The idea of capital is pervasive in economics.
But what is capital?
Traders in the 17th century believed it was commodity money, gold and silver. It was durable, portable and desirable.
Classical economists including Adam Smith broadened the concept to include machines.
Karl Marx defined it as a social relationship, the result of the accumulation of the value derived from exploiting labour.
Austrian and neoclassical economists broadened the definition and often subsumed land into the definition, something that classical economists didn’t.
Today, the majority of the assets of the world’s biggest companies is in a non-tangible form (tangibles assets being land, buildings, machines and stocks).
Most economic text books continue to be very imprecise. Here’s one example:
Economics by Richard Lipsey and Alec Chrystal defines capital as follows:
“The capital stock consists of all those produced goods that are used in the production of other goods and services. Factories, machines, tools, computers, roads, bridges, houses and railways are a few examples. Because capital is a produced input, it is a renewable resource though technical changes over time mean that the characteristics of capital change over time. Here we are always talking about physical capital, such as machines, and not about financial capital. Clearly, the two are connected, as firms need to raise finance in order to purchase capital equipment. But our focus is on the equipment itself and not on the way it is financed.”
Page 251 Economics, Lipsey & Chrystal, 11th edition, 2007
But does the imprecision matter? Well, if you are taking Thomas Piketty seriously, yes it does. He shows that the return on capital consistently exceeds economic growth. But to prove that, he has to have a clear definition of what capital is. He doesn’t and the figures he uses are unstable over time. What we consider to be capital today, wasn’t 100 years ago.
Austrian economists say capital is something that produces income and it can only be valued by measuring an income stream and working out its present value.
The problem here is that future income streams are uncertain. So the value of capital using an Austrian approach could vary between zero and infinity depending upon your perspective.
This issue becomes insuperably difficult when you try to value intangible capital: sources of income that have no physical characteristics. Knowledge is the key form of intangible capital in advanced economies.
But what is knowledge? How is it measured? And how to you value it?
The answer is: you can’t.
The result is that capital in advanced economies where services dominate is an increasingly redundant concept.
This is a problem for Piketty.
But it’s also a problem for all economists.
A new idea is needed.
You can find one in The myth of intangible page at the top of this site.