The concept of Capital has been on my mind a lot lately. Before I ask my question for you guys I just want to write out a thought / definition of Capital to start with.
So strictly speaking, capital in an economic sense is total liabilties minus total assets related to a given business. So if someone were to ask the business owner how much capital he had invested in his business, the man would reply back with a number denouced in money terms. And of course keeping in mind that it’s only through a market economy that the concept of capital is able to form (through the establishement of a medium of exchange and prices.)
My question is basically what people think of my explanation of capital. Not just if it’s right or wrong (please tell me if it is so) but also of the general idea. Here’s my explanation:
Capital is not just a number denominated in money. “Capital” literally represents scare resources. When an individual saves his money and accumulates Capital, he is in fact “building up” or “saving up” scare resources. These scare resources are Time and Labor. Therefore lets say you’re saving dollars in a glass jar and decide to empty it out on your bed to count it one day. You have it all spread out in front of you. What you’re looking at is not just capital accumulation but real scare factors of Time and Labor!
I’ve been pondering this a lot lately and it’s really mind blowing. What do you guys think of all this?
I believed somebody more qualified would have responded but here’s my take. In your first paragraph you’ve described what is sometimes referred to as financial capital, and in your definition really described capital goods themselves, and your reference to stored time and labour(in addition you should really add nature given resources) is very much reminiscent of Rothbard and Bohm Bawerk’s conception of capital goods as more or less unfinished consumers goods, like half baked cakes etc. The 2 concepts, despite being distinct, are related, perhaps more so than you realise. The value of the financial capital informs a businesman of the estimated market valuations of the capital goods he owns, and allows him to employ economic calculation and rationally plan and evaluate his economising conduct among the plethora of different activities and permutations within which his activity could be organised.(On this Cf. Mises in Human Action and look for the section on ‘Capital.’)
Edit: I don’t claim to be more qualified than Prateek. He made his post before I finished mine, I swear!
I’d suggest that the first explanation is not an economic understanding, but an accounting understanding. It is capital as expressed on a balance sheet.
On your explanation, it sounds like you have some sort of labor theory of value going on. Let’s be clear - capital is not all scarce resources, it is scarce resources that you intend to use as producer’s goods, not as consumer’s goods. So, right off, we have that whether or not a particular item is capital depends on your thoughts and plans. Second, I don’t see that when you’ve done this, you’ve simply built up time and labor. In the classic Crusoe case, say Crusoe has made a fishing net, which he uses to catch fish, making it a capital good. That net is not just stored up time and labor. True, he had to forgoe consumption (time) and work (labor) to make the net, but certainly the reason it is valuable is what you can accomplish with it, and so its value as capital depends on this, not on the time and labor. Would it be less valuable if he were better with his hands, and so able to make it in half the time?
Let’s look at a couple alternatives here to see what I’m getting at. Suppose he turned his time and labor, instead, to something else - something stupid and useless. By your explanation, wouldn’t it seem that the stupid thing he made would be just as much capital as the fishing net?
Now, suppose he made the net, but didn’t realize you could use it for fishing. He thought its most logical use was getting down coconuts. So I come along and realize you can fish with it. I thereby value it more highly than he does - but if I made one myself, it would take me just as much time and labor as it took him. I then offer him 5 fishes in exchange for the net, and he takes it. What’s going on?
Or, even better - he didn’t know you could use it for getting food at all. He’s using it to decorate his hut. Then for him, it is a consumer good, and has no capital value.
I guess I wasn’t trying to explain how capital is valued, but rather what it is or consists of. But I guess it would be accurate to say that defining what economic capital is requires subjective valuations.
Still, wouldn’t time and labor exist within the make-up of capital regardless if someone values it or not? We wouldn’t be able to measure it and make conclusions based on it, but couldnt we say that the capital contains within it stored up time and labor? Maybe I’m confusing accoutning capital and economic capital now…
Right, I understand but, the problem is part of what makes an item capital has to do with the valuation. If there is nothing you can do with some stuff, then it is not capital, regardless of how much time and labor is ‘stored’ within it.
The thing is, time and labor exist within the make-up of anything at all regardless of valuation. They don’t tell us whether or not it is a capital good, or a consumer good, or waste. If you spend a day digging holes, and then a day filling them in, the ground contains 2 days worth of time and labor. Is it a capital good?
Now, suppose I have some capital good. Yes, I had to either do some labor or get someone else to do some to get it (even if its a natural resource, there was labor needed to get it to me.) Yes, that took time. Yes, if I take a capital good from you, I’ve saved myself some time and labor. Those things are all true, but what do they have to do with defining capital? Sure, the idea of capital accumulation is forgone consumption for the sake of later production, and yes, forgone consumption means time, but I don’t see what meaningful thing you now want to do. If you want to go that way, why not say that capital contains within it forgone consumption?