7.4 Capital

A farmer with land and strong arms can still grow far more with a plough; a tailor works far faster with a sewing machine. The tools, machines and equipment that help people produce, along with the money used to buy them, make up the third factor of production: capital.

What capital is

Capital = The Tools of Production Capital refers to all the human-made goods used to produce other goods and services, tools, machines, equipment, factories, buildings and infrastructure, as well as the money used to buy them. Unlike land, capital is made by people; unlike a finished product, capital is used to make more things.

The key idea is that capital is produced in order to produce. A loaf of bread is a final good you eat; the oven that bakes it is capital, it exists to help make more bread.

Physical capital and money capital

Two Senses of “Capital”

• Physical (real) capital, the actual tools, machines, equipment, factories and infrastructure used in production: a tractor, a loom, a delivery van, a computer, a road.
• Money (financial) capital, the funds a business uses to buy raw materials, pay wages and purchase physical capital. You need money to start, and to keep running, a business.

Why capital boosts production

Capital makes labour far more productive. One worker with a digging machine moves more earth than a hundred workers with bare hands. By giving people better tools, capital multiplies what the same labour can achieve, which is why economies that build up more and better capital tend to produce more.

Technology: capital’s powerful partner

The Role of Technology Technology, better methods, machines and knowledge, acts as a great helper to production. It allows a business to produce more with the same or even fewer inputs: more cloth from the same cotton, more crop from the same field, faster service from the same workers. Improvements in technology are one of the main reasons the world can produce so much more today than in the past.

Think About It A potter shaping pots by hand can make a few a day; with a potter’s wheel (capital) she makes many more; with an electric wheel and a kiln (better technology) more still. At each step, the land (clay) and the worker are the same. What changed, and why does it matter for an economy?

Don’t Confuse Capital with Money Alone A common mistake is to think capital just means money. Money is one kind of capital, but the heart of capital is the produced tools and equipment that help make other goods. A pile of cash produces nothing until it is turned into machines, materials and skilled work.

Let’s Explore Visit (in your mind) a small shop or workshop near you, a bakery, a tailor, a barber. List three items of physical capital they use. Then suggest one piece of technology that could help them produce more or faster.

We now have land, labour and capital. But who decides what to make, gathers these three together, and dares to take the risk? That is the fourth and organising factor: entrepreneurship.