What is a capital good?

Economics Economics Questions
1

The definition usually given in introductory passages is “produced factor of production”.

But then Bob Murphy (and Rothbard too I think) makes the point that if a freak bolt of lightning hewed a spear out of a tree, and people were able to both use it and duplicate it perfectly, it would not be “produced” technically, but it would be economically no different from any other capital good. So then the definition is give: a reproducable factor of production.

But when Rothbard talks about capital goods always wearing out, he says that a produced factor of production that didn’t wear out would be for all intents and purposes land.

He also says that the improvable and degradable aspect of “land”-in-the-loose-sense is actually a capital good, and that it is the “site”-aspect of “land” (site land) that is truly land.

So what makes something a capital good? Being produced? Reproducable? Impermanent? Unimprovable? Undegradable?

2

You already mentioned that different people have different definitions. I think that as long as you use a definition more or less consistently, and not too wildly apart from the other circulating definitions, you are good.

Why the question?

3

I think it’s that it is not consumable. You can’t wear a loom but you can wear woven fabric (OK, it at least needs to be hemmed but you get the point). Anything up the chain from immediate consumption is a “factor of production” or “capital equipment”. I suspect that the “orders” of goods can get pretty damn fuzzy since it is conceivable that the same good could be used in direct consumption and, in a different way, as a factor of production.

It seems to me that the distinction between a factor of production and capital equipment is that a factor of production will eventually become or be part of a consumer good but capital equipment never will be. To use the loom example, the threads fed into the machine are a factor of production because they will eventually be a part of a consumer good but the loom itself will never be a consumer good. It exists solely for the sake of producing goods that will be consumed but is not itself consumable. I’m guessing that with enough imagination, a person could probably think up goods that could go both ways.

Clayton -

4

a factor of production will eventually become or be part of a consumer good but capital equipment never will be.

To check my understanding, how do you classify agricultural seeds (e.g., grain or potatoes)?

5

My understanding is: The important thing for capital goods is the capability to increase indirectly (not consumption) net utility. I know that’s a far reaching definition. But any narrower definition I don’t think really captures it. If it wears out or is produced, reproducable, impermanent, unimprovable or undegradable doesn’t matter.

To give examples:

  • A technical drawing does not wear out when used to manufacture something.
  • Wood from the natural woods used for any kind of fire for any production process is not produced
  • A pit of a sun flower can be a capital good if it is used to seed, or a consumption good if consumed

I can’t find an example now for a capital good which at least could not be theoratically one day be reproducable. Would a picture of Van Gogh count, since it is compulsary to be a picture of Van Gogh to be painted by Van Gogh? But how else as by looking and therefore “consuming” it you could use it? You mentioned land. Land also is not reproducable, but land is no good, is it?

6

I’ve been pondering this for some time as well. I was in the very first mises academy class, and I remember there being a lesson where Dr. Murphy talked about an apple being both capital, or a consumer good. You can throw an apple at something to knock an object out of a tree or off a ledge. You can also use it to nourish yourself. Either way, you are using it as a means to achieve something.

This has bothered me, because for some reason it sort of implies that the distinction between “consumer good” and “capital good” is just a convenience. It could be that all capital and consumer goods are just “means” and there are varying degrees of what we can consider to be capital goods and consumer goods.

We can point out instances of things that are capital goods and consumer goods, but this distinction seems to be not so clear when we discus the definitions of these words.

7

Ok, if this is already enough, then I have my example that a capital good has not to be reproducable:
I buy a Van Gogh not to look at it, but because I want to pose around with it, and therefore I like being envied. So the Van Gogh is used as a means not as an end.

This distinction between first order goods (consumption) and higher order goods (capital) is used to understand the process of production and its capital structure better to analyze implications and effects of policies. So I think that this distinction is well reasoned. It is just not so easy to draw a definite line.

8

It seems to me that the most logical way to distinguish “capital goods” from “consumption goods” is in terms of means vs. ends. Capital goods are thus goods which are used as means. Consumption goods, on the other hand, are goods which are used as ends in themselves - that is, as ultimate ends. For example, a fruit tree is a capital good if it’s being used to produce fruit to eat. In turn, the fruits produced by the tree are consumption goods.

One apparent corollary to this is that consumption goods don’t have to be used up in the process of being “consumed”. So a machine that’s simply admired for its perceived aesthetic qualities, for example, is as much of a consumption good as the fruit from the fruit tree.

Another apparent corollary, interestingly enough, is that capital goods are always used in labor. Indeed, one could say that labor is the original capital good!

9

In light of these ambiguities, I’m glad Mises correctly identified the economic concept of capital as properly a concept of calculative action strictly within the framework of a market economy, denoting the money equivalent of assets over liabillities.

That way he avoided what he labelled as these “Hairsplitting discussions” over “whether inventories of consumers’ goods held by business units are or are not real capital.”(cf p.263, HA Scholar’s edition)

10

I would call it a factor of production because it gets “used up” and is “part of” the consumer good.

