April 23, 2024

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Capital

Capital is a type of good that can be consumed now, but if consumption is deferred an increased supply of consumable goods will be available later. Adam Smith defines capital as “That part of a man’s stock which he expects to afford him revenue is called his capital.” Capital is derived from the Latin word “caput” meaning head, as in “head of cattle”. The term “stock” is derived from the Old English word for stump or tree trunk, i.e. something that grows over time. It has been used to refer to all the moveable property of a farm since at least 1510. In Middle Ages France contract leases and loans bearing interest specified payment in heads of cattle. In economics, capital goods, real capital, or capital assets are already-produced durable goods or any non-financial asset that is used in production of goods or services. How a capital good is maintained or returned to its pre-production state varies with the type of capital involved. In most cases capital is replaced after a depreciation period as newer forms of capital make continued use of current capital non profitable. Capital is distinct from land (or non-renewable resources) in that capital can be increased by human labor. At any given moment in time, total physical capital may be referred to as the capital stock (which is not to be confused with the capital stock of a business entity.) In a fundamental sense, capital consists of any produced thing that can enhance a person’s power to perform economically useful work—a stone or an arrow is capital for a caveman who can use it as a hunting instrument, and roads are capital for inhabitants of a city. Capital is an input in the production function. Homes and personal autos are not usually defined as capital but as durable goods because they are not used in a production of saleable goods and services. In classical economic schools of thought, particularly in Marxist political economy, capital is money used to buy something only in order to sell it again to realize a financial profit. For Marx capital only exists within the process of economic exchange—it is wealth that grows out of the process of circulation itself, and for Marx it formed the basis of the economic system of capitalism. In more contemporary schools of economics, this form of capital is generally referred to as “financial capital” and is distinguished from “capital goods”.

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