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What is capital?

Capital is stuff used to make things, like land, equipment, and supplies. Labor is people working. Return on capital measures how much money is made from investing in capital. The video shows how capital has changed over time in the U.S., like land becoming less important. Created by Sal Khan.

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  • aqualine ultimate style avatar for user Jenny P
    at , why is labor not considered capital? is capital just the things you own?
    (19 votes)
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    • mr pants teal style avatar for user Wrath Of Academy
      Labor is often considered capital, but it's a fairly special type of capital. Labor is special because it can be used for anything, which is a bit axiomatic, but rather amazing to think about. You can't make bread out of copper, for example, so while copper is capital, it has only some uses. Labor can be directed towards any production.

      Also, you do own your own labor, because you own yourself. And you can sell your labor on the open market - that's simply the act of working.

      But not all labor is equal. That's where the phrase "human capital" comes in. You can learn more about that here: http://www.econlib.org/library/Enc/HumanCapital.html
      (30 votes)
  • leaf green style avatar for user Caiti
    Is the value of your capital equivalent to how much you would make if you sold it on that day or is it equivalent to how much you paid for it originally?
    (10 votes)
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    • mr pants teal style avatar for user Wrath Of Academy
      This is a great question, and is fundamental to understanding how potentially biased and arbitrary it is to sum up the value of all the capital in a country. If I'm not willing to sell my house for less than $1 trillion, cause I don't want to move, then, to me, that's its price. But other people would say the house is worth far less. So, the price depends on who you ask. What's gone wrong? Well, you can only definitively state the price of something at the specific point in time and place that a sale was actually made. When a sale has not been made, all you can state are the bid and ask prices. (For more on bid/ask, see http://www.investopedia.com/terms/b/bid-askspread.asp for example.)

      Therefore the value of capital depends on the context. It depends on whether you're a buyer or a seller.
      (15 votes)
  • purple pi purple style avatar for user ScienceMon
    Is there a fundamental reason why the value of capital hovers between 400% and 500% the total productive output ? () And is this ~450% unique to the United States?
    (8 votes)
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    • mr pants teal style avatar for user Wrath Of Academy
      Historically the return on capital investment has been fairly steady over long periods. The book Stocks for the Long Run covers this at length. So you would expect the ratio of national income to national capital to be fairly stable over time. What that numbers is (in this case 4.5x) is fairly arbitrary, depending on how you measure capital value. I suspect (for example), that PIketty did not attempt to measure the value of the human capital of the people - ie, their education and skills.
      (5 votes)
  • blobby green style avatar for user free education
    at , the total capital has been around 4-5 times of the value of the total productive output?
    I didn't get it?
    (7 votes)
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  • blobby green style avatar for user Maria Kirschbaum
    I had previously heard that capital was all the fixed expenses which included things such as machines and labor was all the unfixed costs which obviously includes labor but also other unfixed expenses. Sal explained it, however, as capital basically being anything but labor. which definition is more standard or are both pretty normal?
    (3 votes)
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    • mr pants teal style avatar for user Wrath Of Academy
      Capital goods are things of value which can used for the creation of other capital goods, or for the creation of consumer goods. Labor is a special type of capital good, because it is needed for every production process. Because labor is so special, its often broken out into its own sub-category.

      Note that a thing could be needed for production, but not of value. For example, airborne oxygen is needed to produce labor (or you suffocate), but it is not a capital good here on Earth, because its existence is omnipresent and it thereby can demand no price on the free market.
      (3 votes)
  • duskpin ultimate style avatar for user tuannb1997
    I am kind of confused by the charts you presented at the later half of the video. Of course, i pretty much understand the fundamental basis of "Capital" thanks to your two examples about mine and food. But, to the core, what does the word "CAPITAL" really mean in terms of our daily lives ? To illustrate my point, what are some common forms of capital that we purchase everyday ? Say, a car for us to spend less time driving to work and hence improving our productivity; a government bond or a bank account for savings so that we may have money to spend n our twilight years ? Are they forms of CAPITAL ? If then, can we measure literally values of all capital in dollar-terms ?
    (2 votes)
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    • mr pants teal style avatar for user Wrath Of Academy
      Yes, those are all frequently referred to as capital, at least informally, however money is radically different. Money is not economic capital - money can only be used to buy capital. Money cannot itself be used to create another form of capital, or create a consumer good. It can only acquire capital or consumer goods through exchange. (See http://www.investopedia.com/terms/c/capital.asp ...)

