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 goal of accumulation of capital is to create new fixed capital and working capital, 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.
Definition
In economics and accounting, capital accumulation is often equated with investment of profit income or savings, especially in real capital goods. The concentration and centralisation of capital are two of the results of such accumulation (see below).
Capital accumulation refers ordinarily to:
- Real investment in tangible means of production, such as acquisitions, research and development, etc. that can increase the capital flow.
- Investment in financial assets represented on paper, yielding profit, interest, rent, royalties, fees or capital gains.
- Investment in non-productive physical assets such as residential real estate or works of art that appreciate in value.
and by extension to:
- Human capital, i.e., new education and training increasing the skills of the (potential) labour force which can increase earnings from work.
- Social capital, i.e. the wealth and productive capacity that the people in a society hold in common, rather than as individuals or corporations.
Both non-financial and financial capital accumulation is usually needed for economic growth, since additional production usually requires additional funds to enlarge the scale of production. Smarter and more productive organization of production can also increase production without increased capital. Capital can be created without increased investment by inventions or improved organization that increase productivity, discoveries of new assets (oil, gold, minerals, etc.), the sale of property, etc.
In modern macroeconomics and econometrics the term capital formation is often used in preference to "accumulation", though the United Nations Conference on Trade and Development (UNCTAD) refers nowadays to "accumulation". The term is occasionally used in national accounts.
Measurement of accumulation
Accumulation can be measured as the monetary value of investments, the amount of income that is reinvested, or as the change in the value of assets owned (the increase in the value of the capital stock). Using company balance sheets, tax data and direct surveys as a basis, government statisticians estimate total investments and assets for the purpose of national accounts, national balance of payments and flow of funds statistics. Usually, the reserve banks and the Treasury provide interpretations and analysis of this data. Standard indicators include capital formation, gross fixed capital formation, fixed capital, household asset wealth, and foreign direct investment.
Demand-led growth models
In macroeconomics, following the Harrod–Domar model, the savings ratio (<math>s</math>) and the capital coefficient (<math>k</math>) are regarded as critical factors for accumulation and growth, assuming that all saving is used to finance fixed investment. The rate of growth of the real stock of fixed capital (<math>K</math>) is:
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