CAPITAL. - It is defined as a saved (not consumed) good allocated to further production. For the firm, every good, whether material or immaterial, applied to the productive process, and therefore also every contribution of labor, entails an expenditure of capital.
Thus, capital in monetary form is a potential complex of the instruments of production. A distinction is drawn between fixed capital, capable of repeated services and whose cost can be apportioned over several accounting periods (amortization), and circulating capital, which is used up within the scope of a single productive process. Capital is indispensable for the production of any (material) good and of almost every service (immaterial good). The productivity of productive processes is closely connected with the availability of capital, and this, in turn, depends on the availability of real income and therefore on the level of preceding production, as well as on the population's propensity to save. Consequently, the formation of capital is to a great extent bound up with the changing and hardly schematizable or foreseeable decisions of individuals. Banks can correct this phenomenon only to a limited extent, through the manipulation of the interest rate on deposits; and they themselves are able to "create credit," that is, monetary capital, only insofar as there exists for them a convenient possibility of contributing, by financing it, to the pre-formation of incomes in firms, incomes that will become substantive only with the sale of the products thus obtained.
The creation of capital on the part of credit institutions is therefore limited by the state of business and by the maintenance of a given coverage ratio between bank money, issued in order to mobilize the capital of credit origin granted to firms, and the availability of liquid funds to meet the payment of checks.
A productive process is said to be more or less capitalistic according to whether it entails the use of greater or lesser quantities of instrumental goods; usually the adoption of a productive process of a high degree of capital intensity means lengthening the interval between the beginning and the conclusion of that same process, thereby also bringing about a temporary diminution of goods for consumption. However, this phenomenon is not encountered when technological innovations make it possible to employ capital goods to a lesser extent in order to obtain identical quantities of product.
Just as a single productive process, so too a nation, considered as a single firm, can enjoy a greater overall real income when it has at its disposal an abundance of technical capital, that is, of productive factors other than labor. Moreover, since the productivity of labor increases — up to a given limit — with the amount of capital combinable with labor itself in productive processes, the wage can be correspondingly increased. Therefore, a large availability of capital is the starting point for having a high national real income and high labor incomes.