Capital (economics)

In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services.^[1] A typical example is the machinery used in a factory. At the macroeconomic level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year."^[2]

Capital is a broad economic concept representing produced assets used as inputs for further production or generating income.^[3]

What distinguishes capital goods from intermediate goods (e.g., raw materials, components, energy consumed during production) is their durability and the nature of their contribution. Capital provides a flow of productive services over multiple cycles, facilitating production processes repeatedly, rather than being immediately consumed, physically incorporated, or transformed into the final output within a single cycle. While historically often focused on its physical manifestation in physical capital goods, the modern understanding explicitly includes non-physical assets as well.^[4]

Within economics, the capital stock is generally understood as the collection of these produced assets held by an individual, company, or nation at a point in time.^[5] This stock comprises both Tangible (Physical Capital) and Intangible Capital (Non-Physical Capital).^[6] Consequently, because these assets are varied in form and function, this stock is inherently heterogeneous.^[5]

Economists consider capital (often referring implicitly to the services provided by the capital stock) as a factor of production, alongside labor and land (or natural resources). This classification originated during the classical economics period and has remained the dominant method for classification.

Capital as a factor of production represents the produced means of production that contribute to generating output, featuring prominently as an input variable in standard economic production functions such as ${\displaystyle {\displaystyle Q=f(L,K)}}$ where ${\displaystyle {\displaystyle L}}$ is a quantity of labor,  ${\displaystyle {\displaystyle K}}$ a quantity of capital and ${\displaystyle {\displaystyle Q}}$ a rate of output of commodities.^[7]

Importantly, while capital serves as a crucial input to the general production process, the creation of new capital goods (such as machinery, buildings, or software) is itself an output of specific production activities, which then enter the capital stock to replace potentially deprecated capital and facilitate future production. Typically, the producers of these capital goods are not the same firms that use them as inputs, but rather specialized firms engaged in capital goods production.

However, the precise definition of capital, how to measure it (especially in aggregate), and its exact role and productivity in the production process have been subjects of significant and long-standing debate throughout the history of economic thought.^[5]

In Marxian critique of political economy, capital is viewed as a social relation.^[8] Critical analysis of the economists portrayal of the capitalist mode of production as a transhistorical state of affairs distinguishes different forms of capital:^[8]

• constant capital, which refers to capital goods
• variable capital, which refers to labor-inputs, where the cost is "variable" based on the amount of wages and salaries paid during an employee's contract/employment,
• fictitious capital, which refers to intangible representations or abstractions of physical capital, such as stocks, bonds and securities (or "tradable paper claims to wealth")