Reading the discussions about Piketty’s book Capital in the 21st century there seems to be considerable confusion about the concept ‘capital’, for three reasons. First, the book is about 200+ years of ‘capital’. In this period, the (legal, cultural) concept of ‘capital’ changed which means that, to understand the book, a ‘historical’, non-homogenous understanding of capital is needed. Second, There also seem to be a habit among readers to mix up the concept of ‘capital’ of the asset side of the balance sheet (i.e. physical capital) and the concept of ‘capital’ of the liability side of the balance sheet (financial capital, i.e. all kinds of, often tradeable, ownership claims regarding physical capital, ‘physical’ capital nowadays increasingly consisting of intangibles). This confusion is part of the state of economics, see for instance this Wikepedia entry about the marginal productivity of capital. Third, there is confusion about the nature of ownership rights and power. In this post, I’ll use the concept of the balance sheet as well as some data on long-term nineteenth century land rents to try to explain the concept in a more orderly fashion – using, among other things, Ricardian concepts and some data on ownership rights and land rents in the nineteenth century and the large difference differing ownership rights made to the return on capital (but not to the productivity of land).Real-World Economics Review Blog
The definition of capital and the difference between the productivity and the profitability of capital
Merijn Knibbe
3 comments:
The concepts of physical v. financial capital don't have anything to do with the right and left sides of balance sheets.
An entity's capital is equal to the value all of the assets on the asset side of the balance sheet, physical or financial, minus all of the liabilities on the liability side of the balance sheet - generally almost 100% financial.
But his point is right on. The book is about wealth, not capital...
It is amazing that these 200 years old discussions are still going on. Already Smith and Ricardo explained that land and machinery are completely different factors. Inrease in machinery inreases producticy, By improving output and the division of labour. New land has instead always decsending productivity. If one has to employ more land to production his costs will rise. Combining these two into same category does not make any sense. At least when weare talking about productivity. In fact growing rental value suggests that the utility (productivy) of the land is declining not the opposite (like in case of "capital" inrease.)
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