In economics Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current, capital, capital goods In macroeconomics and accounting, a good is contrasted with a service. In this sense, a good is defined as a physical product, capable of being delivered to a purchaser and involves the transfer of ownership from seller to customer, say an apple, as opposed to an (intangible) service, say a haircut. A more general term that preserves the, or real capital are factors of production In economics, factors of production are the resources employed to produce goods and services. They facilitate production but do not become part of the product (as with raw materials) or become significantly transformed by the production process (as with fuel used to power machinery). To 19th century economists, the factors of production were land ( used to create goods or services A service is the intangible equivalent of a good. Service provision is often an economic activity where the buyer does not generally, except by exclusive contract, obtain exclusive ownership of the thing purchased. The benefits of such a service, if priced, are held to be self-evident in the buyers willingness to pay for it. Public services are that are not themselves significantly consumed (though they may depreciate Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years) in the production process. Capital goods A capital good, or simply capital, is saved up wealth that enables enterprise by allowing start-up companies to enjoy an initial period where they consume more than they produce. For start-ups to be able to do this, others must either currently be saving or must have saved in the past. It is simply not possible to have some people consuming more may be acquired with money Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment or financial capital Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc.
In finance Finance is the science of funds management. The general areas of finance are business finance, personal finance, and public finance. Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money, and risk and how they are interrelated. It also deals with how money is spent and budgeted and accounting Accountancy is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the financial´s form statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user, capital generally refers to saved-up financial wealth In economics, wealth of a person, household, or nation is the value of all assets owned net of all liabilities owed (to foreigners in the national accounts) at a point in time. The term may also be used more broadly as referring to the productive capacity of a society or as a contrast to poverty. Analytical emphasis may be on its determinants or, especially that used to start or maintain a business. A financial concept of capital is adopted by most entities in preparing their financial reports. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.[1]Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. [2] There are thus three concepts of capital maintenance in terms of International Financial Reporting Standards International Financial Reporting Standards are Standards, Interpretations and the Framework adopted by the International Accounting Standards Board (IASB) (IFRS): (1) Physical capital maintenance (2) Financial capital maintenance in nominal monetary units (3) Financial capital maintenance in units of constant purchasing power.[3]
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Capital in narrow and broad uses
In classical economics Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill, capital is one of three (or four, in some formulations) factors of production In economics, factors of production are the resources employed to produce goods and services. They facilitate production but do not become part of the product (as with raw materials) or become significantly transformed by the production process (as with fuel used to power machinery). To 19th century economists, the factors of production were land (. The others are land In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to the production of all goods, including capital goods, labour Labour economics seeks to understand the functioning and dynamics of the market for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services , the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and and (in some versions) 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 Intermediate goods or producer goods are goods used as inputs in the production of other goods, such as partly finished goods. They are goods used in production of final goods. A firm may make then use intermediate goods, or make then sell, or buy then use them. In the production process, intermediate goods either become part of the final product,. (The significant exception to this is depreciation Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years allowance, which like intermediate goods, is treated as a business expense.)
These distinctions of convenience carried over to neoclassical economics Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often as mediated through a hypothesized maximization of income-constrained utility by individuals and of cost-constrained profits of firms employing available with little change in formal analysis for an extended period. There was the further clarification that capital is a stock Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have accumulated in the past. A flow variable is. As such, its value can be estimated at a point in time, say December 31. By contrast, investment Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument. It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and, as production to be added to the capital stock, is described as taking place over time ("per year"), thus a flow Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have accumulated in the past. A flow variable is.
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 Human capital refers to the stock of competences, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience. Many early economic theories refer to it simply as workforce, one of three factors of production, and consider it or knowledge capital Knowledge capital is a concept which asserts that ideas have intrinsic value which can be shared and leveraged within and between organizations. Knowledge capital connotes that sharing skills and information is a means of sharing power. Knowledge capital is the know how that results from the experience, information, knowledge, learning, and skills, and investments in intellectual property can be viewed as building up intellectual capital The term Intellectual capital collectively refers to all resources that determine the value and the competitiveness of an enterprise. As such, it includes as subsets the attributes that concur to building all financial statements as well as the balance sheet.. These terms lead to certain questions and controversies discussed in those articles. Human development theory Human development theory is a theory that merges older ideas from ecological economics, sustainable development, welfare economics, and feminist economics. It seeks to avoid the overt normative politics of most so-called "green economics" by justifying its theses strictly in ecology, economics and sound social science, and by working describes human capital as being composed of distinct social, imitative and creative elements:
- Social capital Social capital is a sociological concept, which refers to connections within and between social networks. Though there are a variety of related definitions, which have been described as "something of a cure-all" for the problems of modern society, they tend to share the core idea "that social networks have value. Just as a is the value of network trusting relationships between individuals in an economy.
- Individual capital Individual capital, also known as human capital, comprises inalienable or personal traits of persons, tied to their bodies and available only through their own free will, such as skill, creativity, enterprise, courage, capacity for moral example, non-communicable wisdom, invention or empathy, non-transferable personal trust and leadership, which is inherent in persons, protected by societies, and trades labour for trust or money. Close parallel concepts are "talent A skill is the learned capacity to carry out pre-determined results often with the minimum outlay of time, energy, or both. Skills can often be divided into domain-general and domain-specific skills. For example, in the domain of work, some general skills would include time management, teamwork and leadership, self motivation and others, whereas", "ingenuity Ingenuity refers to the process of applying ideas to solve problems or meet challenges. The process of figuring out how to cross a mountain stream using a fallen log, build an airplane from a sheet of paper, or start a new company in a foreign culture all involve the exercising of ingenuity. Human ingenuity has led to technological developments", "leadership Leadership is stated as the "process of social influence in which one person can enlist the aid and support of others in the accomplishment of a common task." Definitions more inclusive of followers have also emerged. Alan Keith stated that, "Leadership is ultimately about creating a way for people to contribute to making something", "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 Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc, 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.
