Capital accumulation is the dynamic that motivates the
pursuit of profit, involving the
investment
Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
of money or any
financial asset
A financial asset is a non-physical asset whose value is derived from a contractual claim, such as deposit (finance), bank deposits, bond (finance), bonds, and participations in companies' share capital. Financial assets are usually more market li ...
with the
goal of increasing the initial monetary
value of said asset as a
financial return whether in the form of
profit,
rent,
interest
In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...
,
royalties or
capital gains. The goal of accumulation of
capital is to create new
fixed capital and
working capital, broaden and modernize the existing ones, grow the material basis of social-cultural activities, as well as constituting the necessary resource for reserve and insurance. The process of capital accumulation forms the basis of
capitalism
Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...
, and is one of the defining characteristics of a capitalist
economic system
An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within an economy. It includes the combination of the various institutions, agencies, entities, decision-making proces ...
.
[''Capital'', Encyclopedia on Marxists.org: http://marxists.org/glossary/terms/c/a.htm#capital]
Definition
In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
and
accounting
Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
, capital accumulation is often equated with investment of profit income or savings, especially in
real capital goods. The concentration and
centralisation
Centralisation or centralization (American English) is the process by which the activities of an organisation, particularly those regarding planning, decision-making, and framing strategies and policies, become concentrated within a particular ...
of capital are two of the results of such accumulation (see below).
Capital accumulation refers ordinarily to:
*Real investment in tangible means of production, such as acquisitions, research and development, etc. that can increase the capital flow.
*Investment in financial assets represented on paper, yielding profit, interest, rent,
royalties, fees or
capital gains.
*Investment in ''non-productive'' physical assets such as residential real estate or works of art that appreciate in value.
and by extension to:
*
Human capital
Human capital or human assets is a concept used by economists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a subs ...
, i.e., new education and training increasing the
skills
A skill is the learned or innate
ability
Abilities are powers an agent has to perform various Action (philosophy), actions. They include common abilities, like walking, and rare abilities, like performing a double backflip. Abilities are in ...
of the (potential)
labour force which can increase earnings from work.
*
Social capital, i.e. the wealth and
productive capacity that the people in a society hold in common, rather than as individuals or corporations.
Both non-financial and financial capital accumulation is usually needed for
economic growth
In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...
, since additional
production usually requires additional funds to enlarge the scale of production. Smarter and more
productive organization of production can also increase production without increased capital. Capital can be created without increased investment by inventions or improved organization that increase productivity, discoveries of new
assets (oil, gold, minerals, etc.), the sale of property, etc.
In modern
macroeconomics
Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...
and
econometrics
Econometrics is an application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics", '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8 ...
the term ''
capital formation'' is often used in preference to "accumulation", though the
United Nations Conference on Trade and Development (UNCTAD) refers nowadays to "accumulation". The term is occasionally used in
national accounts.
Measurement of accumulation
Accumulation can be measured as the monetary value of investments, the amount of
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...
that is reinvested, or as the change in the
value of assets owned (the increase in the value of the capital stock). Using company
balance sheets,
tax data and direct
surveys as a basis, government statisticians estimate total investments and assets for the purpose of
national accounts, national
balance of payments and
flow of funds statistics. Usually, the
reserve banks and the
Treasury provide interpretations and analysis of this
data
Data ( , ) are a collection of discrete or continuous values that convey information, describing the quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpreted for ...
. Standard
indicators include
capital formation,
gross fixed capital formation,
fixed capital, household asset wealth, and
foreign direct investment.
Demand-led growth models
In
macroeconomics
Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...
, following the
Harrod–Domar model, the
savings ratio (
) and the capital coefficient (
) are regarded as critical factors for accumulation and growth, assuming that all saving is used to finance
fixed investment. The rate of growth of the real stock of fixed capital (
) is:
:
where
is the real national income. If the capital-
output
Output may refer to:
* The information produced by a computer, see Input/output
* An output state of a system, see state (computer science)
* Output (economics), the amount of goods and services produced
** Gross output in economics, the valu ...
ratio or capital coefficient (
) is constant, the rate of growth of
is equal to the rate of growth of
. This is determined by
(the ratio of net fixed investment or saving to
) and
.
A country might, for example, save and invest 12% of its
national income, and then if the capital coefficient is 4:1 (i.e. $4 billion must be invested to increase the national income by 1 billion) the rate of growth of the national income might be 3% annually. However, as
Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomics, macroeconomic theories and Economic model, models of how aggregate demand (total spending in the economy) strongl ...
points out,
savings do not automatically mean investment (as
liquid funds may be
hoarded for example). Investment may also not be investment in fixed capital (see above).
Assuming that the turnover of total production capital invested remains constant, the proportion of total investment which just maintains the stock of total capital, rather than enlarging it, will typically increase as the total stock increases. The growth rate of incomes and net new investments must then also increase, in order to accelerate the growth of the capital stock. Simply put, the bigger capital grows, the more capital it takes to keep it growing and the more
markets must expand.
The Harrodian model has a problem of unstable static equilibrium, since if the growth rate is not equal to the Harrodian warranted rate, the production will tend to extreme points (infinite or zero production). The Neo-Kaleckians models do not suffer from the Harrodian instability but fails to deliver a convergence dynamic of the effective capacity utilization to the planned capacity utilization. For its turn, the model of the Sraffian Supermultiplier grants a static stable equilibrium and a convergence to the planned capacity utilization. The Sraffian Supermultiplier model diverges from the Harrodian model since it takes the investment as induced and not as autonomous. The autonomous components in this model are the Autonomous Non-Capacity Creating Expenditures, such as exports, credit led consumption and public spending. The growth rate of these expenditures determines the long run rate of capital accumulation and product growth.
