Capital (economics)

ferred to as the capital stock (which is not to be confused

with the capital stock of a business entity).
In a fundamental sense, capital consists of any produced
thing that can enhance a persons power to perform economically useful worka stone or an arrow is capital for
a caveman who can use it as a hunting instrument, and
roads are capital for inhabitants of a city. Capital is an input in the production function. Homes and personal autos
are not usually dened as capital but as durable goods because they are not used in a production of saleable goods
and services.
In Marxist political economy,[5] capital is money used to
buy something only in order to sell it again to realize a
nancial prot. For Marx capital only exists within the
process of economic exchangeit is wealth that grows
out of the process of circulation itself, and for Marx it
formed the basis of the economic system of capitalism.
In more contemporary schools of economics, this form of
capital is generally referred to as "nancial capital" and is
distinguished from "capital goods".

1 In narrow and broad uses

Is Capital Income? (1921) by George Howard Earle, Jr.

Classical and neoclassical economics regard capital as one

of the factors of production (alongside the other factors:
land and labour). All other inputs to production are called
intangibles in classical economics. This includes organization, entrepreneurship, knowledge, goodwill, or management (which some characterize as talent, social capital
or instructional capital).

In economics, capital goods, real capital, or capital

assets are already-produced durable goods or any nonnancial asset that is used in production of goods or
services.[1]

Adam Smith denes capital as That part of a mans stock

which he expects to aord him revenue. Capital is de- This is what makes it a factor of production:
rived from the Latin word caput meaning head, as in
head of cattle.[2] The term stock is derived from the
The good is not used up immediately in the
Old English word for stump or tree trunk. It has been
process of production unlike raw materials or
used to refer to all the moveable property of a farm since
intermediate goods. (The signicant exception to
at least 1510.[3] In Middle Ages France contracted leases
this is depreciation allowance, which like intermeand loans bearing interest specied payment in heads of
diate goods, is treated as a business expense.)
cattle.[4]
The good can be produced or increased (in contrast
How a capital good is maintained or returned to its preto land and non-renewable resources).
production state varies with the type of capital involved.
In most cases capital is replaced after a depreciation pe- These distinctions of convenience have carried over to
riod as newer forms of capital make continued use of contemporary economic theory.[6][7] There was the furcurrent capital non protable. It is also possible that ad- ther clarication that capital is a stock. As such, its
vances make an obsolete form of capital practical again. value can be estimated at a point in time. By contrast,
Capital is distinct from land (or non-renewable resources) investment, as production to be added to the capital stock,
in that capital can be increased by human labor. At any is described as taking place over time (per year), thus a
given moment in time, total physical capital may be re- ow.
1

4 INTERPRETATIONS

Marxian economics distinguishes between dierent

forms of capital:
constant capital, which refers to capital goods

Human capital, a broad term that generally includes

social, instructional and individual human talent in
combination. It is used in technical economics to dene balanced growth which is the goal of improving
human capital as much as economic capital.

variable capital, which refers to labor-inputs, where

the cost is variable based on the amount of wages Public and private sector accounting dier in goals, time
and salaries are paid throughout the duration of an scales and accordingly in accounting. The ownership and
control of some forms of capital may accordingly jusemployees contract/employment,
tify dierentiating it in an economic theory. A blanket
ctitious capital, which refers to intangible repre- term that attempts to characterize all that clearly physical
sentations or abstractions of physical capital, such capital that is considered infrastructure and which supas stocks, bonds and securities (or tradable paper ports production in unclear or poorly accounted ways is
claims to wealth")
public capital. This encompasses the aggregate body of
all government-owned assets that are used to promote priEarlier illustrations often described capital as physical vate industry productivity, including highways, railways,
items, such as tools, buildings, and vehicles that are airports, water treatment facilities, telecommunications,
used in the production process. Since at least the 1960s electric grids, energy utilities, municipal buildings, pubeconomists have increasingly focused on broader forms lic hospitals and schools, police, re protection, courts
of capital. For example, investment in skills and edu- and still others. However it is a problematic term insofar
cation can be viewed as building up human capital or as many of these assets can be either publicly or privately
knowledge capital, and investments in intellectual prop- owned.
erty can be viewed as building up intellectual capital.
Separate literatures have developed to describe both
These terms lead to certain questions and controversies
natural capital and social capital. Such terms reect a
discussed in those articles.
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
2 Modern types of capital
as dierent types of capital in themselves. In particular,
they can be used in the production of other goods, are not
Detailed classications of capital that have been used in used up immediately in the process of production, and
various theoretical or applied uses generally respect the can be enhanced (if not created) by human eort.
following division:
There is also a literature of intellectual capital and
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
nancial 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.

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.

