Another definition of capital is financial risk-bearing. For example, the United States government provides a large preponderance of the capital to the US banking system, because it bears a large preponderance of the risk should banks' assets become impaired. The US government does not hold "wealth"-like assets against the assets at risk. Yet the US government provides the capital nonetheless.
Perhaps it would be better if we had yet another word for this. But in financial contexts, I'd argue this is the main meaning of the word capital. A loan guarantee is a much more substantive form of capital than whatever is offered by a liquidity provider who benefits from the guarantee, even though it's the latter who holds the wealth.
"Liquidity" is very tempting but it's also impossibly polysemous, so vague at best. A particular usage can often often only be parsed by financerati who are able to understand (and often, deduce) the intended meaning.
It is! A bank's "capitalization" is an attempt at describing the *private* risk-bearing brought to bear on behalf of the bank. But the "capitalization" is provided by the party that bears risk. Depositors hold "capital" in the sense of "wealth", but they do not in any meaningful sense "capitalize the bank".
Liquidity is quite distinct from capital in this sense. Liquidity can be provided by a risk bearer. But it needn't be. It independently emerges when risks are fully borne, in the context of a modern financial system.
There is a unity between what a shareholder in an ordinary firm and the government for its countries banks provide: financial risk-bearing.
Finance is a factor of production. Without it there is no production. But what is scarce in finance is financial risk-bearing. Nothing more and nothing less, in modern financial systems. Liquidity is endlessly available once risk is fully borne.
The reason why "financial capital" is the right word for this is precisely because it is a factor of production, like physical capital. Like the pistons of a factory, without some party to bear the risk of buying the pistons, nothing will be produced. Sure, without oxygen nothing would be produced either, but it's not scarce. Same with liquidity. On the financial side, the scarce factor is risk bearing. So it should be counted "capital" in your first sense, even though it isn't physical stuff.
Okay. You've 100% convinced me that we should say "financial risk-bearing" (forgive me, FRB) rather than the impossibly and inevitably ambiguous "capital." FRB is perhaps not as mechanically precise as I tend to like, but that's a + here. It encompasses multiple mechanisms of FRB, deployed at multiple removes from the proximate risk-bearer/payer. This an Aha term and understanding for me, thanks! A category label under which I can conceive a taxonomy of mechanisms.
OTOH, ahem...
> Finance is a factor of production. Without it there is no production.
Utterly disagree. The second sentence does NOT support the first. The only inputs to production are human labor/effort, and natural resources. Financing or "funding" (from borrowing, sales/profits, whadevuh) just delivers assets onto balance sheets that can then be spent to purchase those factors of production. So they're necessary for production to occur. In practice FRB likewise enables and is necessary for that investment spending to happen. Stockholders, in the modern economy, need to exist. As does the Fed and other FRBers.
> the scarce factor is risk bearing. So it should be counted "capital"
Here, the first doesn't support the second. If, as I think you'll agree, we need to think of capital as a stock of stuff, I'm having a lot of difficulty comprehending what a "stock" of risk-bearing would be.
Semi-aside, this reminds me of optimal taxation theory and its anathema of "taxing capital." In a world in which ETF shareholders (etc) are the far-removed risk-bearers. OTT conceives them as the actual investment spenders, a flow concept, while in fact they're just holding, owning their ETF shares. Sheer ownership is not an input to production. Or even a funding source for it.
But back to the top, yeah: they're the ultimate FRBers for particular firms, and FRBers need to exist.
I realize I should reply proleptically to a possible and reasonable objection. Capital services are also reasonably seen as an input to production. But those can reasonably be seen as outputs from previous production of capital, which ultimately devolves back to human effort + natural resources. (This is I think a more complete understanding than Marx's (my words) condensed past work-hours.)
I also, BTW, tend to think about the human labor/effort "factor" as human-capital services delivered to production. Much of that human capital comes from "natural resources" (humans have exceptional abilities at birth, subject to "normal" development. They can walk upright, use their hands, speak, etc.) But much comes from human-produced abilities/capital – produced via education, health care, etc.
