Capital (from the Latin capitalis "main, basic", from the root caput - "head, unit, thing", in the meaning of counting cattle by heads is a broad term that includes physical capital (capital goods - buildings, equipment, software, stocks), financial capital (money), human capital (education, training, intelligence, skills, health). 

In macroeconomics, physical capital (capital goods, capital stocks) is considered as a factor of production, including buildings, equipment, software, stocks (current assets). 

In the international economy, the word "capital" is used both in the meaning of finance (currency and securities) and in a broader sense.

The terms "export of capital", "capital flight", "capital account", and partly "capital market" when it comes to the world capital market refer to the international economy.

The term capital market refers to the part of the financial market in which long-term money circulates, that is, money with a maturity of more than a year.

The placement of assets in production or the provision of services for the purpose of making a profit is also called capital investment, or investment.

In modern accounting, the term "capital" is not used as an independent one, but there are a number of similar indicators of financial analysis, for example, equity - the difference between the value of the company's assets and the amount of its liabilities. Usually, this value is formed at the expense of the authorized capital (contribution of the company's owners), additional capital (revaluation of property, issue income), retained earnings and reserves (formed from profits).

Capital in different economic schools

Physiocrats

François Quesnay became the founder of the physiocratic trend in political economy. He rejected the mercantilist view of profit as the result of circulation and tried to explain it by the process of production. This led to a more detailed analysis of capital and its role.

This school considered soil and nature to be the only independent factor of production. In this case, surplus value is created only in agriculture and takes the form of ground rent. The physiocrats analyzed the material components of capital, distinguishing "annual advances", "annual costs" and "primary advances", which corresponds to the modern division into fixed and circulating capital. Only capital invested in agriculture was considered productive capital. The physiocrats considered industrial capital to be "sterile", not creating a "pure product", not subject to division into "advances". Money was not included in any of the types of "advances", there was no concept of money capital. The physiocrats recognized only one function of money – a means of circulation.

In the classical and neoclassical schools of economics

Capital in the economy is resources that can be used in the production of goods or the provision of services. In classical economics, one of the three factors of production; the other two are land and labor.

In classical political economy, "capital" usually means physical (real, production) capital, i.e., the means of production used to produce goods and services: machinery, equipment, buildings, structures. In order for a thing to be considered capital, it must have the following characteristics:

it can be used in the production of other goods (it is a factor of production);
it is the result of processing (unprocessed natural resources – for example, minerals – belong to the land);
is not used entirely in the production process (which distinguishes capital from raw materials or semi-finished products).
The work of the Italian economist Piero Sraffa in the mid-1920s laid the theoretical foundations of neo-Ricardianism. His interpretation by Ricardo and the book "The Production of Goods by Means of Commodities" were of particular importance. In fact, Sraffa abandoned the "annoyingly contradictory" term capital, equating it with any product of past labor, which played an important role in the two Cambridges' controversy about capital.

Modern authors believe that capital is reflected in corporate rights (for example, in the total value of shares — capitalization). In contrast, investment is an increase in capital over a certain period, for example, for a year. This approach considers capital as a value fixed as of a certain time, and investment as an action to attract/place funds for a period, capital investment, and financial flow.

In Marxist political economy

Within the framework of Marxist political economy, capital is not just value, but self-expanding value. 

It is characteristic of classical political economy to identify any means of labor as physical capital. Marx considered this approach to be inaccurate and characterized the term "capital" as "self-expanding value". Marx did not identify capital with a certain type of property. He emphasized the importance of the complex of social relations, which he considered a necessary condition for the "self-growth" of value.

According to Marx, a means of labor can become capital (will bring value more than its own value) only when its owners directly or indirectly enter into economic relations with the owners of labor power. For example, a metal-cutting machine itself does not bring any new value to its owner. Using the machine personally by the owner does not turn the machine into capital. Even if the owner does not consume the products himself, but sells them, then part of the proceeds will be depreciation of equipment, and the second part will be the payment for the labor of the working owner of the machine, which is neither wages nor profit, but combines them in itself. A machine becomes "capital" only after hiring a worker or renting out a machine, since only in this situation is the amount received in excess of depreciation divided into the wages paid and the profit of the machine owner.

Capital arises only where the owner of the means of production and means of subsistence finds a free worker on the market as a seller of his labor power.
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Capital is not a thing, but a definite, social, production relation belonging to a certain historical formation of society, which is represented in a thing and gives this thing a specific social character. Capital is not just the sum of material and produced means of production. Capital is the means of production transformed into capital, which in themselves are as much capital as gold or silver are money in themselves.

