Virtuous Cycles: Toward An Expanded Model Of Capital

By Canadian Management Centre

Today, the concept of capital reigns supreme. As a means of allocating resources, capitalism has been adopted by most of the world. In the rich United States, "capitalists" seem to be everywhere, from the average owners of mutual funds to the growing ranks of "angel investors" who pump seed capital into start-up companies.

Yet, from a historical perspective, the idea of capital is relatively new. It wasn’t until the 1700s that it rose to prominence in economic thought. In classical economics, capital refers to the assets used to produce goods and services. In the business world, it usually refers to resources that are expected to generate returns in the future. Although it has traditionally been confined to material assets, capital may be "so broadly defined as to include all possible material, nonmaterial, and human inputs into a productive system," notes Encyclopaedia Britannica.

In this age of capital reverence, maybe it’s only natural that everyone – from social scientists to conservationists – is intent on using an expanded definition of capital, appropriating the term to signify the value of his or her own most treasured concepts. Some authors use terms like "natural capital" to refer to the environment, "intellectual capital" to refer to good ideas and "human capital" to refer to people at work. On one level, these terms sometimes seem like an absurd use of jargon, an unnecessary attempt to turn clean and simple ideas into buzzwords. On another level, however, they serve to remind us that physical and financial resources (i.e., traditional capital) are not the only assets used to create economic wealth. Everything from ideas to ecosystems can – however theoretically – be assigned a monetary value; and these assets can be harnessed to create products and services that generate economic wealth.

Take the example of natural capital, a term referring to the economic value of natural resources (such as ores that can be mined) and natural services (such as the filtering of water by streambeds). It’s difficult to measure the value of certain types of natural capital – especially the ecosystems, without which we could not live at all. Nonetheless, some scientists have estimated that the biological services flowing directly into society from the stock of natural capital are worth at least $36 trillion annually, a figure close to the annual gross world product. "If natural capital stocks were given a monetary value, assuming the assets yielded ‘interest’ of $36 trillion annually, the world’s natural capital would be valued at somewhere between $400 and $500 trillion– tens of thousands of dollars for every person on the planet," write the authors of Natural Capitalism. Human capital serves as another example. The World Bank’s Wealth Index calculates that the sum value of human capital is three times greater than all of the world’s financial and manufactured capital.

Another reason for using the "capital" terminology is that it implies that these other types of capital can also be leveraged to create greater wealth for investors. A dollar spent on building intellectual capital, for example, can provide a company with a significant and measurable return, according to some observers. Case in point: Columbia University professor Frank
Lichtenberg looked at the return on investment for spending on new plant and equipment (i.e., physical capital) versus spending on research and development (i.e., investments in intellectual capital). His findings suggest that a dollar spent on R&D returned eight times more than a dollar spent on new machinery. 

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