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Capital

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Capital is that part of our wealth that is employed in the production of goods. The definition of certain types of wealth, measured in monetary terms, as capital is merely an accounting convention, for the purposes of economic calculation.

Capital has no inate properties. It is not a different type of thing to other types of good or wealth. Something is capital simply by virtue of being defined as capital.

The role of capital in the calculation of economic progress

Capital is depleted in production, whether as an input to the process, or through wear-and-tear. If the value of the production output is not sufficient to replace and repair the capital as it is used, we are consuming our capital and reducing our wealth. If the value of the production output is more than sufficient to replace and repair the capital as it is used, the excess income can be spent, saved or invested. Some of it will contribute to public expenditure through taxation. If the market is competitive, a sufficient excess will result in a reduction in costs to consumers. Whichever, we have increased our wealth.

Capital must have a monetary value

Capital that cannot, objectively and to a reasonable degree of accuracy, be quantified in monetary terms is meaningless. The point of capital is to assist in economic calculation.

Capital requires property rights

As the purpose of capital is for use in production of goods, the person employing the capital must have the right to use it - must have property rights in it. It is nonsensical to speak of investment in capital, if the investment does not give the investor the necessary property rights in that capital.

The utility of capital

Things are not capital simply because they are capable of being used for production, nor because they are a component of the environment in which production takes place. Goods are defined as capital, for the purposes of economic calculation, if they are actually (not potentially) and directly (not ancillarily) involved in production.

Expanding the scope of the term "capital" to include anything related potentially or periperally to production would undermine the utility of the concept for the purposes of economic calculation. Almost everything would fall within the concept, and calculation would be both impossibly complex and useless as a guide to investment if achieved.

Natural, human and social capital

The concept of capital has been expanded in recent years to include concepts that are neither appropriate nor useful to describe as capital, including natural, human and social "capital". They are missing one or more (usually more) of the above essential characteristics of capital. This categorical error has led to much confusion and woolly thinking, with harmful offshoots.

Corporate Social Responsibility and the "triple bottom line"

An offshoot of the woolly thinking that expanded the concept of capital to include aspects that are not capital has been the development of the "triple bottom line" concept under the banner of Corporate Social Responsibility (CSR). What is one supposed to do with three bottom lines? If the first bottom line implies one course of action, the second another, and the third yet another, which action should be taken? To make that decision, one needs to find a way to make the different bottom lines commensurable (e.g. measured in the same units, which inevitably must be monetary units). But if they are commensurable, why have three bottom lines?

In practice, of course, they are not commensurable, because non-capital types of "capital" like natural capital and social capital are not amenable to accurate and objective monetary valuation. If one wants to use the tools of economic calculation to help assess organisations' performance in areas outside those normally subjected to financial measurement, one needs first to find a way to assign a reasonable monetary value to them, to bring them into the realm of financial assessment, by modifying the institutional framework to "internalize the externalities". These aspects then become simply another item on the organisations' accounts, and their contribution to overall performance can be assessed on the single bottom line.

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Dr. Radut Consulting