Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Thursday, February 24, 2011

Das Kapital

I could probably get an answer to this question by opening a text book on Economics or Corporate Finance, but I'm contrary and not inclined to do that.  First let's define the term, Capital.   A Google search reveals a long list of definitions, including these:

  • assets available for use in the production of further assets
  • wealth in the form of money or property owned by a person or business and human resources of economic value
Let's narrow the focus a bit, and use capital to mean the cash (and equivalent) assets of a commercial enterprise.

The question then is: What can the enterprise do with it's capital. I see two possibilities: distribution and use.

I)  Distribution
a)  Payment, as salaries, wages, bonuses, etc.
b)  Payment as dividends
c)  Donations - charitable or political
d)  Taxes
e)  Bribes (let's be both complete and realistic)

II)  Uses
a)  Investment - here, narrowly defined as spending on:
     i     Property (for facility use)
     ii    Physical plant
     iii   Equipment
     iv   Employee training
b)  Rent seeking 
     i     Loans
     ii    Interest bearing notes
     iii   Speculative Ventures  (Financial tail chasing)
     iv   Mergers and Acquisitions

c)  Reduce liabilities (H/T to Angry Saver in comments)

d)  Hoarding  (H/T to Stagflationary Mark in comments)

That's all I can come up with.  Help me out here.  Am I on the right track?  What did I miss?


Angry Saver said...
This comment has been removed by the author.
Angry Saver said...

Capital is assets less liabilities.

I'll add that capital can be used to reduce liabilities.

Stagflationary Mark said...

d) Safety seeking

A business could use capital to *hoard* raw materials.

You covered this a bit with "Speculative Ventures" but I don't think it is the same.

I'm picturing the restaurant rice hoarding of 2008. It would be devastating for an Asian restaurant to actually run out of rice.

Similarly, a business could also hoard cash out of safety rather than pay off debt, especially if it was worried about being cash flow negative in the future and was also worried about obtaining extra financing. Although hoarding cash would lose money compared to paying off debt more than likely, it might allow the business to weather the storm.

Steve Roth said...

First, I'm on a campaign: when anyone says "capital," they should distinguish whether they mean financial capital (aka money) or fixed capital.

There are other kinds too, not to be sneered at: organizational capital, human capital, etc. But mostly people are talking about one of the above. Need to distinguish.

There are only four things companies and individuals can do with money (aka financial capital):

o Consume
o Invest (in fixed capital, organizational, etc..)
o Save (store it in financial instruments)
o Pay taxes

"Consume" and "Invest" both constitute "spending," and are not hard-edged categories. They're mainly distinguished by how long the purchased thing(s) will last. But just like red and yellow are different even though orange exists, they're different things.

Jazzbumpa said...

Steve -

That's why I was careful to specify "the cash (and equivalent) assets of a commercial enterprise."

The way you parse it, what I'm calling speculation would fall under investment, I think.

I'm not on a campaign, by I do think it's important to realize that investment is specifically employing assets in something real that has the potential to generate wealth; while speculation simply involves trading financial assets, which is wealth transfer, not wealth generation.

I further believe that this is a root cause of the great stagnation - assets misallocated to finncial til chasing, rather than investment.


Steve Roth said...

For "investment," as for "capital." Whenever you use the word, you have to specify.

There's fixed investment, and there's financial "investment."

Financial investment is actually "saving" -- storing money in financial instruments. It's not really investment, at least as that word is used in national accounts.

When a company "invests" in financial assets (saving, or "hoarding" money), they are by definition *not* investing that money in fixed assets.

Oh and I realize there's a fifth thing companies can do with financial capital: pay off debt (whether by paying off loans or doing stock buybacks). This is de-"investing" in financial assets -- using money that's stored in financial instruments (an asset) to reduce a liability. A balance sheet move, unrelated to real cash flows.

Booksellers versus Bestsellers said...

Since you mention rent seeking, perhaps you should include the archetypical modern form of rent-seeking, that on talent, celebrity or connections. Income distribution makes little sense without this.