In the ordinary language capital means the money one invests in a business. But according to economists the capital does not mean money. They say that money is simply a medium of exchange capital may be measured in terms of money but money is not capital. Capital really consists of goods like machines, buildings, plants, raw materials etc which are invested to produce more goods. It is that part of the produced wealth which is invested for further production.
Capital is therefore wealth. But all wealth is not capital, it is only part of wealth. Only that part of wealth is capital which is invested in further production. The wealth which is directly consumed by its owner for satisfying his immediate wants is not capital. Whether an article of wealth is capital or not depends, not on any inherent quality in that article, but on the use to which it is put by its owner. Suppose a man possesses an engine or a boiler, it cannot be called capital; but if he uses it in a factory, it will certainly be called capital. Capital is a produced means of production, it is the creation of human efforts and does not include free gifts of nature like land. It is only a part of economic goods i.e. of wealth.
In short, to be capital of thing must e wealth but it must be produced wealth invested for more production.
Forms of Capital
Capital has been classified into different kinds from different standpoints.
(a) Fixed Capital: The fixed capital means that capital which exists more or less in a durable shape for a comparatively long period of time and renders repeated services till it is worn out. For instance, machines, buildings, furniture and similar other things which are not exhausted by a single use.
(b) Circulating Capital: The circulating capital means the capital which performs only a sing operation in production and changes its shape by a single use. Cotton, sugar-cane or any other raw-material comes under this class of capital.
(c) Consumption Capital: Consumption capital refers to that kind of capital which helps production indirectly and which a man uses in satisfying the wants of his workers directly. Thus when an industrialist give rice to provide his labourers with food or builds a house for residence of his labourers, then the rice and the building become consumption capital.
(d) Auxiliary or Production Capital: Production capital means capital like machines, raw-materials etc, which help the worker directly in producing goods.
(e) Sunk Capital: Sunk or specialised capital means that capital goods which are highly specialised and cannot be used generally in more than one industry. For example blast furnace.
(f) Floating Capital: Floating capital consists of those capital goods which are not specialised and can be easily withdrawn from one industry and invested in another.
Importance of Capital:
Capital plays an important part in the modern system of production. It is one of the factors of the production. Without some form of capital there can be no production.
Modern system of production is a round about process. In modern times instead of spending our labour directly in the satisfaction of wants, we first product capital goods like machines. The process requires a huge capital. In fact in the modern capitalistic system of production, capital is the chief factor of production. Modern civilization with its huge production of goods would have been impossible without the enormous growth of capital. So the modern production is known as capitalistic production and modern civilization as capitalistic civilization because of the dominant part played by capital in the modern production system.
Functions of Capital:
(i) Capital increases Productivity as a whole: The more the capital, the round about is the process of production and the round-about process of production is certainly more productive. The machine enables labourers to produce a larger volume of goods. A weaver with modern weaving machinery can produce larger quantities of cloth then he can do with his simple old fashioned weaving loom. A cultivator with the help of a tractor and other modern agricultural machines can produce larger harvests from his and than he can do with his primitive tools. Thus by increasing the total output, capital diminishes the cost of production, consequently things become cheaper.
(ii) Capital improves the efficiency of Workers: Capital also improves the efficiency of labourers and removes the strain on their muscles. It makes possible to provide labourers with up to date machines. The labourers have only to regulate machineries. The whole process of production is splitted up into so many small operations. Every worker has to do only one operation repeatedly. Thus he becomes expert in regulating the particular machinery and becomes specialised in his work. At the same time he is relieved of strain on his muscle.
(iii) Capital Saves time: Capital saves time in two ways. It saves time in the sense that it helps to produce large volume of goods in a comparatively short period. The work of expert has been replaced by specialised machines. Thus much their time is saved. Now each particular process of production is finished with in a twinkling of an eye.
(iv) Capital enables workers to get remuneration in time: Capital also enables the labourers to get their remuneration during the process of production i.e. before their products are marketed. Formerly an artisan used to make a thing from beginning to end, and he had to wait for payment till the finished products could not sold. Now he gets his wages daily, weekly or monthly. The industrialist advances wages to the workers from his capital. In short capital plays an important role in the modern economic system. Capital is necessary for the purchase of raw-materials, for the construction of factory, for the purchase of mills and machinery and for paying wages to the labourers during the long process of production.
.jpg)