Where does capital come from?

Question

Sorry if this is a birds and the bees type question. Where does capital come from? And I am not talking human capital (which to my mind is skills basically). I suppose I'm taking about financial capital.

So, I think one can create personal capital by choosing not to consume, i.e. save. Also I think retained profits are another (and I was wondering perhaps the ultimate) source of capital.

If we look at the capital structure of a company then bank loans, corporate bonds and equity capital are all invested, retained profits are internally generated capital. External corporate capital, to my mind, comes from household savings.

I know there is the external sector but can we simplify the problem by excluding this? Let us consider the closed economy only.

I suppose I'm asking for a theory of capital.

I know Marxists have a view and they are welcome to give an updated view (please no re-hash of nineteenth century economic theory, bring it up to date please).

I also think that the Austrian school is critical of Keynesians because the former says the latter have no theory of capital.

Need illuminating in the capitalism facts of life. Thanks.

I wish there was a tag 'meta-economics' or 'philosophy of economics' to describe this question.

Answer 1

Material capital is any durable good that is used as a factor of production and, by virtue of being durable, it is gradually consumed in production over a maximum possible duration of a length that is determined by (i) how much a unit of capital is used and (ii) the depreciation rate of a unit of capital. Capital forms by labor and savings (which is in accordance with the labor theory of value) and/or capital forms by chance (which is in accordance with the marginal theory of value).

Imagine, for example, a solitary person that is stranded on a tropical island. To stay alive, that person must eat and, on the particular island, imagine that virtually every bit of edible biomass is a coconut. In order to be able to consume any coconuts, coconuts must be produced. Without any tools, this person must climb a palm tree to obtain a coconut and, once back on the ground, then must find a way to crack it open. If the person has obtained enough coconuts to last long enough for the person to take a day off from climbing trees then the person, by virtue of their coconut savings, can afford to leisure. Yet, perhaps the person decides not to leisure and, rather, decides to produce tools (i.e. to labor) to make coconut production easier. Perhaps the person fashions a pole out of bamboo to knock coconuts from the tree so that the person doesn't have to keep climbing trees, which reduces the amount of work required to produce coconuts and, therein, makes coconut production that much more productive by virtue of the bamboo tool, which is a form of material capital (as it can be used repeatedly to produce coconuts, which cannot be used repeatedly). As Abraham Lincoln (1861) once said, "Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed." Yet, capital also forms by chance. To break open the coconuts, the person might use a rock and, perhaps, if there were no rocks on the island that could be used to crack open coconuts then, thanks to misfortune, the person might starve.

Capital cannot be discussed without also discussing tools and technology; they are inseparable. A tool is when capital and a technology coalesce. For example, a makeshift wooden spear is a hunting tool. It is a coalescence of wooden material (capital) and a hunting technology. The wooden object of which the spear is made is material capital, which depreciates at a rate at which the wooden material’s maximum strength decreases. Knowledge about how a wooden object can be used as a spear is a hunting technology. Such technical knowhow is cognitively embodied (in some form or another) in the living body of the tool user, and it is expressed in the body’s behavior, which is behavior that determines how the material object is used (and effectively renders it a tool). This theory has support in the life sciences. (Alfred Marshall [1922] once wrote, “Economics [is] biology broadly interpreted.”)

The phenotype of an organism extends beyond the individual organism, as expressions of an individuated organism’s genes are not contained within that individual organism. Gene expression can be manifest in the behavior of its kith and even in the behavior of another species entirely. “Genes in orchids express themselves phenotypically [as] changes in bee behavior, which result in [a] transference of pollen grains containing those same genes” (Dawkins 1984). The extended phenotype of any individuated organism is the gene expression that extends beyond the embodied physiology of that individual, and it is “less purely biochemical than . . . the conventional local phenotype” (Dawkins 1984). Among the many kinds of phenomena that can be considered to be of an extended phenotype are artifacts like fabricated shelters and tools. “Caddis larvae live in houses which they themselves build out of stones [or] other material. The form of the house is determined by the behavior of the builder, which is presumably influenced by the builder’s genes” (Dawkins 1984). The genome of a builder is the energetic scaffolding of the behavior of the builder (Hoffmeyer 2014), and such behavior, which is gene expression, determines the form of what the builder builds.

