Ineconomics,capital goods orcapital are "those durable produced goods that are in turn used asproductive inputs for further production" of goods and services.[1] A typical example is the machinery used in afactory. At themacroeconomic level, "the nation'scapital stock includes buildings, equipment, software, and inventories during a given year."[2]
Themeans of production is as a "... series of heterogeneous commodities, each having specific technical characteristics ..."[3] "capital goods",[4] are one of the three types ofintermediate goods used in the production process, the other two beingland andlabour.[5] The three are also known collectively as "primaryfactors of production".[5] This classification originated during theclassical economics period and has remained the dominant method for classification.
Capital can be increased by the use of a production process (seeproduction function andfactors of production). Outputs of the production process are normally classified ascapital goods,durable goods, andconsumer goods. Durable goods are differentiated from capital goods by virtue of the fact that they are long lived personal property not used in the production of marketable goods, e.g personal homes and personal automobiles are not used in the production of marketable goods and services.
InMarxian critique of political economy, capital is viewed as asocial relation.[6] Critical analysis of the economists portrayal of the capitalist mode of production as a transhistorical state of affairs distinguishes different forms of capital:[6]
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 "tradablepaper claims to wealth")
Many definitions and descriptions of capital goods production have been proposed in the literature. Capital goods are generally considered one-of-a-kind,capital intensive products that consist of many components. They are often used as manufacturing systems or services themselves. Examples include handtools,machine tools,data centers,oil rigs,semiconductor fabrication plants, andwind turbines. Their production is often organized in projects, with several parties cooperating in networks.[8][9]
This is what makes it a factor of production:
The good is not used up immediately in the process of production unlike raw materials orintermediate goods. (The significant exception to this isdepreciation allowance, which like intermediate goods, is treated as a business expense.)
These distinctions of convenience have carried over to contemporaryeconomic theory.[10][11] Adam Smith provided the further clarification that capital is astock. As such, its value can be estimated at a point in time. By contrast,investment, as production to be added to the capital stock, is described as taking place over time ("per year"), thus aflow.
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 uphuman capital orknowledge capital, and investments inintellectual property can be viewed as building upintellectual capital.Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. These terms lead to certain questions and controversies discussed in those articles.
A capital good lifecycle typically consists of tendering, engineering and procurement, manufacturing, commissioning, maintenance, and (sometimes) decommissioning.[12][9][8][13]
All innovations—whether they involve the introduction of a new product or provide a cheaper way of producing an existing product—require that the capital goods sector shall produce a new product (machine orphysical plant) according to certainspecifications.
— Rosenberg, "Article Title",Capital Goods, Technology, and Economic Growth (1963)
Capital goods are a constituent element of the stock of capital assets, orfixed capital and play a key role in the economic analysis of "... growth and production, as well as the distribution of income..."[15]
Capital goods can also be immaterial, when they take the form ofintellectual property. Many production processes require the intellectual property to (legally) produce their products. Just like material capital goods, they can require substantial investment, and can also be subject to amortization, depreciation, and divestment.
People buy capital goods to use as static resources to make other goods, whereasconsumer goods are purchased to be consumed.
For example, an automobile is a consumer good when purchased as a private car.
Dump trucks used in manufacturing or construction are capital goods because companies use them to build things like roads, dams, buildings, and bridges.
In the same way, a chocolate bar is a consumer good, but the machines that produce the candy are capital goods.
Some capital goods can be used in both production of consumer goods or production goods, such as machinery for the production of dump trucks.
Consumption is the logical result of all economic activity, but the level of future consumption depends on the future capital stock, and this in turn depends on the current level of production in the capital-goods sector. Hence if there is a desire to increase consumption, the output of the capital goods should be maximized.[16]
Capital goods, often called complex products and systems (CoPS), play an important role in today's economy.[9] Aside from allowing a business to create goods or provide services for consumers, capital goods are important in other ways. In an industry where production equipment and materials are quite expensive, they can be a high barrier to entry for new companies. If a new business cannot afford to purchase the machines it needs to create a product, for example, it may not be able to compete as effectively in the market. Such a company might turn to another business to supply its products, but this can be expensive as well. This means that, in industries where the means of production represent a large amount of a business's start-up costs, the number of companies competing in the market is often relatively small.
The acquisition of machinery and other expensive equipment often represents a significantinvestment for a company. When a business is struggling, it often puts off such purchases as long as possible, since it does not make sense to spend money on equipment if the company is not around to use it. Capital spending can be a sign that a manufacturer expects growth or at least a steady demand for its products, a potentially positive economic sign. In most cases, capital goods require a substantial investment on behalf of the producer, and their purchase is usually referred to as a capital expense. These goods are important to businesses because they use these items to make functional goods for customers or to provide consumers with valuable services. As a result, they are sometimes referred to as producers' goods, production goods, or means of production.[13]
In the theory of international trade, the causes and nature of the trade of capital goods receive little attention. Trade-in capital goods is a crucial part of the dynamic relationship between international trade and development. The production and trade of capital goods, as well as consumer goods, must be introduced to trade models, and the entire analysis integrated with domesticcapital accumulation theory.
Detailed classifications of capital that have been used in various theoretical or applied uses generally respect the following division:
Financial capital, 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.
Social capital, which in private enterprise is partly captured asgoodwill orbrand value, but is a more general concept of inter-relationships between human beings having money-like value that motivates actions in a similar fashion to paid compensation.