      Imagine for example you have a bank draft check for $1 million in your pocket, but you're stranded on a deserted island. You have money, but the check is not capital. Only if someone shows up with a boat to sell can you convert your money into capital and sail to safety.

      As mentioned previously, education is capital (ie, "human capital"), so if you knew how to perform carpentry that would be some particularly useful capital while stranded on an island. :)
      (4 votes)
  • male robot hal style avatar for user Ryan Jeansonne
    Is money considered capital?
    (3 votes)
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  • aqualine ultimate style avatar for user Jenny P
    at , why are the values of the capital at a percentage over 100? why is the capital's value more than national income?
    (1 vote)
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  • blobby green style avatar for user danielmarbella

    after the video, i still have doubts about the difference between capital and wealth. There is a kind of boundary is not clear at all. Here i sum up my doubt list:

    1. according to the video, capital is the input needed to produce goods and services, to create wealth. But each capital, at the same time, is another form of wealth. A machine (capital) used at a farm, needed other forms of capital to be built before. When it was built, it was another form of wealth, since the company produce a good (the machine). So as far as i am seeing it, wealth and capital have some kind of relationship. Or in other words, CAPITAL in caps could be a sinonim of WEALTH, since both create goods and services, and future income.

    2. A farm that doesnt create net income (lets say, its bad managed), but use capital, could be named wealth?

    3. whats the value of wealth? according to the video, the market value of future income. I have seen this definition in Irving Fisher books, but i would like to know from where Khan obtains the definition, which bibliography.

    4. According to our actual world, "capital markets" are the kind of markets that sells/buys securities, like stocks, bonds, real state, commodities, etc. In every buy/sell, there is a bid/ask, that from my point of view is a kind of interest rate. But apart from it, are all this securities also wealth? according to the video definition, they are also fountains of future income.

    hope somebody could help in here.

    (1 vote)
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    • spunky sam blue style avatar for user jacobsmithguitar
      1. Capital is not a synonym of Wealth. They are different concepts that do overlap, however.
      "Capital" basically consists of what (land, equipment, energy, etc.) you need to make something–excluding labor.
      "Wealth" is the sum total of all your assets minus your debts.
      Obviously much or all capital will be included under wealth–excluding capital that is used up, like energy–but although factories, machines, horses, etc. can be counted as wealth, they are really intended to be used as a MEANS to gain wealth. In other words, capital is usually counted as Wealth at present, but the owner is trying to use the capital to gain more Wealth.
      2. A farm with a field worth $10m and a bunch of barns and cows and seed and feed worth $40,000 is, at this moment, worth $10,040,000. That number, minus any business debts the farmer owes, would be the farm's wealth. What the farmer intends to do with that wealth is irrelevant: if he has it, it's wealth. Once he spends it, it's not wealth.
      3. I dunno.
      4. Securities are worth something, so they are wealth.
      (3 votes)
  • leafers seed style avatar for user Matthew Yang
    Assume that this is a company, let's say for example, McKinsey & Co. When we talk about the capital for this company, does the cost for the building and offices (like the physical concrete and glass) count as part of the capital?
    (2 votes)
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Video transcript

