Question

Explain the following features of Capital:

1. Capital is the produced means of production.
2. Capital is a passive factor.
3. Capital is the result of past savings.

Answer 1

1. Capital is the produced means of production: Unlike land, it is not a natural resource. It is entirely a man-made asset, having previously been generated via human effort and labour. However, rather than being used directly for personal gratification, this asset is laid aside to serve as an input in the future production of more products and services.
2. Capital is a passive factor: Capital is inherently lifeless and cannot generate anything on its own. To become productive, another human component of production, namely labour, must actively participate. No matter how advanced or expensive an industrial machine or automated computer system is, it will remain entirely inactive and provide no output unless it is operated, programmed, or switched on.
3. Capital is the result of past savings: Capital cannot exist without the sacrifice of current consumption. Individuals, households, or enterprises must choose not to spend all of their income on immediate consumer items in order to create a financial surplus or save for the future. When these collected deposits are transferred through banks and invested by entrepreneurs in physical assets such as machinery or tools, capital is created. As a result, all tangible capital that exists now is a direct product of historical savings.