capital, in economics, the elements of production from which an income is derived, usually defined with the exception of land and labor. As originally used in business, capital denoted interest-bearing money. In classical economic theory it was one of the three major factors of production, along with land and labor. In the broad sense, capital consists of such paper as stocks and bonds (financial capital), which is used to acquire the physical capital of tools, machines, stores of merchandise, houses, means of transportation—any materials used to extract, transport, create, or alter goods. Marketable intangibles, such as credits, goodwill, promises, patents, and franchises, are also included by some economists. Capital goods are those that form a nation's productive capacity, as opposed to consumer goods, which are bought for personal or household use. A distinction is also made between capital stocks, or circulating capital (such as raw materials, goods in process, finished goods, and sometimes wages), and capital instruments, or fixed capital (such as machines, tools, railways, and factories). Capital may be classed as specialized, such as railway equipment, or unspecialized, such as lumber or other raw materials having many uses. Economic theorists believe that capital arose out of the need to use the world's limited natural materials efficiently. The scarcity of the earth's resources necessitates the creation of materials (capital) that can act on the resources in such a way as to make more goods available to society than would normally exist. Capital goods can be considered a form of deferred consumption, because they produce goods for future consumption, but are not themselves consumable items. The expansion of capital formation—the flow of savings into the creation of new productive facilities—is often the most important target of economic planning.
See I. Fisher, The Nature of Capital and Income (1906); F. A. von Hayek, The Pure Theory of Capital (1941, repr. 1975); S. S. Kuznets, Capital in the American Economy (1961, repr. 1975); J. Robinson, Accumulation of Capital (3d ed. 1985); S. Ahmad, Capital in Economic Theory (1991).
The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2012, Columbia University Press. All rights reserved.