Marx's approach assumes separate ownership of the means of production (for capitalists) and labor power (for workers). But originally, workers were usually the owners of the means of production. Therefore, the preparatory period of the initial accumulation of capital is distinguished. The author of the term is Adam Smith. Marx used the example of European countries to show that there was a forced deprivation of the means of labor of small owners, after which they became hired workers. Marx believed that such processes were necessary to create the conditions of the capitalist system. At the same time, the examples of North America and Australia did not fit into this pattern. Modern authors note that at the first stage of English industrialization, the majority of entrepreneurs were peasants, but there were also representatives of other social groups, such as merchants, landowners, Protestant communities, and not at all those who took advantage of the enclosure. Today, savings and the accumulation of investments, for example, through the banking system, are considered a factor of capital accumulation, but not violent measures.

Marx noted that there is a minimum limit to the amount of value that can be transformed into capital. Marx assumed that the minimum amount of variable capital is equal to the cost of hiring one worker for the period of the turnover cycle. The minimum amount of constant capital is equal to the cost of purchasing raw materials, materials, depreciation of equipment necessary for the hired worker for the period of the turnover cycle. The sum of these minimum sizes gives the smallest amount of value that can be converted into capital. At the same time, the amount of profit received may be significantly less than the salary of the worker. Marx assumes that the real minimum will be several times higher, so that profit not only provides a standard of living higher than that of the worker, but also allows for an increase in the amount of capital. Although this minimum depends on many factors, it is quite specific within the framework of the society, historical period, and branch of activity. In Chapter 9 of the first volume of Capital, Marx notes that some branches of production initially require a minimum of capital that is not in the hands of individuals. In this case, individuals either rely on government subsidies or pool their funds with those of others, for example, in the form of joint-stock companies.

At the Austrian School of Economics

A feature of the Austrian school of economics is the analysis of economic phenomena from the subjective position of personal consumption. Since capital is not intended for direct consumption, the representatives of the Austrian school did not have a single definition of this concept.

Böhm-Bawerk, one of the founders of the Austrian school, believed that "Capital is nothing but a set of intermediate products that are created at each stage of a long production cycle." Böhm-Bawerk distinguished between present goods (valued higher) and future goods (their value is lower). The Austrian school believes that investment is a refusal to consume now for the benefit of the future. In Böhm-Bawerk's view, when investing, the entrepreneur buys future goods at their current price, that is, at a discount. The waiting period depends on the length of the production cycle, at the end of which the goods increase their value, since they become the present good, and the entrepreneur receives income (interest on capital), which is the difference between the prices of present and future goods.

In other formulations of the Austrian school, capital is resources that are not consumed in the present, but are used to obtain a higher level of consumption in the future. At the same time, profit on capital is treated as interest income, which is:

a) payment for deferred consumption
b) payment for the risk of losing the ability to consume.
Thus, the Austrian school considers interest income to be a relatively independent phenomenon arising from the peculiarities of the prices of goods in different periods of time, and capital is considered as intermediate stages in the process of production of new goods.

Controversial Contemporary Notions of Capital

Main article: Cambridge Capital Controversy
Since the middle of the 20th century, leading economists have been debating the essence of capital and its economic role. Critical publications began in the mid-1950s and continued until the mid-1970s. The neoclassical economic theory of aggregate production and distribution has undergone critical analysis, which has led to the recognition that the theory suffers from a "misconception of composition"—we cannot extend microeconomic concepts to macroeconomics. The results of the debate do not have a consensus interpretation among economists and remain debatable.

The course of reasoning and the contradictions identified can be summarized as follows. The use of the concept of marginal return of a factor of production in marginalism assumes that it is possible to calculate the amount of each factor of production used and to analyze the effect of a change in the quantity of one of the factors on output. If we remain within the limits of marginalism and it is impossible to determine the volume of one of the factors of production, then it is impossible to determine the return not only of this factor, but also of all the others. After all, the very idea of marginal returns is based on the possibility of changing the quantity of only one factor while the quantities of all the others remain unchanged, which inevitably requires the ability to measure and quantify all the factors used. The concept of marginalism assumes that the incomes of the factors "labor" and "capital" (wages and interest rates) are determined by the market from the balance of supply and demand: at the equilibrium point, the price of the factor is equal to its marginal productivity. Thus, the marginal product of labor in a unit of commodity will be equal to the quotient of dividing the amount of wages of the workers involved by the volume of output. What is important for this discussion is that the rate of profit (the rate of interest) must be equal to the marginal product of capital.

The second important consequence arising from marginalism is that a change in the price of a factor of production will lead to a change in the use of this factor and its share in the final product. For example, a fall in wages will lead to two consequences: 1) to an increase in the rate of profit and 2) to an increase in the use of labor in production. The law of diminishing marginal return implies that a greater use of one of the factors, other things being equal, will mean a lower marginal productivity: since the firm receives less from adding another unit of fixed assets than it received from the previous one, if profits are maximized, the rate of profit must increase in order to stimulate the use of this additional unit.

