on capital

Ages ago, when somebody tried to explain to me the concept of “capital”, it was the version probably most people have heard of: a factor that creates more productive value, or maybe some good that is used in production of other goods, something along those lines. Then you get some examples of “capital” like a tool, a machine, a car… then you hear it’s contrasted with consumptive raw material, non-productive land resource, labor, etc. etc. I always thought it was completely vague and incomprehensible. What things are capital? Why is a tool capital, for example? I’ve got plenty of tools sitting around doing nothing of value most of the time, and when I use them I never produce anything.

Later I realized this was a stupid way of explaining it (or I was just stupid at the time). Capital isn’t a “thing”, it isn’t the physical object at all, it is the usage. Whether something is capital is completely determined by intention, that is, how it is intended to be used, hence the vague definition.

For example a $100 bill, depending on how it is used, can be a consumptive good, a store of value, or capital. If you burn the paper money as offering to the gods, it is a consumptive good. If you keep it under the mattress to buy stuff later, it is a store of value. If you invest it by putting it to use in a productive venture or lending it to somebody whom you expect to do so, then it becomes capital. It’s the same $100 bill, the only difference is intention…

By the way, if the person you lend the $100 to as capital burns it as offering to the gods instead, then you might feel as if you could have enjoyed such frivolous consumption yourself. I’m sure many a bondholder of previously AAA-rated companies feel that way right now, haha…

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