The coalescence of capital and a technology as a tool is a process of semiosis. A tool is a sign of capital signifying a technology, which is a notion that comes to be more clear in reference to Ferdinand de Saussure’s semiological conception of the (dyadic) sign. The makeshift wooden spear is a sign of capital signifying a technology. The wooden spear is a hunting tool, and a tool is a sign. The wood of which the spear is made is material capital, and capital is a signifier. The knowledge about how the wooden object can be used as a spear is a hunting technology, and a technology is a signified. The wooden spear, which is a hunting tool, is a sign of wooden material capital signifying a hunting technology, and the arbitrariness of the signifier speaks to the old adage that anything can be used as a weapon. Tools are to technology are to capital as signs are to signifieds are to signifiers.

Returning to the topic of capital, material capital extends from human capital (e.g. knowledge, skills, & innovation) and financial capital extends from material capital. Financial capital is part of financial infrastructure, which is a tool by which other tools (and material capital commodities) can be obtained by supplying one's saved income (or positive profit in production) rather than one's labor. Human capital is phenotypic, which means there is a genetic component. As Ronald A. Fisher once wrote, "In organisms of all kinds the young are launched upon their careers endowed with a certain amount of biological capital derived from their parents." (Fisher 1930). Fisher considered the inheriting of household wealth by offspring from their parents to be an extension of a more generalized inheritance process stemming from the inheriting of genes by the offspring from the parents, which is a notion that foreshadowed the Dawkinsian theory of the extended phenotype. Fisher was a protégé of the political economist Leonard Darwin, a son of Charles Robert Darwin. Charles Robert Darwin notably employed the Malthusian population principle from classical political economics (see Malthus 1798) as the architecture for designing his theory of natural selection (see C. Darwin 1860) and, as Karl Marx (1867) once remarked, "Darwin has interested us in the history of nature's technology, i.e., in the formation of the organs [that] serve as instruments of production for sustaining life." Indeed, Charles Robert Darwin's grandfather, Erasmus Darwin, had written of an "Economy of Vegetation" (1791) and, prior to that, Carolus Linnaeus described all life as an "Economy of Nature" (1749). Indeed, "The ultimate subject matter of biology and economics is one, viz., the life process" (Daly 1968).

NOTE: In answering this question, I've borrowed heavily from two draft works of mine that are on my Academia.edu page (i.e. I have not plagiarized whatsoever): https://independent.academia.edu/AaronHRubin The following two links are to the two works of mine from which I'd borrowed:

https://www.academia.edu/28416634/A_Brief_Historical_Survey_of_Economic_Thought_and_the_Life_Sciences

https://www.academia.edu/29823064/LifeEconomyEnergyandSemiosis_-_working_paper.pdf

Answer 2

From a Marxist perspective, capital is a social relation. Essentially, it is money that begets more money. As such, it only becomes more or less synonim with "means of production" once it takes over production, ie, once society becomes capitalist.

In a feudal society, tools and land are not capital, albeit being means of production. The money of money lenders, on the contrary, is not a means of production, albeit being (a primitive form of) capital.

In a capitalist society, capital is in flux. A capitalist has money that he wants to invest for a profit; that money is capital. He then buys the labour power of a few workers. The money, that was capital in his hands, becomes something different - a mere fund of consumption - in the hands of those workers. Their labour power, conversely, which was not capital when it belonged to them, becomes capital in the hands of the capitalist. Now those workers produce some commodity - let's say bread. Such bread is capital in the hands of the capitalist. The capitalist then sells the bread to workers in general, against their consumption funds. In the hands of the workers, bread is no longer capital. Their money, conversely, which was merely a consumption fund in their hands, again becomes capital in the hands of the capitalist. This view avoid the classic confusion that classic economists indulge in when discussing the subject.

