Capital (economics)

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In economics, capital consists of assets that can enhance one's power to perform economically useful work. For example, a stone or an arrow is capital for a hunter-gatherer who can use it as a hunting instrument; similarly, roads are capital for inhabitants of a city. Capital is distinct from land and other non-renewable resources in that it can be increased by human labor, and does not include certain durable goods 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 models, capital is an input in the production function.

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The total physical capital at any given moment in time is referred to as the capital stock (not to be confused with the capital stock of a business entity). Capital goods, real capital, or capital assets are already-produced, durable goods or any non-financial asset that is used in production of goods or services. [1]

In Marxian economics, [2] capital is money used to buy something only in order to sell it again to realize a profit. For Marx, capital only exists within the process of the economic circuit (represented by M-C-M')—it 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 "financial capital" and is distinguished from "capital goods".

In narrow and broad uses

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).

This is what makes it a factor of production:

These distinctions of convenience have carried over to contemporary economic theory. [3] [4] There was[ when? ] 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.

Marxian economics distinguishes between different forms of capital:

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.

Modern types of capital

Detailed classifications of capital that have been used in various theoretical or applied uses generally respect the following division:

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.

Interpretations

Within classical economics, Adam Smith (Wealth of Nations, Book II, Chapter 1) distinguished fixed capital from circulating capital. 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 argued that financial instruments like stocks, bonds, mortgages, promissory notes, or other certificates 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 affect the sum of wealth in the community". [5] [ non-primary source needed ]

Some thinkers, such as Werner Sombart and Max Weber, locate the concept of capital as originating in double-entry bookkeeping, which is thus a foundational innovation in capitalism, Sombart writing in "Medieval and Modern Commercial Enterprise" that: [6]

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 adds a distinction that is often confused with David Ricardo'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 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 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 economist Eugen Boehm von 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.

Human development theory describes human capital as being composed of distinct social, imitative and creative elements:

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. 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 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 and Piero Sraffa claimed that there is no basis for aggregating the heterogeneous objects that constitute 'capital goods.'

Political economists Jonathan Nitzan and Shimshon Bichler 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. [7] [ non-primary source needed ]

See also

Related Research Articles

In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, finished goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function. There are three basic resources or factors of production: land, labour and capital. The factors are also frequently labeled "producer goods or services" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods".

Human capital is the stock of habits, knowledge, social and personality attributes embodied in the ability to perform labour so as to produce economic value.

In economics and sociology, the means of production are physical and non-financial inputs used in the production of economic value. These include raw materials, facilities, machinery and tools used in the production of goods and services. In the terminology of classical economics, the means of production are the "factors of production" minus financial and human capital.

Use value or value in use is a concept in classical political economy and Marxian economics. It refers to the tangible features of a commodity which can satisfy some human requirement, want or need, or which serves a useful purpose. In Karl Marx's critique of political economy, any product has a labor-value and a use-value, and if it is traded as a commodity in markets, it additionally has an exchange value, most often expressed as a money-price.

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 form of profit, rent, interest, royalties or capital gains. The aim of capital accumulation is to create new fixed and working capitals, broaden and modernize the existing ones, grow the material basis of social-cultural activities, as well as constituting the necessary resource for reserve and insurance. The process of capital accumulation forms the basis of capitalism, and is one of the defining characteristics of a capitalist economic system.

A theory of value is any economic theory that attempts to explain the exchange value or price of goods and services. Key questions in economic theory include why goods and services are priced as they are, how the value of goods and services comes about, and—for normative value theories—how to calculate the correct price of goods and services.

A theory of capitalism describes the essential features of capitalism and how it functions. The history of various such theories is the subject of this article.

In Marxian economics, economic reproduction refers to recurrent processes. Michel Aglietta views economic reproduction as the process whereby the initial conditions necessary for economic activity to occur are constantly re-created. Marx viewed reproduction as the process by which society re-created itself, both materially and socially.

Surplus product

Surplus product is an economic concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy.

Law of value central concept in Karl Marxs critique of political economy

The law of the value of commodities, known simply as the law of value, is a central concept in Karl Marx's critique of political economy first expounded in his polemic The Poverty of Philosophy (1847) against Pierre-Joseph Proudhon with reference to David Ricardo's economics. Most generally, it refers to a regulative principle of the economic exchange of the products of human work, namely that the relative exchange-values of those products in trade, usually expressed by money-prices, are proportional to the average amounts of human labor-time which are currently socially necessary to produce them.

