The reason we have such a hard time understanding concepts in economics is because many of the definitions given to terms are so clear, yet filled with ambiguity.
If terms like capital or institutions have more than one interpretation, this can have some implications when getting a message across. Sometimes, an alternative interpretation will completely change the outcome of a proposed theory!
In this series, we look at some of these confusing concepts. We don’t do much to solve the issue, but aim to give a heads up to some of these terms. If we make you think twice next time you see a particular economic concept, we’ve done our job! Get ready to learn a few clearly ambiguous concepts that often help us make sense of the mess in the world while simultaneously muddying it all up!
The term is tossed around quite frequently in economics. Capital is commonly thought of as a good that is used to produce something else rather than simply consumed. For example, if a pizza shop buys a pizza oven, they are buying a capital good, not a consumption good. The pizza shop is not simply consuming the pizza oven. It is using the new pizza oven to produce pizzas to be sold to pizza lovers.
But, capital becomes ambiguous when we think of most goods we consume. Do we not eat food as energy to produce things? Computers may be capital goods, but we sure as heck use them as consumption goods. The same can be said for smartphones, workout bikes, water bottles, WiFi, zebra cakes, shoes, underpants, college degrees, you get the picture. Where is the line?
What’s more is that economists have subcategories for capital. Human capital (what does human capital even mean!?): “The company has the human capital to keep pushing the envelope in the industry.” Uhh, what?
Does that mean that they have enough employees or people to do the job? Isn’t that called labor? Human capital is different. It’s the skills people possess in order to produce stuff.
OK, so does it encompass everything a person knows? I’m sure a whole lot of us have a bunch of useless knowledge in our brain that couldn’t possibly be used to “produce” anything or be considered a skill. Unless, of course, they are competing on Jeopardy. Some of us have the special skill of being able to flip their eyelids. Is that considered human capital?
What about social capital? At first glance, this looks like social butterflies might have a whole lot of it. But, it’s a little more complex than that. It’s not simply being friendly or jumping from network to network. Having social capital is being able to connect people with each other in ways that make them more productive.
Think of a pastor at a church. Pastors meet a lot of people from different backgrounds and, because of their role as the pastor of a church, they can cash in on favors and connect people with each other. (This is one of the cool benefits of being part of a church. Your social capital usually increases quite a bit as you start meeting people.)
Nonetheless, it’s still confusing. How do you even measure that? Is the number of “friends” you have on LinkedIn or other social media platform? Does it make a difference if I know a lot of people from different industries and backgrounds or if I know a lot of people within the same industry? Hmm… who knows?
We often think of capital from a financial angle. It’s usually one of our biggest worries—not having enough financial capital to do the stuff we’d like to do. Whether it’s starting a business, beginning a new project, starting a family, we need financial capital. One way to acquire financial capital is by taking out a loan. Businesses do it all the time. They take on debt by taking out business loans. This is capital. So is the capital you buy with your capital. The debt you take on can be capital only if you’re using it to produce stuff. But, isn’t most stuff we buy, kind of like capital?
Cultural capital is even more confusing! Remember when you were invited to a Latino party for the first time and were forced to kiss people you’ve never met on the cheek? Super awkward, right? Though, now, you won’t be surprised the next time. You might even make the first move! This, my friend, is having cultural capital. Another form of cultural capital is how we view work, the afterlife, education, and so on. Understanding different cultural holidays and customs can help you be more productive in different markets. But, how is this even measured? And, how is this different from human capital? Speaking another language may provide cultural capital, but it is also human capital, right?
Good luck figuring “capital” out.