3 Endowment

Natural capital, which is inherent in ecologies and

which increases the supply of human wealth, e.g. Endowment is the natural state of something, before it
is processed. The production turns an endowment into
trees.
capital. Just as capital can be split into natural capital
Social capital, which in private enterprise is partly etcetera, so endowment can also be split into a countrys
captured as goodwill or brand value, but is a more natural endowment or a populations endowment.[8]
general concept of inter-relationships between human beings having money-like value that motivates
actions in a similar fashion to paid compensation.
4 Interpretations
Instructional capital, dened originally in academia
as that aspect of teaching and knowledge transfer
that is not inherent in individuals or social relationships but transferrable. Various theories use names
like knowledge or intellectual capital to describe similar concepts but these are not strictly dened as in
the academic denition and have no widely agreed
accounting treatment.

Economist Henry George argued that nancial instruments like stocks, bonds, mortgages, promissory notes, or
other certicates for transferring wealth is not really capital. Because Their economic value merely represents
the power of one class to appropriate the earnings of another. and their increase or decrease does not aect the
sum of wealth in the community.[9]

3
Some thinkers, such as Werner Sombart and Max Weber, locate the concept of capital as originating in doubleentry bookkeeping, which is thus a foundational innovation in capitalism, Sombart writing in Medieval and
Modern Commercial Enterprise that:[10]
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 doubleentry bookkeeping. Capital can be dened as
that amount of wealth which is used in making
prots and which enters into the accounts.

"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.
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 accounting

and is further developed in ecological economics, welfare
economics and the various theories of green economics.
Within classical economics, Adam Smith (Wealth of Na- All of which use a particularly abstract notion of capital
tions, Book II, Chapter 1) distinguished xed capital from in which the requirement of capital being produced like
circulating capital. The former designated physical as- durable goods is eectively removed.
sets not consumed in the production of a product (e.g. The Cambridge capital controversy was a dispute bemachines and storage facilities), while the latter referred tween economists at Cambridge, Massachusetts based
to physical assets consumed in the process of production MIT and University of Cambridge in the UK about
(e.g. raw materials and intermediate products). For an the measurement of capital. The Cambridge, UK
enterprise, both were types of capital.
economists, including Joan Robinson and Piero Sraa
Karl Marx adds a distinction that is often confused with claimed that there is no basis for aggregating the heteroDavid Ricardos. In Marxian theory, variable capital geneous objects that constitute 'capital goods.'
refers to a capitalists 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.
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 capital goods. Investment is closely related to
saving, though it is not the same. As Keynes pointed out,
saving involves not spending all of ones income on current goods or services, while investment refers to spending on a specic type of goods, i.e., capital goods.
Austrian School economist Eugen von Bhm-Bawerk
maintained that capital intensity was measured by the
roundaboutness of production processes. Since capital is
dened 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:

Political economists Jonathan Nitzan and Shimshon Bichler have suggested that capital is not a productive entity,
but solely nancial and that capital values measure the
relative power of owners over the broad social processes
that bear on prots.[11]

5 See also
Capital deepening
Capitalist mode of production
Das Kapital
Means of production
Organic composition of capital
Organizational capital
The Accumulation of Capital
Venture capital
Wealth (economics)

6 References
[1] http://www.britannica.com/topic/capital-economics

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",

[2] Karl Marx (1858). Pre-Capitalist Economic Formations

on Marxists.org. Marxism.org. Marxism.org. Retrieved
14 December 2014.
[3] Online Etymology Dictionary. Online Etymology Dictionary. Retrieved 14 December 2014.

[4] Karl Marx (1858). Pre-Capitalist Economic Formations

on Marxists.org. Marxism.org. Marxism.org. Retrieved
14 December 2014.
[5] Denition of Capital on Marxists.org. Encyclopedia of
Marxism. Marxism.org. Retrieved 8 February 2013.
[6] Paul A. Samuelson and William D. Nordhaus (2004).
Economics, 18th ed.
[7] Glossary of Terms, Capital (capital goods, capital equipment).
Deardors Glossary of International Economics,
Capital.
[8] http://www.econlib.org/cgi-bin/searchbooks.pl?
searchtype=BookSearchPara&id=bbPTC&query=
endowment
[9] http://www.henrygeorge.org/pchp2.htm
[10] Lane, Frederic C; Riemersma, Jelle, eds. (1953). Enterprise and Secular Change: Readings in Economic History.
R. D. Irwin. p. 38. (quoted in Accounting and rationality)
[11] Capital as Power: A Study of Order and Creorder, Routledge, 2009, p, 228.

Further reading
Boldizzoni, F. (2008). chapters 4-8. Means and
ends: The idea of capital in the West, 1500-1970.
New York: Palgrave Macmillan.
Hennings, K.H. (1987). Capital as a factor of production. The New Palgrave: A Dictionary of Economics. v. 1. pp. 32733.

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