Productive and unproductive labour are concepts that were used in classical political economy mainly in the 18th and 19th centuries, which survive today to some extent in modern management discussions, economic sociology and Marxist or Marxian economic analysis. The concepts strongly influenced the construction of national accounts in the Soviet Union and other Soviet-type societies.

The tendency of the rate of profit to fall (TRPF) is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Capital, Volume III. Economists as diverse as Adam Smith, John Stuart Mill, David Ricardo and Stanley Jevons referred explicitly to the TRPF as an empirical phenomenon that demanded further theoretical explanation, yet they each differed as to the reasons why the TRPF should necessarily occur.

Criticism of Marxism

Criticism of Marxism has come from various political ideologies and academic disciplines. This include general criticism about a lack of internal consistency, criticism related to historical materialism, that it is a type of historical determinism, the necessity of suppression of individual rights, issues with the implementation of communism and economic issues such as the distortion or absence of price signals and reduced incentives. In addition, empirical and epistemological problems are frequently identified.

Criticisms of the labor theory of value affect the historical concept of labor theory of value (LTV) which spans classical economics, liberal economics, Marxian economics, neo-Marxian economics, and anarchist economics. As an economic theory of value, LTV is central to Marxist social-political-economic theory and later gave birth to the concepts of labour exploitation and surplus value. LTV criticisms therefore often appear in the context of economic criticism, not only for the microeconomic theory of Marx but also for Marxism, according to which the working class is exploited under capitalism.

Throughout modern history, a variety of perspectives on capitalism have evolved based on different schools of thought.

Constant capital one of the forms of capital invested in production

Constant capital (c), is a concept created by Karl Marx and used in Marxian political economy. It refers to one of the forms of capital invested in production, which contrasts with variable capital (v). The distinction between constant and variable refers to an aspect of the economic role of factors of production in creating a new value.

"Surplus value" is a translation of the German word "Mehrwert", which simply means value added, and is cognate to English "more worth". Surplus-value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and labour power. It is a central concept in Karl Marx's critique of political economy. Conventionally, value-added is equal to the sum of gross wage income and gross profit income. However, Marx uses the term Mehrwert to describe the yield, profit or return on production capital invested, i.e. the amount of the increase in the value of capital. Hence, Marx's use of Mehrwert has always been translated as "surplus value", distinguishing it from "value-added". According to Marx's theory, surplus value is equal to the new value created by workers in excess of their own labor-cost, which is appropriated by the capitalist as profit when products are sold.

Socialist mode of production

The socialist mode of production, also referred to as the lower-stage of communism or simply socialism as Karl Marx and Friedrich Engels used the terms socialism and communism interchangeably, is a specific historical phase of economic development and its corresponding set of social relations that emerge from capitalism in the schema of historical materialism within Marxist theory.

Social ownership is any of various forms of ownership for the means of production in socialist economic systems, encompassing state ownership, employee ownership, cooperative ownership, citizen ownership of equity, common ownership and collective ownership. Historically social ownership implied that capital and factor markets would cease to exist under the assumption that market exchanges within the production process would be made redundant if capital goods were owned by a single entity or network of entities representing society, but the articulation of models of market socialism where factor markets are utilized for allocating capital goods between socially owned enterprises broadened the definition to include autonomous entities within a market economy. Social ownership of the means of production is the common defining characteristic of all the various forms of socialism.

Marxian economics school of economic thought

Marxian economics, or the Marxian school of economics, is a heterodox school of economic thought. Its foundations can be traced back to the critique of classical political economy in the research by Karl Marx and Friedrich Engels. Marxian economics comprises several different theories and includes multiple schools of thought, which are sometimes opposed to each other, and in many cases Marxian analysis is used to complement or supplement other economic approaches. Because one does not necessarily have to be politically Marxist to be economically Marxian, the two adjectives coexist in usage rather than being synonymous. They share a semantic field while also allowing connotative and denotative differences.

References

  1. Boulding, Kenneth E. "Capital and interest". Encyclopedia Britannica. Retrieved July 22, 2017.
  2. "Definition of Capital on Marxists.org". Encyclopedia of Marxism. Marxism.org. Retrieved 8 February 2013.
  3. Paul A. Samuelson and William D. Nordhaus (2004). Economics , 18th ed.
  4. Glossary of Terms, "Capital (capital goods, capital equipment)."
       • Deardorff's Glossary of International Economics, Capital.
  5. George, Henry. "Progress and Poverty, Chapter 2". www.henrygeorge.org. Bob Drake. Retrieved July 22, 2017.
  6. 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" Archived 2011-07-22 at the Wayback Machine )
  7. Capital as Power: A Study of Order and Creorder, Routledge, 2009, p, 228.

Further reading