The title of Thomas Piketty's book is Capital in the 21st Century. It's probably worth having a conversation about what capital is. If you're going to produce anything, you need some input, you need some factors for that production. You'd put them together. Let's say that you are a farm. Your output is food. What are your inputs going to be? This is a farm right over here. Let me a draw a little circle here. Farm and your output is food. What are your inputs going to be? You're going to need some land. You're going to need some water. You're going to need some equipment. And you are going to need some seeds and animals so, I'll just put generally here, supplies. And of course, you're going to need people to put all these things together and essentially work the land, to plow the soil and plant the seeds and harvest the crops and manage the whole operations. You're going to need labor as well. You take all of these factors of production together. They essentially represent a farm that is going to output food. When people talk about capital as a factor of production, sometimes they talk about it in a fairly narrow way. They'll separate things like land and resources or something separate and they'll say capital is hey, that's your equipment and your supplies. When people talk in more general terms, especially, in the focus of this book when there are people talking about labor versus capital. Capital when we just group things in only those two categories in that context, capital would essentially represent pretty much everything else. This right over here would be capital and one way to think about capital is the things that you could maybe you, they are assets that you have that can be valued that will give you future benefit. You can buy and sell those assets and we could think about other businesses here. Other things that are trying to produce something. Let's say you have a mine. This is the operation and it's going to produce, let's just say it's a goldmine. It's going to produce gold. What are the inputs that you would need there? You're clearly gonna need some labor. You're gonna need the miners and the people who would manage the operation of the goldmine but that's not all you need. You also need energy maybe to operate your equipment and I actually, I will put energy in here too. Some of which comes from the sun but some of which you might have to purchase or have somehow and then you would also need equipment. And you would need supplies. I mean we could consider energy as supply if you like or you use supply of energy but you also might need tires or something like that. You might need food in order to provide for the labor. Who knows what else you might need in your mine? And you also would need, of course, land. You need access to land to actually mine. Here, if we're thinking very broad terms, you could view all of this as the capital and of course, you have your labor and you put your labor and your capital together and you produce the gold. Another idea that you will hear in life a lot but obviously, in a book about capital, this will come up a lot, it's the idea of return on capital. This is just a measure of giving a value of capital that you've employed, how much income are you getting for that capital. For example, let's say this farm. The total value of this capital, let's just say it is, I don't know, I'll make up a number here. Let's just say it is $1 million. $1 million is the total value of the land and maybe you have access to your own lake and the equipment and the supplies. It's $1 million of capital. The value of that capital is $1 million. Let's say that the income of the farm after you pay the labor. Actually, let's just do this in a little broader term. Let's say the food's value, the food that's produced has a value of $100,000 in the market. Now, out of that $100,000, you obviously had to pay your labor. Let's say that $50,000 of it, goes to the labor. And then we're saying this is in a given year. You use the capital of the labor, You produce $100,000 worth of food. $50,000 goes to the labor was gonna be returned on capital. You have another 50,000 leftover for the capital for the owners of the capital whoever owned the farm. The owners of the capital would get the other $50,000. Your return on capital is going to be $50,000 that's what the owner of the capital gets and it's thee return on their investment of $1 million. And this is going to be the same thing as 5 divided by 100 or it would be 5%. You have a 5% return on capital. You invest $1 million, you're going to get $50,000. It was a 6% return on capital, you invest $1 million. You get $60,000. Now, that we've thought about that a little bit, let's actually at a pretty neat chart from the book and once again, it's pretty neat. If you look right over here piketty.psc.ens.frcapital21c. He has all the charts from his book, which make for interesting analysis at minimum and he's gathered all of this information. This is pretty interesting. There's capital and slavery in the United States. And what's interesting about that is when you study American history, you talk a lot about slavery but you don't realize that in the time of slavery as abhorrent as it is and was, people viewed slaves as capital, not as laborer. They view them as something that they could buy or sell that they own and that would create future income for them and this just gives us a sense of kind of the breakdown of capital over history. You see down, at least in the United States, you see agricultural land. In 1770, it was a reasonable percentage. This is a value capital as a percentage of national income. The value of the land is a percentage of national income was much higher than it is, today and we see the other trend that the other domestic capital has become much more value. Well, what is this other domestic capital? This could be things like infrastructure. It could be technology. It could be mechanical technology. Things like trains and cars and trucks and buses or, and factories or it could be software. It could be computers, whatever else and as we see as we went through the industrial revolution, the value of other forms of technology became... or other forms of capital other than land became more and more important for our economy and obviously, slavery ended in the mid late 1860's and obviously, that went away but it's just an interesting way to think about macroeconomic trends in the United States. Land in 1770 was a major factor of production and still is obviously. We still need land in order to produce things, especially, agriculture. Well, this is agriculture and it's still a major part. It's not like the land has disappeared. It's just that the economy has grown to be much more than just agriculture. In 1770, agriculture was a big part of our economy. Now, agriculture is a much, much smaller part of our economy. This is just an interesting way to think about, well, okay, this is all of the capital and this both public and private capital included here. Public capital would be something that is owned by the public, by the government while private capital would be something that is owned by private individuals or corporations or whatever else but you see on average, you have had kind of a a fairly constant give or take a little bit that the total value of the capital has been around four to five times the value of the total productive output, four to five times the value of the total productive output of the country.