Tags The EntrepreneurEntrepreneurship
What is capital? Austrian economics has a precise and distinctive definition — unlike business schools and most business publications, books, and columnists. Among those entities, the term capital tends to be used very imprecisely. You might see sentences like, “Entrepreneurs must ensure they have sufficient capital to get their new product to market”, or “to get to break-even”. Such usages imply that capital is a cash reserve to be “burned off” in the process of launching and scaling a business.
Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.
And it’s important to note that capital is not the same as capital goods, which are “produced means of production”. Capital is not a means of production, it is a consequence of production.
On the E4E podcast #87, Professor Matthew McCaffrey gives us this definition:
Capital is the monetary value of a business’s claims to income. This includes all of its marketable assets, whether they are tangible or intangible. It’s a sum of individual values. These values are ultimately determined by consumers, because the value of a firm’s assets and the value of its income streams ultimately depend on how consumers value the final product. Crucially, capital is distinct from what are called capital goods or production goods, which are the physical goods used in production. Those are also vital for understanding how entrepreneurship works in practice, but they are not capital in the sense in which we mean it.
B2B businesses can substitute the term “final purchasers” for consumers if producing goods and services purely for business customers. But it is important to remember that the value of capital always eventually reflects the valuations of goods and services by consumers. The software or professional services your B2B business provides to a business customer will command less of a claim to income if that business customer faces a change in preferences and a decline in market demand from their consumer population. When forecasting future income flows, every business must bear in mind the climate among ultimate consumers.
Professor McCaffrey made reference to Frank Fetter’s role in defining capital in his online discussion, "Frank Fetter and the Austrian Tradition in the United States": Mises.org/E4E_87_McCaffrey
Professor Peter Klein explains why metaphors like Human Capital are unhelpful to entrepreneurs in his article, "A Note on Human Capital": Mises.org/E4E_87_Klein