Capital is not a factor of production but organizes the allocation and distribution of resources in capitalism

Abstract

AbstractEconomists usually define capital as a factor of production—roughly speaking, as physical equipment. This paper demonstrates the limits of this common approach and develops a meaningful alternative. In actual business life, capital refers to the monetary value of business assets, regardless of what the assets consist of, and as such, it is an important aspect of economic calculations that helps to guide entrepreneurial activities. In this sense, capital is pervasive in capitalist societies. Virtually all goods and services are produced by profit-oriented enterprises. Natural resources, intermediate goods, and finished products all appear on the balance sheets of enterprises and are consequently part of business capital. Likewise, the majority of people are employees of enterprises. They receive their pay because the employing firms consider this to be a profitable investment of their capital. Despite its extreme practical importance, this business notion of capital is ignored by nearly the entire economics profession. The paper shows how economists could profit from adopting the business notion of capital, irrespective of their ideological backgrounds.