Essay on Capital: Meaning and Types | Business

In this essay we will discuss about:- 1. Meaning of Capital 2. Types of Capital 3. Characteristics.

Essay on the Meaning of Capital:

A business firm needs to update and increase its capital stock. Capital is the machinery, factories, tools, offices, etc., that are used to produce other goods and services. A capital goods such as a machine is different from a consumption good, because a consumption good is one which, like a chocolate bar, a skirt or an LP record, is bought for the satisfaction or enjoyment that it brings. Investment is the addition to the stock of capital.

The term ‘capital’ has different meanings in the writings of economists. To an ordinary businessperson, it means the amount of money invested in trade and business. In economics, it has a different meaning. It consists of productive assets used in production. Capital, the third agent or factor is the result of past labour and it is used to produce more goods.

Capital has, therefore been defined as ‘produced means of production’. It is a man-made resource. In a broad sense, any product of labour-and-land which is re­served for use in future production is capital. To put it more clearly, capital is that part of wealth which is not used for the purpose of consumption but is utilised in the process of production.

Tools and machinery, bullocks and ploughs, seeds and fertilizers, etc. are examples of capital. Capital refers to producers’ goods or investment goods such as machinery, equipment, buildings, tools and implement that are used in the production of goods and services.

Even in ancient times capital was created for producing food, hunting animals and for the transportation of goods. At that stage capital goods consisted of simple tools and implements. Even in the most backward economies some capitalist used. In such countries people make use of simple ploughs, axes, bows and arrows, and leather bags to carry water.

It may be pointed out, in this context, that the same article may, at one time be a consumption good and at another time capital, depending on the use to which it is put. Thus, if a doctor goes out in his motor car to example a patient he is using his car as capital. But, if he goes out for a joyride in the same car, he is using it as a consumption good. Similarly, when coal is used in a factory it is capital, but when coal is used as domestic fuel it is a consumption good.

Economists use the term capital to mean goods used for further produc­tion. In the business world, however, capital is always expressed in terms of money. If a businessperson is asked, “What is your capital?” he will always mention a sum of money. But, money is not capital, because money, by itself, cannot produce anything.

The businessperson thinks of money as capital because he can easily convert money into real resources like tools, machines and raw materials, and use these resources for the production of goods. Also, capital is measured in terms of money. So, the amount of resources used or possessed by a businessperson is conveniently expressed as a sum of money.

The Austrian economist, Von Bohm-Bawerk defined capital as “a produced means of production”. It is a means of production produced by man with physical resources. So, capital is a combination of land and man. As an agent of production, capital yields income or helps the process of an income generation Capital can be distinguished from land and labour which are not themselves produced by the economic system. Machines, tools etc. are examples of capital goods or physical assets. Capital is also used to mean financial assets known as finance capital.

Essay on the Types of Capital:

There are different types of capital. It is very difficult, if not impossible, to measure the capital stock of an economy. It is obviously not possible to add up so many factories, so many machines, so many hospitals, etc., and produce a figure for square meters of capital or tones of capital. It is also difficult, if not impossible, to add up the monetary value of the capital stock.

Physical capital may be of two types — fixed capital and circulating capital. The latter is that type of capital that is finished up in a single use and the framer renders continuous service, e.g., a sewing machine or a tractor. But, the distinction often is not very clear.

A car tyre generally renders repeated service, but for a very long journey it will become circu­lating capital. Fixed capital means durable capital like tools, machinery and factory buildings, which can be used for a long time. Things like raw materials, seeds and fuel, which can be used only once in production, are called circulating capital. Circulating capital refers to funds embodied in stocks and work-in-progress or other current assets as opposed to fixed assets. It is also called working capital.

Circulating capital may also be called revolving capital because it moves in a circle in the process of production. Thus paddy is grown from seeds and again a certain portion of the grown paddy is set aside in the form of seeds for use in the next season. The cost of circulating capital is usually recovered immediately from the sale of the goods produced.

Thus, a confectioner gets the entire cost of sugar and other raw materials from the prices of various sweets. But, fixed capital is used for producing several batches of goods. The cost or charge for fixed capital has to be spread over a number of goods.

They are not recovered at once or at a time. Fixed capital is that one which exists in a durable shape and the return to which is spread over a period of corresponding duration (e.g., tools, machine and equipment, factory build­ings, office furniture, etc.). It can be used many times in production; its utility is not exhausted with a single use.

Circulating capital, on the other hand, can be used in production once only it is exhausted with a single use. Once used in production, it changes its form and nature (e.g., raw materials like raw cotton, raw jute, seeds, etc.)

Finance capital may be classified into three categories on the basis of maturity period and rate of interest. They are short- term capital, medium- term capital and long-term capital.

Capital is often divided into concrete capital and debt capital. The former includes the stock of goods possessed by the household sector and the private business sector (such as houses, machines, land, motor car etc.) that are assets from which they expect to earn an income or derive utility Debt capital, on the other hand, denotes investible resources like equities, bonds, and government securities that are income-yielding.

Essay on the Characteristics of Capital:  

Capital as used in economics has the following chief characteristics:

1. Result of past human labour:

Capital, as distinguished from land, is the result of past labour; it is not a gift of nature.

2. Productive:

Capital is productive in the sense that labour with the help of capital can produce more than what it can produce without capital.

3. Prospective:

The owners of capital look forward to their capital for steady flow of income from it in-future.

4. Result of saving:

Capital is the result of saving; it grows out of savings which are needed for the production of capital goods.

5. Non-permanence:

Capital is not permanent; it depreciates in value through constant use-age over the years. Hence, it needs to be replen­ished and reproduced too, on a regular basis.

6. Means of production:

Capital, a produced means of production, is used for further production; it is not used for direct or immediate consumption.