What is capital?

In the economy, capital is any asset capable of generating a stream of income over time through its application in production. This concept includes not only money itself, but also financial investments, stocks and assets that can be applied to generate wealth, among others.

The set of durable goods necessary for production, such as machinery and equipment and the facilities of a company, are called capital goods or production goods.

In today’s parlance, capital is widely used as a synonym for money. However, these terms have different meanings. Like money, it has a more immediate purpose, which applies to exchanges made in the economy. The definition of capital implies a long-term perspective, which assumes that its use is intended to generate future income.

In classical economic theory, capital is one of the three factors of production that form the set of essential elements for a productive process, together with land and labor.

However, although it is a factor of production, capital is also a product of the economy. This is because it is the result of investments that, in turn, are generated from savings.

The ability to form savings to invest is directly related to the accumulation of capital, which can occur both through the creation of wealth and its concentration in the hands of some groups.

This cycle that links the accumulation of capital, saving, investment and the generation of more capital is the basis of the capitalist economic system.

Types of capital

When capital is accumulated in the form of bonds, bonds, and other securities that can be quickly converted to cash, the capital is called finance capital. Capital that is invested to generate profit through production is called productive capital.

A feature of the world today is the ability of capital to generate more capital without going through the production process. This occurs through the payment of interest or other forms of remuneration to the holders of these assets.

When capital is invested without profit for the economy, with the aim of making a profit quickly in the financial market, it is known as speculative capital.

The lack of control over this type of capital, which has nothing to do with production, is often pointed to as the cause of recent economic crises. On the other hand, it can be seen by the attraction of liquidity that attracts the financial markets.

The concept of capital in the business world.

The word capital appears frequently in corporate vocabulary. In this context, the term can also be interpreted as resources capable of generating wealth when applied to production. However, the expressions that are heard in companies can have specific meanings. Learn about some of these common uses:

Social capital

Social capital is the initial investment made by the partners or shareholders of a company to put it into operation. This investment is recorded in the bylaws and can be made in cash or in assets.

The share capital corresponds to everything that the partners invested. For example, in the facilities and maintenance activities in the first months of the company, before it began to make profit and support.

Capital that enters the business and becomes a debt to the organization is better known as third-party capital.

Initial capital

The term equity capital has a similar meaning to initial capital. However, when it comes to startup capital, there is no need for a contract. Start-up capital is the investment made to start any activity, including small businesses in the informal economy.

Working capital

Working capital corresponds to the resources necessary for a company to maintain its activity. The term corresponds to cash and other highly liquid assets, which can be used to pay suppliers, salaries and consumer bills on time.

Compensation and cost of capital.

By investing money and assets in a business, the entrepreneur hopes to make a profit. In this sense, the return on capital is the return generated by the investment.

For the business to have been advantageous, it is necessary that the return on capital is greater than the return that the entrepreneur would have invested his money in another way. The income that would be expected from other applications is called the opportunity cost or cost of capital.

Human capital

The term human capital is used to refer to the knowledge, skills, experience and motivation of the people who make up an organization. That is, a set of intangible assets related to the training of its workforce.

This set of qualities is called capital because, when applied to the company through the work of the employees, this  knowledge  is reflected in a greater generation of wealth.