The financial encyclopedia uses cookies to improve your user experience. Find out more here!




Capital theory


That part of economic theory concerned with analysis of the consequences of the fact that production generally involves inputs which have themselves been produced. The existence ce of these 'produced means of production', or capital, has profound implications for the nature of the economic system. A central element is the role of time and intertemporal planning. The production of capita! requires the sacrifice of current consumption in exchange for future, possibly uncertain, consumption, and the mechanisms by which this process is organized influence the growth and stability of the economy in important ways. The existence of capital is also central to the analysis of the income distribution. A major and controversial question has been: what deterrnines the income derived by the owners of capital relative to that of the suppliers of labour power, and can their share be justified in terms of their contribution to the production of output? An understanding of the nature and implications of capital is fundamental to an understanding of our economic system, and indeed, as one leading contributor to the subject has remarked, the problem in attempting to define capital theory is to do it in such away 'as to embrace something less than the whole of economics'.

Reference: The Penguin Dictionary of Economics, 3rd edt.