Capital, Neoclassical

In the neoclassical tradition of economics, capital simply means any human-made means of production. Capital goods are products that are made to be used in the productive process. The term includes natural assets but their worth or value is given in terms of the use that might be made of them in a productive process. Thus, the capital value of a piece of land might increase as the potential for its use changes (through new techniques or legal arrangements, for example). Most firms will monitor capital consumption (i.e., the amount of capital that is used up in the productive process) and capital investment (investment in new means of production that might increase output and profits).

An important difference between capital as ordinarily understood and human capital and social capital is that the latter two cannot be bought and sold in the same way. Human capital is the value of a person within production. The amount of capital that resides in a person is usually thought to depend on the amount of education and training the person has received. The more experienced a person and the more transferable his or her skills, the higher the person's capital value and the greater the rewards he or she should be able to command in the employment market. However, wages and salaries often depend on noncapital assets such as gender, ethnicity, or contacts.

Social capital has several meanings, but in this context, it usually means the amount of value inherent in a person given his or her contacts. If one has a set of friends or relatives who can help secure employment, then one's social capital is higher than that of others lacking such contacts. [Page 87]Sometimes being a member of a particular ethnic group might bring contacts within a specific industry where that group is heavily represented. Again, education might increase an individual's capital through the networks he or she has made. Here, it might not be the precise level of education that is important but the school or university one has attended. This might create a set of networks both through contemporaries at the school and through alumni.

The more capital a person has the more powerful the person might be; he or she is able to bargain for or buy more. Similarly, we might expect the greater the capital holdings of a firm relative to its debts and commitments, the more powerful it might be in relation to other firms and organizations. However, in neoclassical economics, the term power is rarely used. In contexts where power might be used, it is replaced by the resources of the agent. In other words, power is reduced to the agent's capital in the three forms mentioned here. In that sense, within economics, capital is a measure of an agent's (a person, a firm, or other collective entity) power (or power to). Or at least, capital is the measure of what an agent can bring to any contractual or bargaining situation.

A second important meaning of the term capital is in terms of financial stocks. The stocks can provide an income through interest payments. In this sense, the capital of a firm is the initial amount of money with which it started plus the profits it has retained subsequently. This capital can be spent on future capital goods, held as balances, or used for credit. The capital market is the system through which firms gain capital in this financial sense. Firms sell shares to investors who may be paid dividends, perhaps annually, or can sell those shares for profit as the reputation of the firm increases their value. This capital appreciation is simply the increase in the value of the firm's capital.

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