What is capital?

The capital: its forms, origins, roles, relations with money

The capital is one of the factors of production that make the economy
run.

Senn from the owner's side it is an asset that provides gains / incomes
(but also of risks).

It is not only accumulated but also created by innovation and initiatives.

 sousDeep pockets to fuel the economy

Capital in the general sense is the ownership of
   * either productive means or productive organizations
       (businesses...)
   * or funds that are available for medium / long term investment
       (savings...)

Forms, origins, roles, relations with money

Forms of capital


* Physical capital:
hard assets: equipment, buildings, infrastructures...,

* Immaterial capital
 - Corporate strengths
    (goodwill, brand image, patents, knowhow, organization,
    innovations capabilities...)

 - Or personal talents / reputation and image / knowledge
    that bring economic advantages.

* Financial capital (securities and other financial-assets).
Among financial capital invested in businesses or organizations,
the main types are equity capital (owners' funds) and
long term loans
.

But capital can also not be directly invested, kept as
liquid assets
, or used for other financial operations (for
example
derivatives). More details are given below about this role of
money as a reserve of capital.
Actually, the phrase "capital assets" addresses mostly funds
committed for more than one year.

The border between the three lands
of financial capital,
financial trading and ordinary
savings (or even liquidity), is
obviously fuzzy
,
But what is not fuzzy in our complex complex world?

Also the difference of volumes at stake between the players
might give some clue. Your kid's piggybank hardly makes him
a capitalist ;-)

Origin / ownership of capital

(more details in a related chapter below)

Capital is built in several ways:

* Through accumulation by invested savings, reinvested profits,

* Through creation. business initiatives and innovations
   
   - Create "asset value" if they are financially successful (or
     
antipated to be so, this is the "speculative" aspect of capital) .
    - Also destruct old capital that is unadapted to new economic
       activities.
   
     Creation, anticipation, destruction  those traits are a dent on
     pure "accumulation"

* Also through ...perception by investors: the value they give
   to those assets when buying or selling them on the market.
   Another dent on "accumulation".

An economic system in which capital is mostly privately owned
is called, you guessed it,
capitalism.

Roles of capital

(more details in a related chapter below)

Capital is
* A factor of production related to economic activities,
   normally, the more (wisely) invested and available capital there is,

   the more the economy  is developed and productive.

* An element of personal wealth, an income
source and a capital
   gain potential for the assets' owner but in exchange of financial risk
   taking.

Relations between capital and money

(see below in this article the details about "marketability") :

Money, is not in itself a capital, as it can be used for other purposes
than investment.
But in its broad sense capital includes all reserve of money available
for investment


Conversely, as seen above, capital can be converted in cash and
stored in liquid or near-liquid assets
, thus made easily available
for any project or operation (including financial operations such as
those using derivatives) while not invested.
Altogether, money is a tool that helps make capital fungible,
tradeable, valued, available, disseminated, arbitraged, stored.
That is how money - all along History, and still nowadays - was
a crucial tool for the expansion of capital as an economic factor.

Another thing is that there are limits in asset investing, too much
of it can bring an asset bubble.

Details on economic role
and social ownership


Productive role of capital

Capital is in the economic sense the procurement and creation of
means of production
of goods and services.
As mentioned above, it is a "factor of production"
(*)

To simplify, the more capital, the more economic development.
Of course, if there is no overinvesment that create gluts.

What complicates things is that the means / factors of production
are quite diverse.
For example not all of them are physical, thus capital itself has various
forms, as seen above.

What might be the main aspect is that a person or an institution that
injects capital into the economy, usually via a business or a corporation,
risk  accepts the risk entailed by productive operations (and the
market pricing risk also).

Ownership / acquisition / 

dissemination / marketability


On the financial side, as seen above, capital is a form of wealth for private
persons or for institutions.
The ownership can be done in two ways:
  • Sometimes, on a small scale, it is the direct ownership
Here the productive tools belong directly to private persons
(small business),
  • More and more often, it is the ownership of financial assets,
 through corporations by the public, by groups or by institutions.

Stock
s (or shares, equity) are the the most representative
financial instruments of equity capital, as a portion of the ownership
of a corporate firm.
If the corporation that issued stocks accepts to "go public", they are traded
in stock markets, one of the types of "capital markets".

Such markets are more and more diversified, with a large range of traded
instruments that are supposed to respond to diversified economic needs (*).
This is how capital ownership diffused / percolated in a much larger
population
than just a "class" (**).

(*) some self-serving ones also, as was seen in the subprime crisis and its
"toxic assets".

(**) Marx defined "The Capital" reductively as a the domineering social
        class.
        This confusion between economic tool vs. sociological cluster gave a
        good pretense to Lenin to grab all the available capital ...for the benefit
        of its apparatshiks.

The capital leverage dilemma

(balance between equity and loans)
See the overleverage article

Origin of the value of capital

The value is in the prospects

As for the value of those assets it is based,

* Not on their acquisition cost


* but on the perception of their future return (see present value)
   and of 
their risk of loss.

Therefore, whatever the old visions of some classical economists, the
"Capital" is a notion that is better defined by looking forwards
than backwards
.

A consequence is that the capital, does not just result from just
"accumulation" as its value is future-oriented:
  • Innovation creates prospects of riches
thus is also a key source of asset value
They are therefore liable to frequent and often large upside
and downside variations.
Thus portions of capital can appear and disappear any
day
.
To consider capital as a vested interest would be illusory.

The cost of capital

A dual question:

* Is there too much "accumulated" capital
(a Marxist idea to 
   explain what they
see as overproduction or under-consumption and
   a decrease of
marginal return)?

* Or is capital (in the sense of equity) on the contrary a scarce
   resource?


The fact that investors tend to borrow and to use few own equity could
be an answer (apart transferring the risk to the lenders).
There is a cost of capital / of equity.
The expected return by the investor is a measure of this cost.

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M.a.j. / updated : 03 Sept. 2015
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