Therefore, the theory of marginal productivity on the scale of macroeconomics leads to a contradiction: if the distribution of income between labor and capital has not yet occurred, then it is impossible to determine the total (monetary) value of capital, since it is calculated on the basis of knowledge of the result of the division of income (final profit) and the rate of profit. If the distribution of income has already taken place, then we can talk about the monetary value of capital, but then the theory of marginal productivity cannot be used to explain the distribution of income, since this distribution will be considered as given from the outside, and not from internal market conditions.

Piero Sraffa and Joan Robinson, whose work started the Cambridge Controversy, pointed out that there was a problem with the system of measurement. It is generally accepted that the total profit (or income from property) is defined as the rate of profit multiplied by the amount of capital. As early as 1954, Robinson criticized the concept of the production function and the neoclassical theory of income distribution. She wrote:

The production function has been and remains a powerful tool for dumbing down. A student of economic theory is made to write Q = f (L, K), where L is the quantity of labor, K is the quantity of capital, and Q is the output of goods. The student is taught to regard all workers as the same and to measure L in man-hours; he is told something about the problem of the index when choosing an indicator of output; and immediately rush to the next question in the hope that he will forget to ask in what K is measured. Before he could have such a question, he would already be a professor himself. This is how the habit of intellectual negligence is passed on from generation to generation.

The Production Function and the Theory of Capital
As Robinson argued, apart from the prices of each capital commodity, there is no other inherent element in these commodities that can be added up and the result considered as a quantity of capital. And the model under consideration requires knowing or being able to calculate the "sum of capital" even before determining prices, that is, it requires adding the number of completely disparate physical objects, for example, adding the number of trucks to the number of computers. If the arguments for the production function are taken in monetary terms, then there is a circular process: the production function determines the marginal productivity of factors, which determines the distribution of income into shares for factors, and the share of capital in income determines the amount of capital (that is, sets the initial parameter). The contradiction that arises can be resolved only by finding natural-material, homogeneous units of quantitative measurement of the result of production and its factors.

It is believed that the discussion has succeeded in showing the limitations of the aggregate production function and the impossibility of interpreting capital as an "ordinary" factor of production, the owner of which receives income in proportion to scarcity and marginal productivity, like the owners of other factors. This demonstrated the internal contradictions of the marginalist theory of distribution. It was recognized that the "factor payments" "imputed" by the market did not coincide with the value of output, and that there was a problem in the size of the share received by capital as compared to if it were really an "ordinary" factor of production. However, no alternative tools were proposed. Despite its apparent contradictions with reality, the neoclassical growth model was retained as a textbook illustration of an apparently abstract theory, despite the caveat that "illustrations of this kind can be more misleading than informative."

In accounting and financial analysis

In the theory of accounting, capital is considered as a set of material values and funds, financial investments and costs for the acquisition of rights and privileges necessary for the implementation of the economic activity of the organization.

In practice, the independent concept of capital is not used in accounting. But financial analysis considers a number of more specific indicators:

Equity is the difference between the value of a company's assets and the amount of its liabilities. The aggregate of the authorized capital, additional and reserve capital, retained earnings and other reserves (trust funds and reserves).
Attracted (borrowed) capital is liabilities in the form of credits, loans and accounts payable.
Permanent (or permanent, stable) capital is the total amount of equity capital and long-term borrowed capital.
Working (or net working capital) is the difference between current assets and current liabilities (often only accounts payable are used instead of all current liabilities, without short-term borrowed funds).

Circulation of capital

The capital involved in the economic process is in constant motion. Most often, the starting point is money capital, which is advanced for the purchase of means of production and labor power. In the process of production, economic factors interact, as a result of which a finished product is produced or a service is provided, which through the market change the commodity form again to a monetary one. The advanced money capital returns to its owner.

The purpose of this movement of capital is to make a profit (interest). But the final result in each specific case depends on many factors, both of a production nature and of a market situation. The owner of the capital may end up making a loss instead of the expected profit.

Profit

Profit is calculated as the difference between income (proceeds from the sale of goods and services) and the costs of production or acquisition and sale of these goods and services.

There are different views on the economic nature of profit.

