics
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
describe capital as one of the
factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rela ...
(alongside the other factors:
land
Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various isl ...
and
labour). All other inputs to production are called
intangibles in classical economics. This includes organization,
entrepreneurship
Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values t ...
, knowledge, goodwill, or management (which some characterize as
talent
Talent has two principal meanings:
* Talent (measurement), an ancient unit of mass and value
* Talent (skill), a group of aptitudes useful for some activities; talents may refer to aptitudes themselves or to possessors of those talents
Talent ma ...
,
social capital
Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationship ...
or
instructional capital).
This is what makes it a factor of production:
* The good is not used up immediately in the process of production unlike raw materials or
intermediate goods. (The significant exception to this is
depreciation
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...
allowance, which like intermediate goods, is treated as a business expense.)
* The good can be produced or increased (in contrast to land and
non-renewable resources).
These distinctions of convenience have carried over to contemporary
economic theory
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyze ...
. Adam Smith provided the further clarification that capital is a
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
. As such, its value can be estimated at a point in time. By contrast,
investment, as production to be added to the capital stock, is described as taking place over time ("per year"), thus a
flow
Flow may refer to:
Science and technology
* Fluid flow, the motion of a gas or liquid
* Flow (geomorphology), a type of mass wasting or slope movement in geomorphology
* Flow (mathematics), a group action of the real numbers on a set
* Flow (psych ...
.
In
Marxian critique of political economy, capital is viewed as a
social relation
A social relation or also described as a social interaction or social experience is the fundamental unit of analysis within the social sciences, and describes any voluntary or involuntary interpersonal relationship between two or more individuals ...
,
In Marx critical analysis of the economists portrayal of the capitalist mode of production as a transhistorical state of affairs, he distinguishes between different forms of capital.
*
constant capital, which refers to capital goods
*
variable capital, which refers to labor-inputs, where the cost is "variable" based on the amount of wages and salaries paid during an employee's contract/employment,
*
fictitious capital, which refers to intangible representations or abstractions of physical capital, such as stocks, bonds and securities (or "tradable
paper claims to wealth")
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
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substanti ...
or
knowledge capital
Knowledge management (KM) is the collection of methods relating to creating, sharing, using and managing the knowledge and information of an organization. It refers to a multidisciplinary approach to achieve organisational objectives by making ...
, and investments in
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
can be viewed as building up
intellectual capital Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people ( human capital), the value rela ...
.
Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. These terms lead to certain questions and controversies discussed in those articles.
Modern types of capital
Detailed classifications of capital that have been used in various theoretical or applied uses generally respect the following division:
*
Financial capital
Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provid ...
, 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.
*
Social capital
Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationship ...
, which in private enterprise is partly captured as
goodwill or
brand value, but is a more general concept of inter-relationships between human beings having money-like value that motivates actions in a similar fashion to paid compensation.
*
Instructional capital, defined originally in academia as that aspect of teaching and knowledge transfer that is not inherent in individuals or social relationships but transferable. Various theories use names like
knowledge
Knowledge can be defined as awareness of facts or as practical skills, and may also refer to familiarity with objects or situations. Knowledge of facts, also called propositional knowledge, is often defined as true belief that is disti ...
or
intellectual capital Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people ( human capital), the value rela ...
to describe similar concepts but these are not strictly defined as in the academic definition and have no widely agreed accounting treatment.
*
Human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substanti ...
, a broad term that generally includes social, instructional and individual human
talent
Talent has two principal meanings:
* Talent (measurement), an ancient unit of mass and value
* Talent (skill), a group of aptitudes useful for some activities; talents may refer to aptitudes themselves or to possessors of those talents
Talent ma ...
in combination. It is used in technical economics to define "balanced growth", which is the goal of improving human capital as much as economic capital.
*
Public capital
Public capital is the aggregate body of government-owned assets that are used as a means for productivity.Aschauer, D. A. (1990). Why is infrastructure important? Conference Series roceedings Federal Reserve Bank of Boston. Pp. 21-68. Such asset ...
is a blanket term that attempts to characterize physical capital that is considered
infrastructure and which supports production in unclear or poorly accounted ways. This encompasses the aggregate body of all government-owned assets that are used to promote private industry productivity, including highways, railways, airports, water treatment facilities, telecommunications, electric grids, energy utilities, municipal buildings, public hospitals and schools, police, fire protection, courts and still others. However, it is a problematic term insofar as many of these assets can be either publicly or privately owned.
