Meaning of Capital: Fixed Capital, Working Capital and Human Capital

Meaning of Capital: Fixed Capital, Working Capital and Human Capital!

Meaning of Capital:

The term capital is used in economics in various senses. In ordinary language and sometimes in economics also capital is used in the sense of money.

But when we talk of capital as a factor of production, to confuse capital with money is quite wrong. Of course, money is used to purchase various factors such as raw materials, machinery, labour which help to produce goods, but money itself does not directly help in the production of goods.

The money which is available for investment and productive purposes has been called money capital or financial capital by some economists. But money capital is not the real capital. The real capital consists of machinery, tools, tube well, factories; tractors, etc., which directly assist in the production of goods.

Similarly, government securities and bonds, shares and debentures of public limited companies do not represent real capital. Securities, bonds, stocks, etc., possessed by individuals yield income to them but they cannot be called real capital because they represent only titles of ownership rather than factors of production.

Capital has been rightly defined as “produced means of production”. This definition distin­guishes capital from both land and labour because both land and labour are not produced factors. Land and labour are often considered as primary or original factors of production. But capital is not a primary or original factor; it is a produced factor of production. Capital has been produced by man by working with nature. Therefore, capital may well be defined as man-made instrument of produc­tion.

Capital thus consists of those physical goods which are produced for use in future production. Machines, tools and instruments, factories, canals, dams, transport equipment, stocks of raw mate­rials are some of the examples of capital.

All of them are produced by man to help in the production of further goods. According to Prof. Richard T. Gill, “A country s capital is its stock of produced or man-made means of production, consisting of such items as buildings, factories, machinery, tools, equipment and inventories of goods in stock.”

Fixed Capital and Working Capital:

Capital may be classified into fixed capital and working capital. Fixed Capital is durable-use producer goods which are used in production again and again till they wear out. Machinery, tools, railways tractors, factories etc., are all fixed capital.

Fixed capital does not mean fixed in location. Capital like plant, tractors, and factories are called fixed because money spent upon these durable goods, remains fixed or unrealised for a long period in contrast with the money spent on purchasing raw materials which is recovered as soon as goods made with them are sold.

Working Capital, on the other hand, are the single-use producers’ goods like raw materials, fertilizers, goods in process and fuel. They are used up in a single act of production. Moreover, money spent on them is fully recovered when goods made with them are sold in the market.

Human Capital:

We have explained above the concept of physical capital. For a long time in economics, it was thought that it was the physical capital which played a crucial role in expanding production. In recent years, a new concept of ‘human capital’ has been evolved and emphasised.

By human capital is meant the stock of people equipped with education, skills, health, etc. It has now been found that the rate of growth achieved in the developed countries cannot be wholly explained by the increases in physical capital and advances in technology.

A good part of economic growth has occurred due to the accumulation of human capital. It has now been realised that human capital formation is as important in increasing production and productivity as the physical capital formation. An educated, trained and skilled man is much more productive than an uneducated, untrained, and unskilled.

Likewise, a person with good health contributes to production to a greater degree than the person with frail and poor health. Since investment in education, skill and health adds greatly to the produc­tivity of men, investment in human capital has also been called investment in men, or investment in human beings.

One of the major tasks confronting the developing countries is the building of human capital. There is a growing realisation that a rapid rate of ‘human capital formation’ is as important a pre-condition of economic growth as the rapid rate of ‘physical capital formation’.