Capital Accumulation - Capital Accumulation and Risk

Capital Accumulation and Risk

Most capital accumulation involves risk, because capital is committed to an investment without perfect certainty of future earnings. A capital asset could gain value, but it could also lose value in the future. Owners of capital (investors) therefore typically diversify their investment portfolio, and try to minimise the risks involved in investments by every possible means.

In the course of two centuries of capital accumulation based on industrialisation the intensive economising and exploitation of human labour, and technological innovation,

• the value of the assets that are invested in has become very large
• the markets traded in extend around the globe
• the deregulation of markets has increased the level of market uncertainty
• the volume of speculative capital has grown enormously
• the banking industry dominates the ownership of capital assets.

This has led to an enormous expansion of the insurance industry and of the profession of risk management. As a corollary, this powerfully stimulates the construction of mathematical models which aim to assess how probable it is that particular "risky events" will occur. Some sociologists such as Frank Furedi claim that an exaggerated and unhealthy preoccupation or anxiety about risks has infiltrated the whole of modern society.

Speculation - making money from price differentials or price fluctuations - is justified as follows: "The roles of speculators in a market economy are to absorb risk and to add liquidity to the marketplace by risking their own capital for the chance of monetary reward." However, speculation often also occurs with borrowed capital. In this case, capital is borrowed at a low rate of interest, and reinvested at a higher return.