Many people are not aware of the functions and importance of capital. Capital can be defined as the money, property, and resources necessary for business or economic operations. Industries require capital to initiate production, Individuals invest their money in businesses to earn a return on their investments. Capital is also what allows us to equip ourselves with tools that will help us develop our talents over a duration of time.
Functions of Capital
Capital is necessary for economic development because a country cannot progress without it. Economic development means the nation becomes more prosperous, and individuals benefit from a higher standard of living. The government helps stimulate economic development by investing in public infrastructure. Government investment in capital, such as roads and schools, allows businesses to locate in areas with more favorable conditions.
Investment in Human Capital
Capital is also used to develop human capital, or individuals’ talents and productivity. Education, vocational training, and health care are examples of investments in human capital.
Incentive for Productivity
Capital is an incentive to be productive because people want to earn additional income to save or invest in their future. These funds can be used to secure a home and provide a better lifestyle for the individual and his family.
Capital is also an incentive to innovate. New products and services are developed to increase sales, expand markets, and meet consumer needs. Capital investing or using capital to develop new products and services allows the nation to be innovative. It also allows businesses to expand their markets and meet consumer needs.
Capital provides the opportunity for social mobility by allowing individuals to move up the social or economic ladder through education, job training, and entrepreneurial activities. Social mobility means previously poor people can work hard to improve their financial situation.
Capital is necessary for political stability because a government cannot maintain control over states and other regions without it. Political stability means that individuals want to live in a state where they can freely engage in commerce, employ and pay taxes, and receive services.
Capital is necessary for social welfare because the nation’s governments must provide healthy food and shelter for its citizens. Provision of these necessities requires capital resources.
Capital is necessary for government investment in infrastructure or public structures. Such investments include transportation and communications systems or the facilities needed to supply water and electricity.
Capital is necessary for consumers because they need products and services, like transportation, food, housing, health care, communication systems, and entertainment. Consumers want the world’s technology to improve their standard of living.
Capital is necessary to start a business and provide jobs for others and can be used to purchase tools, equipment, or property. Entrepreneurs use it to develop their business talents through innovation and hard work. Capital is an incentive for entrepreneurship because it allows people to use their talents to develop new products and services.
For officials to sell some of the nation’s state-owned industries to private investors and managers, capital is necessary. This process is called privatization. Privatization is a means for governments to reduce their financial commitments and simplify bureaucratic processes.
Capital is necessary for social security because it is an investment in individuals’ future. Social security gives people retirement benefits based on their contributions to the nation’s economy over many years of paid employment. People who elect governments will be interested in the programs and policies that protect them from old age.
Capital is necessary for governments to collect taxes or revenue based on income, property, and sales. Taxes provide the revenues needed to fund government operations.
Incentives for Productivity
Capital is an incentive to be productive because people want to earn additional income to save or invest in their future. Such funds can be used to purchase homes and provide a better lifestyle for individuals and their families.
Capital is an incentive for education because it allows people to learn and improve their skills. Individuals can become more productive as managers and workers by investing in themselves.
In many instances, capital is valuable to promote efficiency because it can be used to purchase tools, equipment, materials, and labor. If such resources are used effectively, they can save time.
Capital is also an incentive for equality because it provides opportunities for people to become more productive and self-reliant through education, job training, and entrepreneurial activities.
Capital is also a tool to reduce uncertainty in business decision-making. When there are uncertain future events, businesses can create hedges against risk by purchasing insurance or making contracts that impose penalties if the events do not occur as expected.
The main functions of capital are economic development, social security, investment in human capital, an incentive for productivity, innovation, social mobility, and political stability.