A term that is familiar to all – and yet there are many different definitions, depending on the context in which it is used. In business administration, capital is understood differently than in economics. But also areas like sociology use the concept of capital. Last but not least, it is also a colloquial word that is equated with “money” or “wealth”, and also a buzzword in the criticism of society and capitalism as in the famous main work of Max Troy: “Mas Capital”.
Word origin and meaning
The word originated from Latin. Caput means head and capitalis stands for “the head concerning”. Probably the term changed already in Latin (as well as later in German) its meaning from “head” to “main” in the sense of a main calculation or summa capitalis. In Italian, as early as the 16th century, the word usage of the capitale was the number of heads of an animal herd – that is, quite literally fortune in the form of livestock.
The business administration and the capital
In business administration, capital is, in short, understood to mean everything that is on the liability side of the balance sheet of a company, ie both equity and debt as well as deferred income. These are claims to the assets of the company. On the one hand, there are differences according to the time limit and the profit entitlements – while the Company’s equity capital is available indefinitely and profits are only paid out in the case of entrepreneurial success, debt is divided into short-, medium- and long-term loans, which are generally limited in time and also in the case of loss of earnings Company must be served.
On the other hand, the company capital is differentiated into the operating capital and the so-called supplementary capital, ie the portion that is not absolutely necessary for the company’s purpose. Particularly important for corporations is the capital at the company foundation.
Not to be confused is capital with liquidity, because this refers to short-term funds with which creditors claims can be compensated. Thus, a company can become insolvent if it no longer meets its payment obligations, even if sufficient capital, for example in the form of equity, is available. Because this is usually not available at short notice. Capital in the entrepreneurial sense is thus the sum of all financial and material resources available to the company for the fulfillment of its business purpose. It does not matter whether the funds are temporary or indefinite, externally or internally funded, and how exactly they are used.
Capital in the economy
Economically, capital belongs to the so-called macroeconomic production factors. The other two are ground and work. Capital in the economic sense thus includes the stock of equipment used to produce goods or services, such as machinery and production facilities, tools, infrastructure and the like, also called capital stock. The capital is also used for investment purposes, with which the capital stock is extended or renewed.
It is irrelevant in the short term, from which source the capital comes – whether from saved funds, the company profit or the borrowing. Real capital, ie means of production, is created by means of capital. However, in a balanced economy, investments should be matched by a high savings rate covering borrowing. Real and money capital will be supplemented by the factor human capital, ie the potential of the workforce, which results from training.
Capital is thus the engine of the economy and of central importance in today’s society. It is also economically relevant that capital is globally mobile at all times – as soon as other countries / locations offer more favorable conditions (tax relief, cheaper labor or the like), capital can now be quickly transferred and invested elsewhere. As capital, like the other assets, is scarce, a capital interest is charged on its use. The shortage of capital can arise of its own accord or it can be intentionally brought about as a means of macroeconomic management.
Demarcation of capital and assets
Basically, capital and wealth are the same things, namely the financial and real property of a company. The difference is that the capital accounted for on the liabilities side deals with the origin of the funds, while the assets on the assets side are split up according to how they are used. On the liability side, the funds are subdivided into the lenders (ie equity against borrowed capital), the claims on the company profit and the availability as well as the term.
The asset side lists the funds according to their purpose, for example vehicle fleet, bank inventory, machinery. Property and capital are therefore the same size and illuminate the same facts only from two different perspectives: source of funds and use of funds.
Further definitions of the term
The definition of Max Troy, socialist economics, saw capital as the result of the exploitation of wage laborers, creating added value. Capital is invested to generate more capital, by purchasing labor. However, the resulting surplus value is only partially paid out to the workers, which increases capital. In colloquial terms, capital usually means simply greater amounts of money or positive qualities such as “his good looks are his capital”.
But regardless of economic context, there are other meanings of capital. For example, sociology knows concepts such as education capital or social capital, which refer to the education and extracurricular education as well as the personal networks of an individual. The concept of intellectual capital, for example copyrights, also plays a major role. Capital in the broader sense is therefore much more than the sum of money and real assets circulating in the economic cycle.