Conjunctural theories: as a result of some external reasons, market conditions change (for example, there was an increase in demand for a product due to accidental mention by famous people), which leads to a change in revenue. But the costs have remained unchanged, there is no reason to pay the owners of the factors of production more than before. The part of the income that is not distributed among the owners of production factors is the profit or loss of the company.
Monopoly: a company makes a profit due to the violation of competitive equilibrium due to dominance in the market with elements of price dictate up to a complete monopoly.
Capital: Economists in the eighteenth and nineteenth centuries considered profit to be the surplus received by the capitalist after reimbursement of expenses, as a third component of gross income, along with wages and rent. "Profit on Capital" by A. Smith (1723-1790), N. W. Senior (1790-1864) and J. S. Mill (1806-1873) divided it into interest on invested capital, i.e., the "reward for the abstinence" of the entrepreneur from spending his own capital on current consumption; and on entrepreneurial income – the fee for managing the enterprise and bearing a certain business risk.
Surplus value: Karl Marx showed in Capital (1867) that the basis of profit is surplus value. At the same time, there is no deception or coercion. Profit is formed due to the fact that the specific commodity "labor power" is able to create new value, the amount of which exceeds the real value of labor power itself. Part of the surplus value is transformed into the form of "costs" - interest on the loan, rent, taxes, salary supplements.
Payment for the services of the entrepreneur: J.-B. Say (1767-1832) and a number of other economists reduced profit to the payment to the capitalist for the management of the enterprise, which did not differ fundamentally from the wages of workers.
Innovations: profit is the result of innovations, it is the income of a special factor of production – entrepreneurship.
Risk: profit as compensation to the entrepreneur for bearing the "burden of risk" for the success or failure of his business.
Types of capital

Historical concepts

Adam Smith distinguished between the concepts of fixed and circulating capital (An Inquiry into the Nature and Causes of the Wealth of Nations, Book II, Chapter 1):

fixed capital – used in many production cycles, transfers its value to products in parts during its service in the form of depreciation (for example, a machine);
working capital is used only in one production cycle, transfers its value to the product all at once (for example, flour when baking bread).
Karl Marx, in his analysis of surplus value, proposed to divide capital into constant and variable:

constant capital – all costs except wages; transfers its value to the result of production (immediately or in parts), but does not change its total size;
Variable capital is used to hire labor, has the form of wages, in the process of production, instead of the value of the consumed variable capital, a new value is created, the amount of which is usually greater than the consumed one.
Usually, the goal of company owners is to make a profit. According to Marx's hypothesis, profit is a form of manifestation of "surplus value". Marx believed that surplus value is created only by variable capital, and constant capital creates the conditions that extend the capitalist's ownership right to the entire product, including surplus value. Marx called the ratio of the size of constant capital to the size of variable capital the organic composition of capital. Competition and the desire to increase profits lead to an increase in the use of machines. Marx believed that the value of constant capital grows faster than the value of variable capital (labor costs), as a result of which, according to Marx's theory, there should be a tendency for the rate of profit to decrease.

In modern accounting, there is no division of the company's capital into fixed and variable.

Additional concepts

Some economists and politicians sometimes use additional gradations of the concept of "capital":

Physical (real or production) capital is a working source of income invested in business in the form of means of production: machinery, equipment, buildings, structures, land, stocks of raw materials, semi-finished and finished products used for the production of goods and services.
Money capital (monetary form of capital) is money intended for investment. Usually, physical capital is purchased with them. It should be noted that the direct possession of this money does not generate income, that is, it does not become capital automatically, without exchange. In this way, they differ from financial capital, when money retains its form, changing only the current owner. There is no concept of money capital in the financial statements.
Financial capital is a set of conditions when the monetary form of capital allows you to make a profit without formally exchanging money for goods. Financial capital continuously arises and passes into industrial and banking capital. This becomes possible with a developed banking system through a system of deposits and lending. A modern option for financial capital is venture capital, which is directed to new projects that have an increased risk of bankruptcy, but also potential profits well above average.
V. I. Lenin defined the essence of finance capital as follows: "Concentration of production; monopolies that grow out of it; the merger or merging of banks with industry is the history of the emergence of finance capital and the content of this concept". In his opinion, the emergence of finance capital is one of the main features of imperialism.

A number of authors distinguish human capital, which consists of knowledge, skills, and abilities. The term was first used by Theodore Schultz in a number of works in the late 1960s. Some economists (for example, Edward Denison) believe that in modern conditions human capital forms much more surplus value than ordinary capital.

In accounting, the concepts of physical, monetary, financial, and human capital are not used.

The National Bank of Ukraine uses regulatory capital as an indicator of banks' performance, i.e. the aggregate of the bank's own funds, calculated as the sum of fixed and additional capital minus the book value of some assets (investments in subsidiaries, other banks, affiliated companies).

Share capital

To minimize risk, various schemes of share capital are used. Initially, these were simple partnerships, later joint-stock companies appeared. With the development of the Internet, distributed share capital schemes for financing new developments, such as Kickstarter, have become widespread.