Instructional capital, defined originally in academia as that aspect of teaching and knowledge transfer that is not inherent in individuals or social relationships but transferable. Various theories use names likeknowledge orintellectual capital to describe similar concepts but these are not strictly defined as in the academic definition and have no widely agreed accounting treatment.
Human capital, a broad term that generally includes social, instructional and individual humantalent in combination. It is used in technical economics to define "balanced growth", which is the goal of improving human capital as much as economic capital.
Public capital is a blanket term that attempts to characterize physical capital that is consideredinfrastructure and which supports production in unclear or poorly accounted ways. This encompasses the aggregate body of all government-owned assets that are used to promote private industry productivity, including highways, railways, airports, water treatment facilities, telecommunications, electric grids, energy utilities, municipal buildings, public hospitals and schools, police, fire protection, courts and still others. However, it is a problematic term insofar as many of these assets can be either publicly or privately owned.
Natural or ecological capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often calledecosystem services. Two of these (clean water and fertile soil) underpin our economy and society and make human life possible.
Separate literatures have developed to describe bothnatural capital andsocial capital. Such terms reflect a wide consensus 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.
Building on Marx, and on the theories of the sociologist and philosopherPierre Bourdieu, scholars have recently argued for the significance of "culinary capital" in the arena of food. The idea is that the production, consumption, and distribution of knowledge about food can confer power and status.[17]
Within classical economics,Adam Smith (Wealth of Nations, Book II, Chapter 1) distinguishedfixed capital fromcirculating capital. The former designated physical assets not consumed in the production of a product (e.g., machines and storage facilities), while the latter referred to physical assets consumed in the process of production (e.g., raw materials and intermediate products). For an enterprise, both were types of capital.
EconomistHenry George argued that financial instruments like stocks, bonds, mortgages, promissory notes, or other certificates for transferring wealth is not really capital, because "Theireconomic value merely represents the power of one class to appropriate the earnings of another" and "their increase or decrease does not affect the sum of wealth in the community".[18][non-primary source needed]
Some thinkers, such asWerner Sombart andMax Weber, locate the concept of capital as originating indouble-entry bookkeeping, which is thus a foundational innovation incapitalism, Sombart writing in "Medieval and Modern Commercial Enterprise" that:[19]
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.
Karl Marx adds a distinction that is often confused withDavid Ricardo's. InMarxian theory,variable capital refers to a capitalist's investment in labor-power, seen as the only source ofsurplus-value. It is called "variable" since the amount ofvalue 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 ownreplacement value to the commodities it is used to produce.
Investment orcapital 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 ascapital goods. Investment is closely related tosaving, though it is not the same. AsKeynes 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.
Austrian School economistEugen Boehm von Bawerk maintained thatcapital intensity was measured by theroundaboutness 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.
Human development theory describes human capital as being composed of distinct social, imitative and creative elements:
Social capital is the value of network trusting relationships between individuals in an economy.
Individual capital, which is inherent in persons, protected by societies, and trades labour for trust or money. Close parallel concepts are "talent", "ingenuity", "leadership", "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 calledlabour.
Instructional capital in the academic sense is clearly separate from either individual persons or social bonds between them.
This theory is the basis oftriple bottom line accounting and is further developed inecological economics,welfare economics and the various theories ofgreen economics. All of which use a particularly abstract notion of capital in which the requirement of capital being produced like durable goods is effectively removed.
TheCambridge capital controversy was a dispute between economists at Cambridge, Massachusetts based MIT and University of Cambridge in the UK about the measurement of capital. The Cambridge, UK economists, includingJoan Robinson andPiero Sraffa claimed that there is no basis for aggregating the heterogeneous objects that constitute 'capital goods.'
Political economistsJonathan Nitzan andShimshon Bichler have suggested that capital is not a productive entity, but solely financial and that capital values measure the relative power of owners over the broad social processes that bear on profits.[20][non-primary source needed]
^abSamuelson, Paul A.; Nordhaus, William D (2004).Economics. McGraw-Hill.ISBN978-0-07-287205-7.
^abMarx, Karl, Grunddragen i kritiken av den politska ekonomin i urval av Sven-Eric Liedman, 91 29 41310 9, 1971 p.66,104
^Boulding, Kenneth E."Capital and interest".Encyclopedia Britannica. RetrievedJuly 22, 2017.
^abHobday M. (1998). Product complexity, innovation, and industrial organization.Res Policy 26(6):689–710; Vianello G, Ahmed S (2008). Engineering changes during the service phase. In:Proceedings of the ASME 2008 design engineering technical conference, New York.
^abcHicks C., Earl C.F., McGovern T. (2000). An analysis of company structure and business processes in the capital goods industry in the UK.IEEE Trans Eng Manag 47(4):414–423
^Glossary of Terms, "Capital (capital goods, capital equipment)." • Deardorff's Glossary of International Economics,Capital.
^Blanchard B.S. (1997). An enhanced approach for implementing total productive maintenance in the manufacturing environment.J Qual Maint Eng 3(2):69–80;
^abJasper Veldman, Alex Alblas. (2012). Managing design variety, process variety, and engineering change: a case study of two capital good firms.Research in Engineering Design 23 (4) 269–290.
^Rosenberg, N. (1963). Capital goods, technology, and economic growth. Oxford Economic Papers, 15(3), 217-227.
^Hulten, C. R., & Wykoff, F. C. (1980). The measurement of economic depreciation. Urban Institute. Accessed at[2]
Boldizzoni, F. (2008). "4–8".Means and ends: The idea of capital in the West, 1500–1970. New York: Palgrave Macmillan.{{cite book}}: CS1 maint: publisher location (link)
