Capital in narrow and broad uses

Capital-What it means for a business in the restrictive as well as broader sense

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In classical economics, capital has three aspects or four, in some formulations, factors of production, are land, labor and in some versions organization, entrepreneurship, or management. Goods with the following features are capital:

•           It is usable in the production of other goods which makes it a factor of production.

•           It was produced, in contrast to "land," which are naturally occurring resources such as geographical locations and minerals.

•           It is not consumed in the process of production unlike raw materials or intermediate goods.

The significant exception to this is consumption allowance, which like intermediate goods, is looked at as a business expense.

These differences in convenience carried over to neoclassical economics with little change in formal analysis for an extended period. Furthermore capital is classified as a stock. As such, its value can be predetermined at a point in time, say November 14th. Unlike that, investment, being a production should be added to the capital stock, is described as taking place over time ("per year"), so it is a flow.

Earlier illustrations often described capital in terms of physical items, such as tools, buildings, and vehicles used in the process of production. Since before the 1960s economists have increasingly focused on broader terms of capital. For example, investment in skills and training can be viewed as building up human capital or knowledge capital, and investments in intellectual property can be viewed as building up intellectual property capital. These terms arose certain questions and arguments discussed in those articles. Human capital was described in human development theory as being composed of distinct social, imitative and creative elements:

•           Social capital is the value of circle of trust between individuals in an economy.

•           Individual capital which is attached to persons, protected by societies, and trades labor for trust or money. Close similar concepts are "leadership", "trained bodies", "talent", "ingenuity" or "innate skills" that cannot be reproduced in a reliable way by using any combination of any of the others above. In traditional economic analysis labor was used to define the individual capital.

Further classifications of capital used in many theoretical or applied uses include:

•           Financial capital representing obligations, and is liquidated in the form of money for trade, and owned by legal entities.

•           Natural capital inherent in ecologies and obliging communities to protected it to support life, e.g. a lake.

•           Infrastructural capital is non-natural support systems (e.g. Buildings, roads, electric supplies) that decrease need for new social trust, instruction, and natural resources. (Most of these are manufactured, leading to the older term manufactured capital, but some came from interactions with natural capital, and so it is more describable in terms of its appreciation/depreciation process, rather than talking about its origin.

 

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