capital (economics) - Capital in classical economic theory, Broadening the definition of capital

Productive assets. These include fixed capital (ie buildings, machinery, and equipment) and circulating capital (ie stocks of inputs and finished products, and work in progress). It also includes intellectual capital, such as patents and copyright. In discussing the whole economy, land would not be included, and net credit is zero. In discussing a particular firm, land would be included with fixed capital, and net credit extended with circulating capital.

In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. 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.

See also economic capital for a treatment of that topic.

Capital in classical economic theory

In classical economics, capital is one of three factors of production, the others being land and labor. 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). In Marxian theory, variable capital refers to a capitalist's investment in labor-power, seen as the only source of surplus-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. 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.

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. 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.

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. (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.

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.

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.

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.