Associate Professor, PhD, Chernenko N.O.

National Technical University of Ukraine “Kyiv Polytechnic Institute”, Ukraine

UNDERSTANDING “CAPITAL” IN MODERN ECONOMIC THEORY

There is no concept which can be used so frequently and with so much ease and ambiguity in economic theory and enterprise practice as the word “Capital”.

Define 1: “Capital” is understood as everything which brings to fruition income or is capable of producing income. This term is used in context of equipment assets of a factory or lump sum of money or a work of art, or the intellectual talent of an engineer etc. There is a common denominator in all the examples stated above.

Define 2: “capital” in its broadest definition is anything that is produced that will be used to produce other valuable goods or services over time.

Building capital means trading present benefits for future ones. In a modern society, resources used to produce capital goods could have been used to produce consumer goods. Heavy industrial machinery does not directly satisfy the wants of anyone, but producing it requires resources that could instead have gone into producing food, clothing, toys, or golf clubs.

Capital is everywhere. As it contributes to the production process, this capital yields valuable services through time. Capital need not be tangible. When you spend time and resources developing skills or getting an education, you are investing in human capital — your own human capital — that will continue to exist and yield benefits to you for years to come.

The process of using resources to produce new capital is called investment. A wise investment in capital is one that yields future benefits that are more valuable than the present cost.

Capital is able to generate future benefits in excess of cost by increasing the productivity of labor. A person who has to dig a hole can dig a bigger hole with a shovel than without a shovel. A computer can do in several seconds what it took hundreds of bookkeepers hours to do 15 years ago. This increased productivity makes it less costly to produce products. Because resources are scarce, the opportunity cost of every investment in capital is forgone present consumption.

Define 3: “Capital” is the grease or inducement or initiative that helps to increase profit of sustained manufacturing operations. K. Marx [4] defined capital as the cost which produces additional assets or profits. It wouldn`t be any object against his definition if it considers as a profit or percent. To manufacture goods without making profits is impossible. Therefore capital really represents self-increasing costs.

Many American economists (D. Hyman, P. Samuelson, etc.) define “capital” as the resource of longest use that produces in manufacturing activities the optimum quantity of goods and services [3,5,6].

Physically “capital” can viewed or conceived as a car, a building, a construction site, a transfer device, an inventory of raw materials or as human capital. A number of economists consider “capital” as money or universal goods of the business world [1,2].

In scientific understanding there are profound differences between “money as money” and “money as capital”.

“Money as Money”. Money, as money rather than as a commodity, is wanted not for its own sake but for the things it will buy. We do not wish to use up money directly — rather we use it by getting rid of it. Even when we choose to use it by keeping it, its value comes from the fact that we can spend it later on.

Money is an artificial social convention. If for any reason a substance begins to be used as money, people will begin to value it. The use of paper currency has become widespread because it is a convenient medium of exchange. Currency is easily carried and stored. The fact that private individuals cannot legally create money keeps it scarce. Given this limitation in supply, modern currencies have value. They can buy things, independently of any gold, silver, or government backing.

From the onset of a transaction, money handles an exchange of goods, carried out via a prevailing form of currency. The owner of the goods sells them for the sake of acquisition of other goods and/or services. The exchange is made using the formula: G - M - G. Money performs the role of an intermediary or a proxy material. Money will continue to perform this role as long as a mutually beneficial transaction exists. In such an exchange both parties receive a reward: each of owners of the goods is able to get rid of excessive inventory and is able to use the money from the proceeds to identify and purchase other goods and services from the marketplace.

Considerable sums of money can be amassed by many entrepreneurs, businessmen, corporations, conglomerates etc. as long as this mutually beneficial commodity transaction or model exists. It is worth noting that Purchase and Sale certificates may not always balance or synchronize.

“Money as Capital”. Money becomes a capital when it is used as start-up money for the sole purpose of making a profit. The net capital in hand after the transaction or activity is always greater than the start-up capital. The outwardly general formula of capital movement differs from the formula of the commodity turnover. Already is not money but a goods appear in position of the intermediary: M – G – M` (has bought - has sold - has earned) and shows that there was an escalation of the initial capital and hence the goal of the transaction is accomplished.

The “capital” augmentation occurs because of the price difference in the marketplace.

Reference literature:

1. Brue, Stanley L. The evolution of economic thought. 6^th ed. Fort Worth: Dryden Press, 2000. - 568 p.

2. Dornbush, Rudiger. Keys to prosperity: free markets, sound money, and a bit of luck. Cambridge, Mass: MIT Press. 2000. - 357 p.

3. Hyman, D. Modern microeconomics: analysis and Applications. North Carolina State University. Second edition. – USA. - 1973-1979. Homewood, Ill: Richard D. Irwin, Inc. - 1992

4. Marx, K. Capital. A Critique of Political Economy .Volume I. Book One: The Process of Production of Capital. – German. – 1867. – 629 P.

5. Samuelson, P. Aspects of Public Expenditure Theories // Review of Econimics and Statistics. – 1958. – Nowember. Vol. XL. – P. 332-338.

6. Samuelson, Paul Anthony, Nordhaus, William D., and Mandel, Michael J. Economics. 15ed. New York: McGraw-Hill, 1995. – 789 P.