The term “capital” can refer to several different concepts in the business world. While most people think of financial capital or the money that a business uses to finance its operations, human capital and social capital make an important contribution to the overall financial health of a business.
- Capital refers to everything that a company or an individual can use for productive purposes.
- Economic or financial capital involves funds and monetary investments such as stocks, debt, or real estate.
- Human capital and social capital augment the purely economic logic behind capital and together they better explain how business and economic growth actually work.
The following are different examples of types of capital:
1. Financial (economic) capital
Financial capital is necessary for a business to take off. This type of capital comes from two sources: debt and equity. Debt principal refers to borrowed funds that must be repaid at a later date, usually with interest.
Common types of debt capital are:
The capital stock refers to the funds generated by the sale of shares, whether ordinary or preferred shares. While these funds do not need to be repaid, investors expect a certain rate of return.
Economic capital can also take the form of cash or other assets such as real estate, commodities, equipment, vehicles, etc., which can be disposed of for cash on the market.
2. Human capital
Human capital is a much less tangible concept, but its contribution to the success of a company is no less important. Human capital refers to the skills and abilities that a company’s employees bring to the operation.
Although it is difficult to quantify human capital in dollars, most companies know that employee performance can be greatly improved with continuing education classes, professional development seminars, and healthy living programs. Many companies choose to invest in the happiness and well-being of their employees because this investment indirectly benefits the bottom line by cultivating a happier and more efficient workforce.
3. Share capital
Social capital is an even more intangible asset, referring to the relationships that people have with each other and the desire they have to do things for and with others within their social networks. People tend to do things to help and encourage those in the same social network, creating a mutually beneficial cycle of reciprocity. In an individual’s social network, social capital is the content value of the relational links between people and not a product of the members of the network itself. For example, if you have a rich uncle in your network, knowing that he could lend you money in a pinch would be to take advantage of the social capital of that relationship.
In business, a person with high social capital knows many influential people within their industry and may have more opportunities for advancement and development than someone whose social circle is small. People with high social capital may also have an easier time achieving things, both personally and professionally, because they can leverage the strengths and resources of other people within their networks.
In relation to social capital there are other types that have been identified by sociologists and anthropologists such as: symbolic capital, for example, honor and status acquired through accreditation or promotion; and cultural capital, for example, the ability to recognize and appreciate upper-class items such as art or good food and distinguish them from the most mediocre consumption.
Capital and capitalism
While we have listed several general forms of capital here, it says very little about what the economic system of capitalism actually is. In its most basic form, capitalism requires the separation of capital from the labor that uses it in the production process. For example, a business owner and his investors (who constitute the capitalists) jointly own the entire business: its assets, property, equipment, raw materials, and final product for sale. As such, capitalists are also entitled to 100% of the profits that are made from the sale of goods on the market.
Capitalists take their capital (factories, money, tools, vehicles, etc.) and hire workers, generally known as labor, to use those tools and raw materials to assemble and finish a final product, in exchange for a wage. The labor force does not own any of the tools it uses to manufacture the equipment, none of the raw materials that make it up, or the final product, which means that it is not entitled to any of the proceeds from the sale of the goods to be manufactured. . All they get is their salary.
In reality, a modern company is made up of owners and investors, but also a layer of managers (who are well-paid labor) and the workers they supervise. Along the way, economic capital, human capital, and social capital are harnessed to increase profits and productivity.