Concept

Capital (economics)

Overview

In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year." Capital is a broad economic concept representing produced assets used as inputs for further production or generating income.

What distinguishes capital goods from intermediate goods (e.g., raw materials, components, energy consumed during production) is their durability and the nature of their contribution. Capital provides a flow of productive services over multiple cycles, facilitating production processes repeatedly, rather than being immediately consumed, physically incorporated, or transformed into the final output within a single cycle. While historically often focused on its physical manifestation in physical capital goods, the modern understanding explicitly includes non-physical assets as well. The term "capital equipment" is often used interchangeably with "capital goods", and refers especially to significant, durable items—such as machinery, vehicles, or laboratory instruments—used by organizations to produce goods or deliver services.

Within economics, the capital stock is generally understood as the collection of these produced assets held by an individual, company, or nation at a point in time. This stock comprises both tangible (physical capital) and intangible capital (non-physical capital). Consequently, because these assets are varied in form and function, this stock is inherently heterogeneous. Economists consider capital (often referring implicitly to the services provided by the capital stock) as a factor of production, alongside labor and land (or natural resources). This classification originated during the classical economics period and has remained the dominant method for classification.

Capital as a factor of production represents the produced means of production that contribute to generating output, featuring prominently as an input variable in standard economic production functions such as

(

)

{\displaystyle {\displaystyle Q=f(L,K)}}

where

{\displaystyle {\displaystyle L}}

is a quantity of labor,

{\displaystyle {\displaystyle K}}

a quantity of capital and

{\displaystyle {\displaystyle Q}}

a rate of output of commodities.

Importantly, while capital serves as a crucial input to the general production process, the creation of new capital goods (such as machinery, buildings, or software) is itself an output of specific production activities, which then enter the capital stock to replace potentially deprecated capital and facilitate future production. Typically, the producers of these capital goods are not the same firms that use them as inputs, but rather specialized firms engaged in capital goods production.

However, the precise definition of capital, how to measure it (especially in aggregate), and its exact role and productivity in the production process have been subjects of significant and long-standing debate throughout the history of economic thought.

In Marxian critique of political economy, capital is viewed as a social relation. Critical analysis of the economists portrayal of the capitalist mode of production as a transhistorical state of affairs distinguishes different forms of capital:

constant capital, which refers to capital goods

variable capital, which refers to labor-inputs, where the cost is "variable" based on the amount of wages and salaries paid during an employee's contract/employment,

fictitious capital, which refers to intangible representations or abstractions of physical capital, such as stocks, bonds and securities (or "tradable paper claims to wealth")

Overview adapted from Wikipedia (CC BY-SA 4.0; see the article history for authors).

In the original texts

Passages from public-domain books where Capital (economics) is discussed.

Part of the capital of the master manufacturer is employed as a fixed capital in the instruments of his trade, and replaces, together with its profits, that of some other artificer of whom he purchases them. Part of his circulating capital is employed in purchasing materials, and replaces, with their profits, the capitals of the farmers and miners of whom he purchases them. But a great part of it is always, either…
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations
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It is difficult to conceive that a capital should be employed in any way which may not be classed under some one or other of those four. Each of those four methods of employing a capital is essentially necessary, either to the existence or extension of the other three, or to the general conveniency of the society.
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
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This saving must be accomplished first to an amount sufficient to keep production going on from day to day. This capital is all consumed, but in a longer or shorter term (depending on the particular industrial operation) it is reproduced in new forms adapted to the existing wants of man. Moreover, without any new exertion of abstinence, this amount of capital may be again consumed and reproduced, and so go on…
John Stuart Mill, Principles of Political Economy
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Even of his own share a small part only belongs to him as the owner of capital. The portion of the produce which falls to capital merely as capital is measured by the interest of money, since that is all that the owner of capital obtains when he contributes nothing to production except the capital itself. Now the interest of capital in the public funds, which are considered to be the best security, is at the present…
John Stuart Mill, Socialism
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The same is true of rent. In all the forms of society in which land ownership is the prevalent form, the influence of the natural element is the predominant one. In those where capital predominates the prevailing element is the one historically created by society. Rent can not be understood without capital, nor can capital, without rent. Capital is the all dominating economic power of bourgeois society. It must form…
Karl Marx, A Contribution to the Critique of Political Economy
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Capital (economics)

Overview

In the original texts

Philosophers who discussed Capital (economics)

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