Wednesday, March 11, 2015

What on Earth is Capital? (i)

There are many possible answers to the question above. Here we’ll be concerned with three of them.

One answer (all the rage among the economic fashionistas) is that capital is whatever they say. We’ve already discussed this and there’s no point repeating that.

According to the Penguin Dictionary of Economics, the second answer, which virtually every economics student learns during first year at uni, goes something like:
"Capital. 1 Assets which are capable of generating income and which have themselves been produced. Capital is one of the four FACTORS OF PRODUCTION, and consists of the machines, plant and buildings that make production possible, but excludes raw materials, LAND and LABOUR. (…)
"2. In more general usage, any asset or stock of assets - financial or physical - capable of generating income."
That is -- it seems -- a deceptively clear and simple definition. It involves the twice mentioned notions of (1) asset (presupposing private property, with all the concomitant rights conferred to its proprietor: the rights to “consume, alter, share, redefine, rent, mortgage, pawn, sell, exchange, transfer, give away or destroy it, or to exclude others from doing these things”, here); and (2) that it is capable of generating income (presupposing a commercial usage of the assets).

Let’s illustrate that: John Travolta owns a Boeing 707-138. Question: Is that plane a capital good?

Answer: It depends. Obviously, the plane is his private property (he can use, sell, re-paint, burn, or give her away). The plane is in his balance sheet: it’s Travolta’s asset. In that sense, that Boeing is no different from any other asset, like Travolta’s fridge or watch.

That, however, is not enough to identify that specific plane as an item of capital. To have the label “capital” attached to it, the plane must be employed commercially to produce a stream of income: commercial usage plus income are the glue making the label stick. Apparently Travolta does not use his plane commercially. Lacking that, the label “capital” falls, even if the label “asset” remains.

The same applies to a car, for instance: Cars of the same make and model are used commercially as taxis to produce income (capital goods), or as family cars. I could extend the list, but I’m sure you get the idea.

In fact, this should be no news. Thomas Piketty’s general inclusion of housing as "capital" in his “Capital in the Twenty-First Century”, for instance, was the target of that criticism from the get go. James K.Galbraith:
“First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not.”

There are subtleties even in the superficially straightforward mainstream definition of capital. Capital is not a thing, even under that definition: there’s a dimension to capital transcending the economic and heading into the ethical, legal, and political. One cannot see a spanner and conclude with certainty that it’s a capital good.

That often mainstream economists (and, just as often, their critics) ignore these subtleties is a different matter. 

This brings us to the fearsome Marxist answer to the opening question. We'll leave that for a future post.

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