Capital (economics)

thumb|right|200px|A factory and its equipment are examples of capital goods.

In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year." Capital is a broad economic concept representing produced assets used as inputs for further production or generating income.

What distinguishes capital goods from intermediate goods (e.g., raw materials, components, energy consumed during production) is their durability and the nature of their contribution. Capital provides a flow of productive services over multiple cycles, facilitating production processes repeatedly, rather than being immediately consumed, physically incorporated, or transformed into the final output within a single cycle. While historically often focused on its physical manifestation in physical capital goods, the modern understanding explicitly includes non-physical assets as well. The term "capital equipment" is often used interchangeably with "capital goods", and refers especially to significant, durable items—such as machinery, vehicles, or laboratory instruments—used by organizations to produce goods or deliver services.

Within economics, the capital stock is generally understood as the collection of these produced assets held by an individual, company, or nation at a point in time. This stock comprises both tangible (physical capital) and intangible capital (non-physical capital). Consequently, because these assets are varied in form and function, this stock is inherently heterogeneous.

Importantly, while capital serves as a crucial input to the general production process, the creation of new capital goods (such as machinery, buildings, or software) is itself an output of specific production activities, which then enter the capital stock to replace potentially deprecated capital and facilitate future production. Typically, the producers of these capital goods are not the same firms that use them as inputs, but rather specialized firms engaged in capital goods production.

However, the precise definition of capital, how to measure it (especially in aggregate), and its exact role and productivity in the production process have been subjects of significant and long-standing debate throughout the history of economic thought. Critical analysis of the economists portrayal of the capitalist mode of production as a transhistorical state of affairs distinguishes different forms of capital: Adam Smith provided 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.

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. Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. These terms lead to certain questions and controversies discussed in those articles.

A capital good lifecycle typically consists of tendering, engineering and procurement, manufacturing, commissioning, maintenance, and (sometimes) decommissioning.

Capital goods are a major factor in the process of technical innovation:

Capital goods are a constituent element of the stock of capital assets, or fixed capital and play a key role in the economic analysis of "... growth and production, as well as the distribution of income..."

Immaterial capital goods

Capital goods can also be immaterial, when they take the form of intellectual property. Many production processes require the intellectual property to (legally) produce their products. Just like material capital goods, they can require substantial investment, and can also be subject to amortization, depreciation, and divestment.

Differences from consumer goods

People buy capital goods to use as static resources to make other goods, whereas consumer goods are purchased to be consumed.

For example, an automobile is a consumer good when purchased as a private car.

Dump trucks used in manufacturing or construction are capital goods because companies use them to build things like roads, dams, buildings, and bridges.

In the same way, a chocolate bar is a consumer good, but the machines that produce the candy are capital goods.

Some capital goods can be used in both production of consumer goods or production goods, such as machinery for the production of dump trucks.

Consumption is the logical result of all economic activity, but the level of future consumption depends on the future capital stock, and this in turn depends on the current level of production in the capital-goods sector. Hence if there is a desire to increase consumption, the output of the capital goods should be maximized.

Importance

Capital goods, often called complex products and systems (CoPS), play an important role in today's economy.

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".

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:

: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:

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.
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. 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.

Capital (economics)

Immaterial capital goods

Differences from consumer goods

Importance

Interpretations

See also

References

Further reading

External links