I assume the default definition of Capital is the stock of assets held by private individuals, corporations and governments that can be traded in the market.
Marxist often say the strangest things. But I do appreciate David Harvey's (probably the most famous living teacher if Marx's Capital) thought provoking explanation of what Marx believed capital was: value in motion.
What the hell does that mean? We'll, Marx spent 1,152 pages explaining... And that's just the first of -three- books 🤣
Anyways, thanks again for sharing your thinking. I sure enjoyed reading.
>I assume the default definition of Capital is the stock of assets held by private individuals, corporations and governments that can be traded in the market.
I'd say the default definition is "long-lived (productive) real stuff." But our disagreement there just shows why we should stop using the word "capital."
For your def we already have a perfectly good, perfectly clear term: Wealth. As or NW.
> individuals, corporations and governments
Problem there: you can't just sum these up to get NW of the full Domestic/National sector. Need to *consolidate.* If corps sells bonds to HHs, each has more assets. (Corps get cash, HHs get newly-created bonds.) Summing their assets double-counts the new assets.
Best understanding: HHs ultimately "own" the other sectors. Nobody owns HHs. (Not since 1865, they don't...) So HH assets/NW is the only feasible measure of "national wealth" in $s/€s/whatever. (And there's no other unit of measure that's even conceptually feasible.) Assets are pure accounting entities, designated in a unit of account.
> 1,152 pages … And that's just the first of -three- books
Then add hundreds of thousands (?) of pages of commentary like Harvey's, trying to make coherent sense of it. It's a guaranteed fail right from the starting-line/definition. IMO, "ignore." Marx was right that it's all class war (in simple terms, poor vs rich), just like Freud was right that there's a subconscious. Epochal insights! V little useful thinking beyond that, IMO...
The concept of 'capital' is required to understand 'capitalism'.
I get it, but… It doesn’t seem to have helped. If Capital has three or maybe four main meanings, Capitalism has a dozen anyway.
Another definition of capital is financial risk-bearing. For example, the United States government provides a large preponderance of the capital to the US banking system, because it bears a large preponderance of the risk should banks' assets become impaired. The US government does not hold "wealth"-like assets against the assets at risk. Yet the US government provides the capital nonetheless.
Perhaps it would be better if we had yet another word for this. But in financial contexts, I'd argue this is the main meaning of the word capital. A loan guarantee is a much more substantive form of capital than whatever is offered by a liquidity provider who benefits from the guarantee, even though it's the latter who holds the wealth.
> it would be better if we had yet another word for this
Yep.
Financial backstop. Loan guarantee. Promise of liquidity in a crisis. Others that are better than these?
"Liquidity" is very tempting but it's also impossibly polysemous, so vague at best. A particular usage can often often only be parsed by financerati who are able to understand (and often, deduce) the intended meaning.
IAC, in that context, the usage you bruit is in directly conflict with yet another mean for a firm's (bank's) "capital": shareholder equity.
It is! A bank's "capitalization" is an attempt at describing the *private* risk-bearing brought to bear on behalf of the bank. But the "capitalization" is provided by the party that bears risk. Depositors hold "capital" in the sense of "wealth", but they do not in any meaningful sense "capitalize the bank".
Liquidity is quite distinct from capital in this sense. Liquidity can be provided by a risk bearer. But it needn't be. It independently emerges when risks are fully borne, in the context of a modern financial system.
These are too particular, I think.
There is a unity between what a shareholder in an ordinary firm and the government for its countries banks provide: financial risk-bearing.
Finance is a factor of production. Without it there is no production. But what is scarce in finance is financial risk-bearing. Nothing more and nothing less, in modern financial systems. Liquidity is endlessly available once risk is fully borne.
The reason why "financial capital" is the right word for this is precisely because it is a factor of production, like physical capital. Like the pistons of a factory, without some party to bear the risk of buying the pistons, nothing will be produced. Sure, without oxygen nothing would be produced either, but it's not scarce. Same with liquidity. On the financial side, the scarce factor is risk bearing. So it should be counted "capital" in your first sense, even though it isn't physical stuff.
