Capital (economics) - in Narrow and Broad Uses

In Narrow and Broad Uses

In classical and neoclassical economics, capital is one of the factors of production. The others are land, labour and, according to some proponents, organization, entrepreneurship, or management. 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 was produced, 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 significant exception to this is depreciation allowance, which like intermediate goods, is treated as a business expense.)

These distinctions of convenience have carried over to contemporary economic theory. There was the further clarification that capital is a stock. 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.

In Marxian economics, there are distinctions 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 are paid throughout the duration of an employee's contract/employment,
• Fictitious capital, which refers to intangible representations or abstractions of physical capital, such as stocks, bonds and securities (or "tradeable 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 or knowledge capital, and investments in intellectual property can be viewed as building up intellectual capital. These terms lead to certain questions and controversies discussed in those articles. Human development theory describes human capital as being composed of distinct social, imitative and creative elements:

• 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", "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.

Further classifications of capital that have been used in various theoretical or applied uses include:

• 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 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.
• Public capital, which encompasses the aggregate body of 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.
• Natural capital, which is inherent in ecologies and protected by communities to support life, e.g., a river that provides farms with water.
• Spiritual capital, which refers to the power, influence and dispositions created by a person or an organization’s spiritual belief, knowledge and practice.

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. Capital (all types collectively) is often the tool that is leveraged in order to build wealth both personal and corporate.