Essay on Capital : Meaning and Characteristics

In this essay we will discuss about Capital in Economics. After reading this essay you will learn about: 1. Meaning of Capital 2. Characteristics of Capital.

Essay on the Meaning of Capital:

Capital is that part of wealth which can be used for further production of wealth. According to Marshall, “Capital consists of all kinds of wealth, other than free gifts of nature, which yield income.” Therefore, every type of wealth other than land which helps in further production of income is called capital. In this way, money, machine, factories, etc. are included in capital provided they are used in production.

For instance, if a man has an income of Rs 10,000 per month and out of it he invests Rs 6,000 in a business, this amount of Rs 6000 is called capital. In the same way, plough, tractor and other agricultural implements of farmers are also capital. The house in which a man resides is his wealth and the house which is given on rent is his capital.

Capital and Money:

All money is not capital. Money includes currency notes and coins which are circulated or minted by the government. But capital includes all those wealth’s such as machines, tools, buildings, etc. which are known as capital goods. Therefore, all the money is not capital. Only that part of money which is used for production of more income is called capital.

Capital and Wealth:

There is difference between capital and wealth. Only that part of wealth which is used for further production is called capital. Therefore, all capital is wealth but all wealth is not capital. Chairs and cots used in the home are wealth, but if these are given on rent they are called capital.

Capital and Land:

Like land, capital is also an essential factor of production but there is difference between capital and land. Capital is produced by man. He makes it with certain efforts. But the supply of land is a free gift of nature. Man cannot produce land. By way of production, supply of capital can be increased but not that of land. Land is immobile, while capital is mobile, because its supply can be easily changed.

Capital and Income:

There is a considerable difference between capital and income. Capital is that portion of wealth which is used for further production of income. Thus, income is the result of the use of capital. So capital is a stock, whereas the income is a flow produced from capital.

Real Capital and Financial Capital:

Real or national capital is the stock of producers’ goods such as machines, raw materials, factories, railways, buses, ships, houses, etc. which are used for the production of goods and services. It refers to man-made and reproducible resources which help in generating output and income.

Financial capital consists of all income earning financial assets such as holdings of money stocks, bonds, deeds or mortgages, etc. These are items of personal wealth. They are a claim on other individuals. The same is the case with bank deposits.

The rupees we spend or hold in our accounts are part of our personal wealth. They are a claim on goods and services, as in the case of stocks and bonds. Money holdings are financial capital and not real capital. Since financial capital is the claim on assets, it does not generate output and income.

Essay on the Characteristics of Capital:

Capital has its own peculiarities which distinguish it from other factors of production.

Capital possesses the following main characteristics:

1. Man Produces Capital:

Capital is that wealth which is used in the production of goods. Capital is the result of human labour. Thus, every type of capital such as roads, machines, buildings and factories etc. are produced by man. It is a produced factor of production.

2. Capital is a Passive Factor of Production:

Capital cannot produce without the help of the active services of labour. To produce with machines, labour is required. Thus, labour is an active, whereas capital is a passive factor of production. Capital on its own cannot produce anything until labour works on it.

3. Capital is a Produced Means of Production:

The composition or supply of capital is not automatic, but it is produced with the joint efforts of labour and land. Therefore, capital is a produced means of production.

4. Capital is Variable:

The total supply of land cannot be changed, whereas the supply of capital can be increased or decreased. If the residents of a country produce more or save more from their income, and these savings are invested in factories or capital goods, it increases the supply of capital.

5. Capital is more Mobile than other Factors of Production:

Of all the factors of production, capital is the most mobile. Land is perfectly immobile. Labour and entrepreneur also lack mobility. Capital can be easily transported from one place to another.

6. Capital Depreciates:

As we go on using capital, the value of capital goes on depreciating. When machines are used continuously for some time, these depreciate and their value falls.

7. Capital is Stored-up Labour:

Scholars like Marx admit that capital is stored-up labour. By putting in his labour man earns wealth. A part of this wealth is spent on consumption goods and the rest of it is saved. When saving is invested, it becomes capital. In other words, capital is the result of accumulation of savings of a man. Therefore, capital is stored-up labour.

8. Capital is Destructible:

All capital goods are destructible and are not permanent. Because of the continuous use, machines and tools become useless with the passage of time.