Can we create capital by not consuming? Normally, workers' savings are paid a small interest so that they can be put at the disposal of actual capitalists. In that sense, those savings become capital, but not the workers' own capital. Macroeconomically, if workers are saving, then the wages are too high, and will be reduced.

Retained profits are "internally generated capital"? It certainly can be described in this way. To Marxists, it is "capitalised surplus value". "External capital" comes from household savings? In part; I suppose industrial (and commercial, and agrarian) companies also place their money in banks, for protection and ease of transference, and that money becomes capital at the hands of bankers.

Do Austrians criticise Keynesians for the lack of a theory of capital? I don't know; probably. If so, they may be "right" that Keynesians lack such theory; I suspect Keynesians are "right" in dispensing with such theory - a coherent theory of capital is probably incompatible with apologetical economics.

Answer 3

For Marx Capital is a social relationship that flows between particular momentary embodiments in an attempt to realise its value in an expanded form. Capital seeks to begat more capital, above the average social rate of profit, and should one attempt to reproduce with less realised profit, capital will flow from your endeavour towards other endeavours seeking greater than average profit.

As the value form Capital generally is a commodity (except in …P…) and has both a use-value (a purported utility) and an exchange value (a purported magnitude of money it is exchangeable for). To complete flows from Money in exchange for Commodity, the use-value must appear to satisfy a need, the magnitude to be realised must be within the capacity of someone with a perceived need. (Note that a crisis of realisation is inherent: value doesn’t circulate and manifest itself until the commodity is successfully sold; not also the perceived need need not be actually met.)

The circuit of capital is any complete circuit, a reproduction scheme in the general form:

M—C…P…C’—M’…

• M being capital in the money form
• C being capital in the commodity form, as depreciating capital goods, labour power, objects of work, ancilliaries etc
• …P… being production, where capital ceases to have an exchange value and becomes the actual uses of labour, raw materials, machines etc
• C’ being a volume of commodities greater in value than C, due to exploitation
• with M’ being money of a greater value than M, and M’ becoming available as M for the next circuit

Thus, all current capital comes from either capital newly reproduced OR from primitive accumulation. The first is trivial: as a flow capital must continuously reproduce itself. Profits saved don’t count; profit which isn’t reinvested has been taken temporarily out of the capital relationship. If it was banked then it never left, it flowed into finance markets as the bank lent the money on, seeking always profit. Deferred consumption by labour has exactly the same relationship as deferred profit reinvestment. Those savings are transferred to the control of capitalists, even if they’re redrawable during starvation etc.

The second, “primitive accumulation,” is the combination of pre-capitalist classes converting their property into capital, capitalist states appropriating property directly, the enclosure of past labourers in the new form of wage slaves, and the creation of new forms of commodity. As examples in order: I could sell all my opium and buy Bank of England bonds. The UK could seize all my opium and auction it. I could addict all my peasant to opium, only available for cash, while stealing their land. I could declare information to be a commodity by act of state and sell to or tax people for knowing the price of my opium.

As regards finance markets for capital in Marx, I’d go volume 3 and Mandel.

Answer 4

According to Locke, capital originates in mans labour to what is freely given by nature. He mixes his labour with it and this becomes capital. Capital then multiplies capital. Its really just as simple as that.

Answer 5

Capital is the potential to create something of value. Humans can make things or do things for other humans by giving their time to a task of value to other humans. So, if I have a 40 hours spare per week, then I have a 40 hours worth of human capital per week. And, depending on the value of the skills I have that human capital could be worth more or less, than someone else's 40 hours. If we extend the concept of potential to create value then we have a concept of capital that is generic. If I have a £1000 I can use that to hire someone or buy a machine that has the potential to generate things of value, and so on.

Hope that helps?