Capital

Capital in economic theory

In economic theory, capital is one three factors of production, the others being land and labour. 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 is man-made, in contrast to land, which means naturally occurring resources such as geographical locations and minerals.
• It is not used up immediately in the process of production.

Investment in economic theory is the act of producing capital. In order to invest, goods must be produced which are not to be immediately consumed, but instead used to produce other goods. Investment is closely related to saving.

Further economic analysis of capital

Traditional economic theory tended to see capital as physical items such as tools, buildings and vehicles. More recently economists have focussed on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital (or in more detailed analyses, building up individual capital using instructional capital, recognizing that both the individual and the instruction may benefit from the interation). Some theories use the terms intellectual capital or knowledge capital which lead to certain questions and controversies discussed in those articles.

Some of the least controversial analyses break down each of the major factors of production as its own 'style' of capital, allowing for the capital appreciation and depreciation of each asset. Such analyses recognize four styles of capital, or in more detail, six:

• Financial capital which represents obligations, and is liquidated as money for trade, and owned by legal entities.
• Natural capital which is inherent in ecologies and protected by communities to support life, e.g. a river which provides farms with water.
• Infrastructural capital is non-natural support systems (e.g. clothing, shelter, roads, PCs) that minimize need for new social trust, instruction, and natural resources. (almost all of this is manufactured, leading to the older term manufactured capital, 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: natural capital grows back, infrastructural capital must be built and installed).
• Human capital, which may be analysed further into its social, creative, and imitative components.

• • Social capital is trust available to all members of a community (e.g. family, customer base), which is typically applied to distribute resources in case of difficult times. Governments tend to rely heavily on social capital, and in some ways trade on it directly by collecting taxes and spending the funds on things which further advance society.
  • Individual capital which is inherent in persons, protected by societies, and trades labor for trust or money . Close parallel concepts are 'talent', 'leadership', 'trained bodies', or 'innate skills' that cannot reliably be reproduced by using:
  • Instructional capital which is adequately-tested knowledge that persons and communities and software executes to predict/create or avoid futures that they consider desirable, or not. A close parallel term is 'ideas applied in practice', or 'praxis'.

More modern analyses differentiate the latter three so that non-human instructional capital (e.g. software), non-human individual capital (e.g. orang-utans painting, or a race-winning horse, or prize stud bull), and the activities of government can be analyzed more exactly. In such analyses the term "human capital" is rarely or not used.

Another prompting for the more exact analysis is that infrastructural capital has declined in financial value relative to human capital, and separate literatures have developed to describe both natural capital and social capital. There is also a literature of intellectual capital and intellectual property law. However, this has and must increasingly distinguish rewards for patent (imitative or instructional capital), copyright (creative or individual capital), and trademark (social trust or social capital) instruments. To the degree it does, it tends to apply the same terms of reference as the six-style analysis.