What is Capital?

In the economy, capital is any asset capable of generating a flow 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 needed for production, such as machinery and equipment and the facilities of a company, are called capital goods or production goods.

In current language, capital is widely used as a synonym for money. However, these terms have different meanings. Like money, it has a more immediate purpose, being applied to exchanges made in the economy. The definition of capital involves a long-term perspective, which assumes that its use is intended to generate future revenue.

In classical economic theory, capital is one of the three factors of production that form the set of elements indispensable to a productive process, alongside 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 has a direct relationship with the accumulation of capital, which can occur both through the creation of wealth and the concentration of it in the hands of some groups.

This cycle that links capital accumulation, savings, investment and 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 into cash, capital is called financial capital. The capital that is invested in order to generate profit through production is called productive capital.

A characteristic of today’s world is the ability of capital to generate more capital without having to go 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 earnings for the economy, aiming only at obtaining profits 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 out as the cause of recent economic crises. On the other hand, it can be seen by the liquidity attraction it attracts to the financial markets.

The concept of capital in the business world

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

Share 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 articles of association and can be made in cash or in assets.

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

The capital that enters the company and becomes a debt for the organization is better known as third party capital.

Starting capital

The term social capital has a similar meaning to initial capital. However, when it comes to starting capital, there is no need for a contract. The initial 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, wages and consumption bills on time.

Remuneration and cost of capital

When investing money and goods in a business, the entrepreneur expects 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 higher than the return that the entrepreneur would have had invested his money otherwise. The income that would be expected from other applications is called the opportunity cost or the cost of capital.

Human capital

The term human capital is used to refer to the knowledge, skills, experience and motivation of the people who compose in 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 employees, this know-how is reflected in a greater generation of wealth.