Clayton -

11

I thought about it before and concluded that it is contextual.

12

I know this isn’t a technical definition by any means, but I prefer to think of capital goods in the accounting sense. From about.com,

An economic definition that doesn’t come close to matching the commercial definition lowers the utility of economic analysis of business IMO.

13

This.

Capital goods are capital goods not because of any intrinsic property but because of the way we choose to use them.

14

Isn’t that what I said too? :stuck_out_tongue:

15

It seems the matter is settled. Now it is about phrasing it with the right words. Can someone put it into a nicely sounding trochee verse? :wink:

16

In response to Autolykos,

“Capital goods are thus goods which are used as means. Consumption goods, on the other hand, are goods which are used as ends in themselves - that is, as ultimate ends.”

I figured the definition of any and all goods were a means to an end. Including consumption goods, the fruit is only valued as a means to achieve desired end. I wouldn’t consider consumption goods valued as an end in and of themselves, they are valued only as a means to directly achieve an ultimate end. I feel this is only a semantic problem or misunderstanding on my part as the rest of your conclusion I agree with.

To try and sum up I will just say in order for something to be a good, it must be used as a means to achieve desired end. Consumption goods are used directly to achieve an ultimate end (let’s say relieve hunger,) and any higher order capital good is only valued as a means to create a consumption good. Sorry to keep repeating myself I just feel it is very important to point out all goods are means.

17

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We use a tostada shell as a capital good (to hold the ingredients) and as a consumer good (to satisfy hunger)?

18

Greg, you captured the essence of what I was trying to say better than I did. :slight_smile: You’re correct - goods are always used as means. It’s just a question of whether they’re used directly for ultimate ends (consumption goods) or indirectly (capital goods).

19

A while ago, I translated Menger’s “Kapitaltheorie” into the English language. I’m not sure if these quotes provide an adequate answer to your question, but if nothing else, they will give some insight as to how the Austrian definition of capital differed from mainstream/Smithian views on capital early on.

The doctrine that only those goods that are products may become capital (as long as they are destined to serve in a productive process) is above all contradicting practical experience.
Even those theoreticians that professionally teach said doctrine will hardly reject the notion that in numerous cases, even “sheer natural objects“ may become “capital“ (under the same conditions as “products“). No practitioner in the field of business, not even an unbiased theoretician will negate that – if it is agreed upon that resources devoted to income generation are considered “capital“ – said resources (e.g. logs, fruits, mineral water etc.) are to be called “capital“ even if their physical origins necessarily make them sheer natural objects whose relative scarcity is the only reason for their status as economic goods. For example, who could claim that a naturally grown tree used to build a ship is not capital whereas a purposefully planted, equally constituted tree used for the same purpose is? That natural mineral water is not capital, but that water refined by humans is?

[…]

According to A. Smith, land property does not per se gain the status of capital. This status hinges on the amount of labor or the cost of amelioration employed on it. However, Smith does not draw the analogous conclusion with respect to other objects of nature, especially movable ones. Barring land property (more accurately: immovable goods!) and, as will be pointed out below, human labor, any object of nature becomes a “product“, that is to say “capital“, per se once human labor has been employed on it and as long as it is devoted to further production; land property, on the other hand, is said to become capital only to the extent of the amount of labor and capital used on it while remaining a “natural factor“ all along. A. Smith ex professo rejects the notion that land property may become a product as such, or even, in accordance with its entire market value, capital. Logs produced without labor and cost, naturally grown fruits, effortlessly found gems and other objects of this kind may become “products“ (per se) and “capital“ (in accordance with their market value) if labor or expenditures are spent on them afterwards; land property, however, is said to only become capital to the extent of its ameliorations, regardless of the amount of labor spent on it.

[…]

Products of labor are mostly economic goods and tend to have a market value, yet not because labor or products of labor have been used on them, but because economic actors tend to only use labor or products of labor on such goods that are likely to gain the status of economic goods and a market value. Cause and effect are as confused here as in the claim that the possession of a train ticket is the reason for the desire to travel to the chosen destination.

[…]

Sheer objects of nature, labor unrefined by capital or labor expenditures and “products devoted to further production“ are the primary factors of the physical production of goods and, as a consequence according to Smithian thought, also the primary factors of income generation – the last components into which the annual produce of a nation dissolves.
Thus, his main intention has not been to determine the real meaning of capital, but to classify products devoted to further production as a third source of income (besides sheer factors of nature and labor untouched by capital expenditures) in his theory of income sources, which eventually led him to his capital doctrine. “Capital“ described a scientific category that resulted from a theoretical examination whose aim was to analyze income, a theoretical analysis that primarily concerned itself with fundamentally different problems than the definition of the term “capital“, regardless of whether this scientific category matched the real capital phenomenon or not.

20

Interestingly, the kanji for land property in Japanese means literally “immovable assets” (fudousan, 不動産).