*
Natural or ecological capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. Two of these (clean water and fertile soil) underpin our economy and society and make human life possible.
Separate literatures have developed to describe both
natural capital and
social capital
Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationship ...
. 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 Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people ( human capital), the value rela ...
and
intellectual property law
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
. However, this increasingly distinguishes means of capital investment, and collection of potential rewards for
patent
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling disclo ...
,
copyright
A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, education ...
(creative or
individual capital
Individual capital, the economic view of talent, comprises inalienable or personal traits of persons, tied to their bodies and available only through their own free will, such as skill, creativity, enterprise, courage, capacity for moral example, ...
), and
trademark
A trademark (also written trade mark or trade-mark) is a type of intellectual property consisting of a recognizable sign, design, or expression that identifies products or services from a particular source and distinguishes them from oth ...
(social trust or social capital) instruments.
Building on Marx, and on the theories of the sociologist and philosopher
Pierre Bourdieu
Pierre Bourdieu (; 1 August 1930 – 23 January 2002) was a French sociologist and public intellectual. Bourdieu's contributions to the sociology of education, the theory of sociology, and sociology of aesthetics have achieved wide influence ...
, scholars have recently argued for the significance of "culinary capital" in the arena of food. The idea is that the production, consumption, and distribution of knowledge about food can confer power and status.
Interpretations
Within classical economics,
Adam Smith (''Wealth of Nations'', Book II, Chapter 1) distinguished
fixed capital
In accounting, fixed capital is any kind of real, physical asset that is used repeatedly in the production of a product. In economics, fixed capital is a type of capital good that as a real, physical asset is used as a means of production which ...
from
circulating capital
Circulating capital includes intermediate goods and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services. Mark Blaug, 2008. "circulating capital," '' The New Palgr ...
. The former designated physical assets not consumed in the production of a product (e.g. machines and storage facilities), while the latter referred to physical assets consumed in the process of production (e.g. raw materials and intermediate products). For an enterprise, both were types of capital.
Economist
Henry George
Henry George (September 2, 1839 – October 29, 1897) was an American political economist and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of the Progressive Era. He inspired the ec ...
argued that financial instruments like stocks, bonds, mortgages, promissory notes, or other certificates for transferring wealth is not really capital, because "Their
economic value
In economics, economic value is a measure of the benefit provided by a goods, good or service (economics), service to an Agent (economics), economic agent. It is generally measured through units of currency, and the interpretation is therefore ...
merely represents the power of one class to appropriate the earnings of another" and "their increase or decrease does not affect the sum of wealth in the community".
Some thinkers, such as
Werner Sombart and
Max Weber
Maximilian Karl Emil Weber (; ; 21 April 186414 June 1920) was a German Sociology, sociologist, historian, jurist and political economy, political economist, who is regarded as among the most important theorists of the development of Modernity, ...
, locate the concept of capital as originating in
double-entry bookkeeping
Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to ...
, which is thus a foundational innovation in
capitalism
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private ...
, Sombart writing in "Medieval and Modern Commercial Enterprise" that:
: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.
Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
adds a distinction that is often confused with
David Ricardo
David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, an ...
'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
The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time, according to its current worth.
In the insurance industry, "replacement cost" or "replacement cost valu ...
to the commodities it is used to produce.
Investment or
capital accumulation
Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the fo ...
, 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
capital goods
The economic concept of a capital good (also called complex product systems (CoPS),H. Rush, "Managing innovation in complex product systems (CoPS)," IEE Colloquium on EPSRC Technology Management Initiative (Engineering & Physical Sciences Researc ...
. Investment is closely related to
saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recur ...
, 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.
Austrian School
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian scho ...
economist
Eugen Boehm von Bawerk maintained that
capital intensity
Capital intensity is the amount of fixed or real capital present in relation to other factors of production, especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital to labor ratio ...
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.
Human development theory describes human capital as being composed of distinct social, imitative and creative elements:
*
Social capital
Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationship ...
is the value of network trusting relationships between individuals in an economy.
*
Individual capital
Individual capital, the economic view of talent, comprises inalienable or personal traits of persons, tied to their bodies and available only through their own free will, such as skill, creativity, enterprise, courage, capacity for moral example, ...