Okay. You've 100% convinced me that we should say "financial risk-bearing" (forgive me, FRB) rather than the impossibly and inevitably ambiguous "capital." FRB is perhaps not as mechanically precise as I tend to like, but that's a + here. It encompasses multiple mechanisms of FRB, deployed at multiple removes from the proximate risk-bearer/payer. This an Aha term and understanding for me, thanks! A category label under which I can conceive a taxonomy of mechanisms.
OTOH, ahem...
> Finance is a factor of production. Without it there is no production.
Utterly disagree. The second sentence does NOT support the first. The only inputs to production are human labor/effort, and natural resources. Financing or "funding" (from borrowing, sales/profits, whadevuh) just delivers assets onto balance sheets that can then be spent to purchase those factors of production. So they're necessary for production to occur. In practice FRB likewise enables and is necessary for that investment spending to happen. Stockholders, in the modern economy, need to exist. As does the Fed and other FRBers.
> the scarce factor is risk bearing. So it should be counted "capital"
Here, the first doesn't support the second. If, as I think you'll agree, we need to think of capital as a stock of stuff, I'm having a lot of difficulty comprehending what a "stock" of risk-bearing would be.
Semi-aside, this reminds me of optimal taxation theory and its anathema of "taxing capital." In a world in which ETF shareholders (etc) are the far-removed risk-bearers. OTT conceives them as the actual investment spenders, a flow concept, while in fact they're just holding, owning their ETF shares. Sheer ownership is not an input to production. Or even a funding source for it.
But back to the top, yeah: they're the ultimate FRBers for particular firms, and FRBers need to exist.
??
I realize I should reply proleptically to a possible and reasonable objection. Capital services are also reasonably seen as an input to production. But those can reasonably be seen as outputs from previous production of capital, which ultimately devolves back to human effort + natural resources. (This is I think a more complete understanding than Marx's (my words) condensed past work-hours.)
I also, BTW, tend to think about the human labor/effort "factor" as human-capital services delivered to production. Much of that human capital comes from "natural resources" (humans have exceptional abilities at birth, subject to "normal" development. They can walk upright, use their hands, speak, etc.) But much comes from human-produced abilities/capital – produced via education, health care, etc.
I assume the default definition of Capital is the stock of assets held by private individuals, corporations and governments that can be traded in the market.
Marxist often say the strangest things. But I do appreciate David Harvey's (probably the most famous living teacher if Marx's Capital) thought provoking explanation of what Marx believed capital was: value in motion.
What the hell does that mean? We'll, Marx spent 1,152 pages explaining... And that's just the first of -three- books 🤣
Anyways, thanks again for sharing your thinking. I sure enjoyed reading.
>I assume the default definition of Capital is the stock of assets held by private individuals, corporations and governments that can be traded in the market.
I'd say the default definition is "long-lived (productive) real stuff." But our disagreement there just shows why we should stop using the word "capital."
For your def we already have a perfectly good, perfectly clear term: Wealth. As or NW.
> individuals, corporations and governments
Problem there: you can't just sum these up to get NW of the full Domestic/National sector. Need to *consolidate.* If corps sells bonds to HHs, each has more assets. (Corps get cash, HHs get newly-created bonds.) Summing their assets double-counts the new assets.
Best understanding: HHs ultimately "own" the other sectors. Nobody owns HHs. (Not since 1865, they don't...) So HH assets/NW is the only feasible measure of "national wealth" in $s/€s/whatever. (And there's no other unit of measure that's even conceptually feasible.) Assets are pure accounting entities, designated in a unit of account.
> 1,152 pages … And that's just the first of -three- books
Then add hundreds of thousands (?) of pages of commentary like Harvey's, trying to make coherent sense of it. It's a guaranteed fail right from the starting-line/definition. IMO, "ignore." Marx was right that it's all class war (in simple terms, poor vs rich), just like Freud was right that there's a subconscious. Epochal insights! V little useful thinking beyond that, IMO...