The term "capital" can refer to a number of different concepts in the business world. While most people think of financial capital, or the money a company uses to fund operations, human capital and social capital are both important contributors to a company's overall financial health.
Key Takeaways
- Capital refers to anything that can be used for productive purposes by a firm or individual.
- Economic or financial capital entails monetary funds and investments like equity, debt, or real estate.
- Human capital and social capital augment the purely economic rationale behind capital and together better explain how business and economic growth really work.
The following are different examples of types ofcapital:
1. Financial (Economic) Capital
Financial capital is necessary in order to get a business off the ground. This type of capital comes from two sources: debt and equity. Debt capital refers to borrowed funds that must be repaid at a later date, usually with interest.
Common types of debt capital are:
- bank loans
- personal loans
- overdraft agreements
- credit card debt
Equity capital refers to funds generated by the sale of stock, either common or preferred shares. While these funds need not be repaid, investors expect a certain rate of return.
Economic capital may also take the form of cash or other assets like real estate, commodities, equipment, vehicles, and so forth which may be disposed of for cash in the market.
2. Human Capital
Human capital is a much less tangible concept, but its contribution to a company's success is no less important. Human capital refers to the skills and abilities a company's employees bring to the operation.
Though it's hard to quantify human capital in dollars, most companies know that employee performance can be greatly enhanced by continuing education classes, professional development seminars, and healthy-living programs. Many businesses choose to invest in the happiness and well-being of their employees because this investment indirectly benefits the bottom line by cultivating a happier, more efficient workforce.
3. Social Capital
Social capital is an even more intangible asset, referring to the relationships 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 their same social network, creating a cycle of mutually beneficial reciprocity. In an individual's social network, social capital is the value of the content of the relational ties between people and not a product of the members of the network in and of itself. For instance, if you have a wealthy uncle in your network, knowing he could lend you money in a pinch would be to leverage that relationship's social capital.
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 accomplishing things, both personally and professionally, because they can draw on the strengths and resources of others within their networks.
Related to social capital are other types that have been identified by sociologists and anthropologists such as symbolic capital—for instance, the honor and status earned through credentialing or promotion; and cultural capital—for instance, the capacity to recognize and appreciate high-class items like art or fine food and distinguish that from more middle-brow 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 instance, a business owner and their investors (which constitute the capitalists) jointly own the entirety of the company—its assets, property, equipment, raw materials, and final product for sale. As such, capitalists are also entitled to 100% of the profits that accrue from selling goods in the market.
Capitalists take their capital (factories, money, tools, vehicles, etc.) and hire workers, known generally as labor, to use those tools and raw materials to assemble and finish a final product, in return for a wage. Labor does not own any of the tools they use to make the equipment, none of the raw materials that go into it, and none of the final product—meaning they are also not entitled to any of the profits from the sale of the goods they make. All they get is their wage.
In reality, a modern business is assembled from owners and investors but also a layer of managers (who are well-paid labor) and the workers they supervise. All along the way, economic capital, human capital, and social capital are leveraged to increase profits and productivity.