Marxist concept
Karl Marx
Karl Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, political theorist, economist, journalist, and revolutionary socialist. He is best-known for the 1848 pamphlet '' The Communist Manifesto'' (written with Friedrich Engels) ...
borrowed the idea of capital accumulation or the concentration of capital from early socialist writers such as
Charles Fourier,
Louis Blanc,
Victor Considerant, and
Constantin Pecqueur.
In Marx's
critique of political economy, capital accumulation is the operation whereby profits are reinvested into the economy, increasing the total quantity of capital. Capital was understood by Marx to be expanding value, that is, in other terms, as a sum of capital, usually expressed in
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
, that is
transformed through
human labor into a larger value and extracted as profits. Here, capital is defined essentially as economic or commercial asset
value that is used by capitalists to obtain additional value (
surplus-value). This requires property relations which enable objects of value to be appropriated and
owned, and trading rights to be established. Marx argued that capital has the tendency for concentration and
centralization in the hands of richest capitalists
According to Marxism during periods of
stagnation in capitalism, the accumulation process is increasingly oriented towards investment on military and security forces, real estate, financial speculation, and luxury consumption. In that case, income from value-adding production will decline in favour of interest, rent and tax income, with as a corollary an increase in the level of permanent unemployment. Capital accumulation of the
means of production in Marxist thought leads to the formation of the
bourgeoisie
The bourgeoisie ( , ) are a class of business owners, merchants and wealthy people, in general, which emerged in the Late Middle Ages, originally as a "middle class" between the peasantry and aristocracy. They are traditionally contrasted wi ...
.
"Accumulation of capital" sometimes also refers in Marxist writings to the reproduction of
capitalist
Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...
social relations (institutions) on a larger scale over time, i.e., the expansion of the size of the
proletariat and of the wealth owned by the bourgeoisie. In the first volume of ''Das Kapital'' Marx had illustrated this idea with reference to
Edward Gibbon Wakefield's theory of colonisation, and further refers to the "fetishism of capital" reaching its highest point with ''interest-bearing capital'', because of how capital appeared to grow almost of its own accord.
The Marxist analysis of capital accumulation and the development of capitalism identifies systemic issues with the process that arise with expansion of the
productive forces. A crisis of
overaccumulation of capital occurs when the
rate of profit is greater than the rate of new profitable investment outlets in the economy, arising from increasing productivity from a rising
organic composition of capital (higher capital input to labor input ratio). This depresses the
wage bill, leading to
stagnant wages and high rates of
unemployment for the
working class while excess profits search for new profitable investment opportunities. Marx believed that this cyclical process would be the fundamental cause for the
dissolution of capitalism and its replacement by
socialism
Socialism is an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...
, which would operate according to a different economic dynamic.
Anarchists hold that the state always maintains a form of capital accumulation to the elite, even in self proclaimed
socialist states and that for true equality the state should be abolished.
Effects
The effects of wealth accumulation results in increased
savings for the individual. If economic growth is shared unevenly between different groups of the population
wealth inequality emerges. Extreme wealth inequality leads to and economical power by the working class lowering, which can result in
oligarchy
Oligarchy (; ) is a form of government in which power rests with a small number of people. Members of this group, called oligarchs, generally hold usually hard, but sometimes soft power through nobility, fame, wealth, or education; or t ...
, in which super rich individuals hold most power and money in society.
See also
*
Business cycle
*
Capitalist mode of production (Marxist theory)
*
Charity (practice)
*
Commodity fetishism
*
Constant purchasing power accounting
*
Culture of capitalism
*
Dual-sector model
*
History of capitalist theory
*
Internal contradictions of capital accumulation
*
Investment-specific technological progress
*
Matthew effect
*
Organic crisis
*
Preferential attachment
*
Prices of production
*
Primitive socialist accumulation
*
Productive and unproductive labour
*
Proletarianization
*
Property income
*
Relations of production
*
Return on capital
*
Simple commodity production
*
Social reproduction
*
Surplus value
*
The rich get richer and the poor get poorer
*
Unearned income
*
Unequal exchange
*
Value investing
References
Further reading
*
Michel Aglietta, ''A Theory of Capitalist Regulation''.
*
Elmar Altvater, ''Gesellschaftliche Produktion und ökonomische Rationalität; Externe Effekte und zentrale Planung im Wirtschaftssystem des Sozialismus''.
*
Samir Amin, ''Accumulation on a World Scale''.
*Philip Armstrong, Andrew Glyn and John Harrison, ''Capitalism since World War II''. ''
Das Kapital
''Capital: A Critique of Political Economy'' (), also known as ''Capital'' or (), is the most significant work by Karl Marx and the cornerstone of Marxian economics, published in three volumes in 1867, 1885, and 1894. The culmination of his ...
'':
Vol. 1, Part 7 and
Vol. 2, Part 3.'s Environmental Crisis: An Inquiry into the Limits of National Development''. Armonk: M.E. Sharpe, 1992.
*
Hernando de Soto
Hernando de Soto (; ; 1497 – 21 May 1542) was a Spanish explorer and conquistador who was involved in expeditions in Nicaragua and the Yucatan Peninsula. He played an important role in Francisco Pizarro's conquest of the Inca Empire in Peru, ...
, ''The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else''.
*Manuel G. Velasquez, ''Business Ethics: Concepts and Cases.''
External links
Growth, Accumulation, Crisis: With New Macroeconomic Data for Sweden 1800-2000 by Rodney Edvinsson*
David HarveyReading Marx's CapitalReading Marx’s Capital - Class 11, Chapter 25, The General Law of Capitalist Accumulation(video lecture)
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Capital (economics)
Economic growth
Marxian economics
Capitalism