, which is inherent in persons, protected by societies, and trades labour for trust or money. Close parallel concepts are "
talent
Talent has two principal meanings:
* Talent (measurement), an ancient unit of mass and value
* Talent (skill), a group of aptitudes useful for some activities; talents may refer to aptitudes themselves or to possessors of those talents
Talent ma ...
", "ingenuity", "
leadership
Leadership, both as a research area and as a practical skill, encompasses the ability of an individual, group or organization to "lead", influence or guide other individuals, teams, or entire organizations. The word "leadership" often gets v ...
", "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''.
*
Instructional capital in the academic sense is clearly separate from either individual persons or social bonds between them.
This theory is the basis of
triple bottom line
The triple bottom line (or otherwise noted as TBL or 3BL) is an accounting framework with three parts: social, environmental (or ecological) and economic. Some organizations have adopted the TBL framework to evaluate their performance in a broade ...
accounting and is further developed in
ecological economics,
welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level.
Attempting to apply the principles of welfare economics gives rise to the field of public econ ...
and the various theories of
green economics. All of which use a particularly abstract notion of capital in which the requirement of capital being produced like durable goods is effectively removed.
The
Cambridge capital controversy
The Cambridge capital controversy, sometimes called "the capital controversy"Brems (1975) pp. 369-384 or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that starte ...
was a dispute between economists at Cambridge, Massachusetts based MIT and University of Cambridge in the UK about the measurement of capital. The Cambridge, UK economists, including
Joan Robinson
Joan Violet Robinson (''née'' Maurice; 31 October 1903 – 5 August 1983) was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics.
...
and
Piero Sraffa
Piero Sraffa (5 August 1898 – 3 September 1983) was an influential Italian economist who served as lecturer of economics at the University of Cambridge. His book ''Production of Commodities by Means of Commodities'' is taken as founding the neo ...
claimed that there is no basis for aggregating the heterogeneous objects that constitute 'capital goods.'
Political economists
Jonathan Nitzan
Jonathan Nitzan is Professor of Political Economy at York University, Toronto, Canada.
Work
Nitzan is the co-author (with Shimshon Bichler) of ''Capital as Power: A Study of Order and Creorder'', published 2009. Their writings focus of the nature ...
and
Shimshon Bichler
Shimshon Bichler is an educator who teaches political economy at colleges and universities in Israel. Along with Jonathan Nitzan, Bichler has created a power theory of capitalism and theory of differential accumulation in their analysis of the po ...
have suggested that capital is not a productive entity, but solely financial and that capital values measure the relative power of owners over the broad social processes that bear on profits.
[''Capital as Power: A Study of Order and Creorder'', Routledge, 2009, p, 228.]
See also
*
Capital deepening
*
Capital (Marxism)
Capital is a central concept in Marxian critique of political economy, and in Marxian thought more generally.
Marxists view capital as a social relation reproduced by the continuous expenditure of wage labour. Labour and capital are viewed as ...
*
Capitalist mode of production (Marxist theory)
In Karl Marx's critique of political economy and subsequent Marxian analyses, the capitalist mode of production (German: ''Produktionsweise'') refers to the systems of organizing production and distribution within capitalist societies. Priva ...
* ''
Das Kapital
''Das Kapital'', also known as ''Capital: A Critique of Political Economy'' or sometimes simply ''Capital'' (german: Das Kapital. Kritik der politischen Ökonomie, link=no, ; 1867–1883), is a foundational theoretical text in materialist phi ...
''
*
DIRTI 5
*
Means of production
The means of production is a term which describes land, Work (human activity), labor and capital (economics), capital that can be used to produce products (such as goods or Service (economics), services); however, the term can also refer to anyth ...
*
Organic composition of capital
The organic composition of capital (OCC) is a concept created by Karl Marx in his theory of capitalism, which was simultaneously his critique of the political economy of his time. It is derived from his more basic concepts of 'value composition o ...
*
Organizational capital Organizational capital is the value to an enterprise which is derived from organization philosophy and systems which leverage the organization's capability in delivering goods or services.
Overview
Organizational capital is one of the three compone ...
* ''
The Accumulation of Capital''
*
Venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
*
Wealth (economics)
Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
References
Further reading
*
*
* Pistor, K. (2020). ''Code of Capital: How the Law Creates Wealth and Inequality'', Princeton University,
External links
*
{{Authority control
Capitalism