When economists refer to capital, they usually mean the physical tools, plants and equipment that allow for increased work productivity. Capital comprises one of the four major factors of production, the others being land, labor and entrepreneurship. Common examples of capital include hammers, tractors, assembly belts, computers, trucks and railroads. The word "capitalist" refers to the owners of economic capital. During the onset of the Industrial Revolution, mass-producing capitalists started to become dominant employers. To paint those who owned factories as the "bad guys," early socialists created the term capitalist as an expression of derision. Economic capital is distinguished from financial capital, which includes the debt and equity accumulated by businesses to operate and expand.
The Economic Role of Capital
Capital is unlike land or labor in that it is artificial; it must be created by human hands and designed for human purpose. This means time has to be invested into capital before it can be useful. For example, the fisherman who fashions himself a rod must first divert time from other activities to do so.
In this sense, capital goods are the foundation of human civilization. Buildings need to be built, tools crafted and processes improved. By increasing productivity through improved capital equipment, more goods can be produced and the standard of living can rise.
Goods vs. Money
Ever-improving capital is important because of what follows it: cheaper and more bounteous goods. Note that money is not included among the factors of production. While money facilitates trade and stores value very effectively, individuals cannot eat, wear or be sheltered by their bank account balances. The ultimate aim of economic activity, work and trade, is to acquire goods, not money. Money is a means to afford goods. Better capital goods allow people to travel farther, communicate faster, eat better foods and save enough time from labor to enjoy leisure. Many countries have printed and inflated their way into poverty by losing focus on savings, investment and capital equipment in favor of money.
Capital Goods Production Process
Before a factory can be built or a car manufactured, someone must have saved enough resources to be able to survive the production process. This involves forgoing present consumption in favor of greater future consumption.
Every capital production process starts with savings. Savings help by generating investments. Investments eventually lead to finished goods and services. Traditionally, it is the role of the capitalist to first save and then assume risk by employing people in production processes before revenue is generated with finished goods. All of the factors of production interact with one another. Natural resources are transformed into capital goods by human labor and subjected to market risk through entrepreneurial activity.
Each factor of production is able to contribute to production processes and earn an income based on its use. The income for land is usually called rent. Labor receives wages. Employed capital goods and equipment receive interest, normally through their investment. Successful entrepreneurs receive profits. (For related reading, see: Why are the factors of production important to economic growth?)