Capital

Introduction
Factors of production are resources used in the production of goods and services in economics. Classical economics distinguishes between three factors of production:

Land or natural resources – naturally occurring goods such as soil and minerals that are used in the creation of products. The payment for land is rent.

Labor - human effort used in production which also includes technical and marketing expertise. The payment for labor is a wage.

Capital goods - human-made goods (or means of production) which are used in the production of other goods. These include machinery, tools and buildings. In a general sense, the payment for capital is called interest.

These were codified originally in the analyses of Adam Smith, 1776, David Ricardo, 1817, and the later contributions of Karl Marx and John Stuart Mill as part of one of the first coherent theories of production in political economy. Marx refers in Das Kapital to the three factors of production as the "holy trinity" of political economy.

In my project I am going to focus on the third factor of production: capital


Capital
Capital has a number of related meanings in economics, finance and accounting.In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. So below, the word "capital" is short-hand for "real capital" or "capital goods" or means of production.

Capital in classical economic theory
In classical economics, capital is one of 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 human-made, in contrast to "land," which refers to naturally occurring resources such as geographical locations and minerals.


It is not used up immediately in the process of production, unlike raw materials or intermediate goods.

The third part of the definition was not always used by classical economists. The classical economist David Ricardo would use the above definition for the term fixed capital while including raw materials and intermediate products are part of his circulating capital. For him, both were kinds of capital.

Karl Marx adds a distinction that is often confused with Ricardo's. In Marxian theory, variable capital refers to a capitalist's investment in labor-power, seen as the only source of surplus-value. It is called "variable" since the amount of value it can produce varies from the amount it consumes. On the other hand, constant capital refers to investment in non-human factors of production, such as plant and machinery. It is constant, in that the amount of value committed in the original investment, and the amount retrieved in the form of commodities produced, remains constant.

Investment or capital accumulation in classical economic theory is the act of producing increased capital. In order to invest, goods must be produced which are not to be immediately consumed, but instead used to produce other goods as a means of production. Investment is closely related to saving, though it is not the same. As Keynes pointed out, saving involves not spending all of income on current goods or services, while investment refers to spending on a specific type of goods, i.e., capital goods.

The Austrian economist Eugen von Böhm-Bawerk maintained that capital intensity was measured by the roundaboutness 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.

Broadening the definition of capital
Traditional economic theory generally viewed capital as physical items, such as tools, buildings and vehicles that are used in the production process. Other economists have focussed on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital.

Some theories use the terms intellectual capital or knowledge capital which lead to certain questions and controversies discussed in those articles.

In general, intellectual capital is that which produces new " intellectual property rights", and that in turn is "whatever one can get paid royalties for". Further, one can create intellectual property rights simply by taking someone else's ideas and then patenting them. So intellectual capital need not be used.

Classifications of capital that have been used in various economic theories include:
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. is a metaphor for the mineral, plant, and animal formations of the Earth's biosphere when viewed as a means of production of oxygen, water filter, erosion preventer, or provider of other natural services. It is one approach to ecosystem valuation, an alternative to the traditional view of all non-human life as passive natural resources, and to the idea of ecological health. However, human knowledge and understanding of the natural environment is never complete, and therefore the boundaries of natural capital expand or contract as knowledge is gained or lost.


Infrastructural capital refers to any physical means of production or means of protection beyond that which can be gathered or found directly in nature, i.e. beyond natural capital and that which is not considered as "fluid capital". It may include tools, clothing, shelter, irrigation systems, dams, roads, boats, ports, factories or any physical improvements made to nature.


Human capital, arising from investment in skills and education. It is a way of defining and categorizing peoples' skills and abilities as used in employment and otherwise contribute to the economy. Many early economic theories refer to it simply as labour, one of three factors of production. Human development theory recognizes it as being composed of clear and distinctive social, imitative and creative elements:


Social capital is the value of trusting relationships between individuals in an economy.


Individual capital which is inherent in persons, protected by societies, and trades labor for trust or money. In traditional economic analysis individual capital is more usually called labor.

Although it is still possible to calculate the macro economic idea of "human capital" as payments (like salary), it is rarely or not used when discussing the process of planning investment: for this it is broken down into the more specific styles, which are distinct when one considers the means of identifying them, investing in, and exploiting them. The term "human capital" may thus do more harm than good.

Capital deepening is a term used in economics to describe an economy where capital per worker is increasing, it is an increase in the capital intensity. Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor.

Capital deepening is often measured by the capital stock per labour hour. Overall, the economy will expand, and productivity per worker will increase.

Capital widening is a term used to describe the situation where capital stock is increasing at the same rate as the labour force, thus capital per worker remains constant. The economy will expand in terms of aggregate output, but productivity per worker will remain constant.

Venture capital is capital provided by outside investors for financing of new, growing or struggling businesses. Venture capital investments generally are high risk investments but offer the potential for above average returns. A venture capitalist (VC) is a person who makes such investments.

The demand for capital:
The demand for capital depends on the demand of goods, which are produced using this capital. It depends also on the productivity of capital and on the interest rate. If the productivity of capital is higher than the current interest rate, than the demand for the capital increases. If the productivity of capital is lower than the current interest rate, than the demand for the capital decreases, because there is no reason to invest. In that case it is better to put the capital in to the bank and gain interest.

Capital supply:
The most important fact to look at when discussing the supply of capital is the height of the income. Everybody who gains some income can decide what to do with it, whether to invest it, whether to spend it, or whether to put it to the bank.