In its original use the word, “capital,” referred to the number of cattle a person might own. The headcount of cattle and total assets of the owner were often synonymous in ancient Greece and Rome, so capital took on the broader meaning of “wealth” until sometime in the thirteenth century when it evolved to mean money advanced to an entrepreneur to start a business (Hodgson, 2014). Wealth created through goods and stock—assets that could be turned into cash for investment—became the primary definition of the word capital for more than 500 years.
In the eighteenth century, industrialization changed the economic structure. Labor, as well as money, became a critical factor in the ability to create wealth. Economist Adam Smith recognized the importance of labor in the creation of new products and introduced the idea that “capital” applies to people as well as things (Smith, 1776). Karl Marx expanded on the Smith’s idea, arguing that “capital is not just things or people, but a social relationship between people, established by the instrumentality of things” (Hodgson). And the concept of capital grew again—financial, human, and social.
In modern economics, capital is typically defined as an asset that you can use to produce something that is economically useful to a business or an individual. The word, then, has different meaning depending upon its context (Goodwin, 2003). The most common types of capital are:
- Financial – referring to an investment that produces something of value;
- Natural – involving the supply of natural resources in any form that plays a productive process in economic gain;
- Human – referring to individual education, skills, abilities, and labor used in some combination to produce assets for economic benefit;
- Produced (Physical) – relating to those physical assets (products or objects) created for sale by applying Human Capital to Natural Capital for economic gain;
- Social – referring to the goodwill, trust, shared values and social knowledge that, in combination, facilitates a financial benefit.
Even with these different meanings, you still might think capital is synonymous with money. And it would make sense since if you’re a founder, you are spending a lot of time raising and...