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 worrying about financial capital.
Indeed, financial capital is essential to get your business off the ground and keep it going. However, human capital is required to strengthen your weaknesses and often to produce a physical product, and your social capital is necessary to attract employees, customers, advisors, and investors (Wasserman, 2012). For those of you that manufacture a product, access to natural capital supports your ability to create produced capital which is the output that generates the revenue necessary for you and your company to thrive.
If you consider the different context in which the word capital can be used, you might begin to reconsider which type of capital should become your priority. Should you still concentrate on building financial capital first? Maybe.
Of all the capital types, it might be more critical for you to first invest in building your social capital. Some argue that social capital—the trust and goodwill you have created with others—might make it easier to raise financial capital, develop supply networks, entice customers, and find employees willing to help you accomplish your goals (Wasserman, 2012). Most successful entrepreneurs will tell you a robust network of support is critical to building sustainable ventures. Your social capital and your personal network is an essential part of your success.
Maybe the ancient Greeks and Romans were on to something when they considered capital to be synonymous with wealth. Perhaps they understood that wealth was rooted as much in the social connection as it was in financial assets. Wealth is measured in many ways, but social capital may well be a good predictor of financial wealth.
What do you think? Is social capital the key to building wealth and financial success?
Goodwin, N. R. (2003, September). Five Kinds of Capital: Useful Concepts for Sustainable Development (Working Paper No. 03-07). Retrieved September 9, 2018, from Global Development and Environment Institute: http://www.ase.tufts.edu/gdae/publications/working_papers/03-07sustainabledevelopment.PDF
Hodgson, G. M. (2014, 4 April). What is capital? Economists and socialists have changed its meaning: Should it be changed back? Cambridge Journal of Economics, 1063-1086. doi:10.1093/cje/beu013
Smith, A. (1776). Wealth of Nations (Annotated edition, 2003 ed.). Bantam Classics.
Wasserman, N. (2012). The Founders Dilemma. Princeton: Princeton University Press.