Not Misunderstanding Capital

By: Bikal Dhungel

These days, it is not uncommon to hear a lot about Capital, Capitalism etc. Many people call themselves anti-capitalists and even blame capitalism for the ills of the society. I am not sure if they have fully understood the meaning of Capital. I guess not. Neither the large majority of the general public. If the had understood, I think such a big generalised critic on Capital would not be there. The aim of this article is the explain what is capital in an informal way.

First, we need to be sure that Capital has few basic characteristics, it is productive, it is produced, it earns a return, its use is limited and it wears out, meaning that at some point, it cannot be used anymore. These characteristics I took from various sources. So, from this definition, we can derive that, Capital is for example the machines that we use in industries which produce something and whose use is limited. But also the building where the industry is located is a capital because it also contributes to generate income. Similarly, the tools that are available there, for example calculators, computers, and other devices can also be put under Capital. The more capital we have, the more production we can generate. For example, consider a farmer in a poor rural setting. He harvests the crops by himself, then bring it home, hits it against the stone so that the grains fall from the plant, then collects it, filters it, store it and finally he can consume it. In this case, he had no physical capital. Now consider a farmer in the US. He has a big tractor, a Capital, which harvests the crop , puts it in truck and the truck brings this in the store immediately and can be packed into sacks using other machines. He could perform all these tasks within few hours whereas the poor farmer in poor setting needs days or weeks to do so. From here, lets conclude that, better capital generates better productivity. This also explains why some countries are rich and why others are poor. Rich countries have higher rate of Capital per worker than poor countries. Only, one thing what we should remember is, this process of producing capital is also called investment.

Till now, we dealt about Physical Capital. But there is also Human Capital which is not material. The machine you used is a physical capital and your skill or knowledge about how to use that machine is human capital. The Human Capital of a doctor is his skills to perform an operation whereas the capital of a teacher is his skills to teach or his knowledge about a particular subject.

In today's world, the most important factors of production are labour and capital, which includes both physical and human capital. In the 18^th century for example, it was not labour and capital but labour and land because all people had was their land to sustain their life. But things are changing now. Because of the advanced technologies we have today, land is not as important as in the past. We have higher crop yields, we know better farming techniques and we can manipulate the crops with the help of bio-technology to use or consume according to our convenience. Also less than 1% of the workforce can work in agriculture to feed the whole country, at least in developed countries. Others are involved in service sector or industries. As fewer people work in agriculture and a large number can involve in other activities, innovation has increased because people do research in other areas. As a result, in the last 200 years, there were so many innovative inventions like never before.

So, Capital is good for everybody. The general belief among the economists is that, the accumulation of Capital is a key to economic growth. This theory was brought forward by W. Arthur Lewis after World War II who later won a Nobel Prize in Economics. He explains, the key to growth is Saving, which enables the economy to acquire Capital. The output from this capital can again be used to generate more capital. As the capital accumulation accelerates, we have growth. Growth in turn generates employment and employment generates income to the people, tax income to the government and the overall welfare will increase which we call the increase in human welfare.

However, we should also note that, accumulation of capital alone might not generate economic growth. At least, this was not the case in many developing countries. Other factors, such as education, inclusive participation in the economy where no one will be discriminated based on ethnic origin or gender or anything, technological change matter and most importantly, the economical and governmental institution. All these factors are separate area of specialization. For example, another Nobel Prize winning Economist Joseph Stiglitz has published influential papers about institutional economics and how and why institutions matter. In today's context, a combination of all these factors might be important to achieve economic growth. But, within this context, we should not ignore the importance of Capital. Being against Capital means telling not to use machines for production, telling not to use his skills to a doctor or lawyer or teacher. The argument that anti-capitalists make, that Capitalism has caused inequality is vague. Of course there is inequality in the society but is capitalism really responsible for that ? Suppose I have a brother who is unemployed, like me. So, both of us are equal. No problem so far. But If I study hard and became a doctor and earn half a million per year and my brother is still unemployed, this has caused a huge inequality. But is this a problem ? I could give some portion of my income to my brother and at last, we both are better off. But anti-capitalists tell that Capitalism is fault, which means, the skill I acquired as a doctor is faulty.

In a country, if such form of inequality exists, this might be because of unfair tax system, either income tax or property tax. Inequality also might exist because the government is discriminatory, i.e. It discriminates the ethnic minority or women etc. So, for every problem, we should see what the causes are, not putting the whole thing as verdict. This would mean that a football player plays foul, like Uruguay striker Suarez, and you campaign that Football has caused injury, so it should be banned.