- Natural capital Natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future. For example, a stock of trees or fish provides a flow of new trees or fish, a flow which, which is inherent in ecologies and protected by communities to support life, e.g., a river that provides farms with water.
- Infrastructural capital Infrastructural capital refers to any physical means of production or means of protection beyond that which can be gathered or found directly in nature, i.e. beyond natural capital and that which is not considered as "fluid capital". It may include tools, clothing, shelter, irrigation systems, dams, roads, boats, ports, factories or any is non-natural support systems (e.g. clothing, shelter, roads, personal computers) that minimize need for new social trust, instruction, and natural resources. (Almost all of this is manufactured, leading to the older term manufactured capital Infrastructural capital refers to any physical means of production or means of protection beyond that which can be gathered or found directly in nature, i.e. beyond natural capital and that which is not considered as "fluid capital". It may include tools, clothing, shelter, irrigation systems, dams, roads, boats, ports, factories or any, but some arises from interactions with natural capital, and so it makes more sense to describe it in terms of its appreciation/depreciation process, rather than its origin: much of natural capital grows back, infrastructural capital must be built and installed.)
In part as a result, separate literatures have developed to describe both natural capital Natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future. For example, a stock of trees or fish provides a flow of new trees or fish, a flow which and social capital Social capital is a sociological concept, which refers to connections within and between social networks. Though there are a variety of related definitions, which have been described as "something of a cure-all" for the problems of modern society, they tend to share the core idea "that social networks have value. Just as a. Such terms reflect a wide consensus Consensus is defined in English as, firstly - general agreement and, secondly - group solidarity of belief or sentiment. It has its origin in a Latin word meaning literally to feel together 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 The term Intellectual capital collectively refers to all resources that determine the value and the competitiveness of an enterprise. As such, it includes as subsets the attributes that concur to building all financial statements as well as the balance sheet. and intellectual property law Intellectual property is a term referring to a number of distinct types of legal monopolies over creations of the mind, both artistic and commercial, and the corresponding fields of law. Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works;. However, this increasingly distinguishes means of capital investment, and collection of potential rewards for patent A patent is a set of exclusive rights granted by a state (national government) to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention, copyright Copyright is the set of exclusive rights granted to the author or creator of an original work, including the right to copy, distribute and adapt the work. These rights can be licensed, transferred and/or assigned. Copyright lasts for a certain time period after which the work is said to enter the public domain. Copyright applies to a wide range of (creative or individual capital Individual capital, also known as human capital, comprises inalienable or personal traits of persons, tied to their bodies and available only through their own free will, such as skill, creativity, enterprise, courage, capacity for moral example, non-communicable wisdom, invention or empathy, non-transferable personal trust and leadership), and trademark A trademark or trade mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities (social trust or social capital Social capital is a sociological concept, which refers to connections within and between social networks. Though there are a variety of related definitions, which have been described as "something of a cure-all" for the problems of modern society, they tend to share the core idea "that social networks have value. Just as a) instruments.the word capital is what you have as a wealth.
Capital in classical economics and beyond
Some thinkers, such as Werner Sombart Werner Sombart was a German economist and sociologist, the head of the “Youngest Historical School” and one of the leading Continental European social scientists during the first quarter of the 20th century and Max Weber Maximilian Carl Emil "Max" Weber (21 April 1864 – 14 June 1920) was a German sociologist and political economist, who profoundly influenced social theory, social research, and the remit of sociology itself. Weber's major works dealt with the rationalization and so-called "disenchantment" which he associated with the rise of, locate the concept of capital as originating in double-entry bookkeeping The double-entry bookkeeping system was started in 13th century and refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits within the accounting equation, assets = liabilities +, which is thus a foundational innovation in Capitalism Capitalism is an economic system in which the means of production are privately owned; supply, demand, price, distribution, and investments are determined mainly by private decisions in the free market, rather than by the state through central economic planning or through democratic planning; profit is distributed to owners who invest in, Sombart writing in "Medieval and Modern Commercial Enterprise" that:[4]
- "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."
Within classical economics, Adam Smith (Wealth of Nations, Book II, Chapter 1) distinguished fixed capital Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like. Fixed capital is from circulating capital, including raw materials and intermediate products. For an enterprise, both were kinds of capital.
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. It is constant, in that the amount of value committed in the original investment, and the amount retrieved in the form of commodities produced, remains constant.
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 a means of production. 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.
The Austrian economist Eugen von Böhm-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.
See also
- Capital deepening
- Capitalism
- Capitalist mode of production
- Factors of production
- Physical capital
- Means of production
- Venture capital
- Wealth (economics)
Lists
- list of economists
- list of management topics
- list of marketing topics
- list of accounting topics
- list of finance topics
- list of ethics topics
References
- ^ [1]Framework for the Preparation and Presentation of Financial Statements, Par 102
- ^ [2]Framework for the Preparation and Presentation of Financial Statements, Par 104
- ^ [3]Framework for the Preparation and Presentation of Financial Statements, Par 104
- ^ 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")
- F. Boldizzoni (2008). Means and ends: The idea of capital in the West, 1500-1970, New York: Palgrave Macmillan, 2008, chapters 4-8.
- K.H. Hennings (1987). "Capital as a factor of production," The New Palgrave: A Dictionary of Economics, v. 1, pp. 327-33.
Categories: Capital
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