Isn’t value totally abstract and hypothetical until it’s actually acted upon by labor? Capital can create valuations and assign prices to things via speculation but obviously the economy can’t just be pure speculation without anything actually being produced, distributed, or used. Isn’t the value of, say, a plot of land, coming from the -at least hypothetical- potential of someone to farm it, build a house on it, mine it, etc? Can capital function without at least some of those actual returns coming at some point? And if not doesn’t that mean capital is ultimately derived from (at least in large part) the outputs of labor?
I’ve seen people say that updating to new technology is an example of capital adding value, but that seems to me like capital directing labor rather than acting independently. Investors obviously aren’t (for example) inventing new machines, building them, delivering them and installing them in factories.
Is it just something about the way that economists use the term “value” that I’m not understanding?
Can someone help me understand how capital is said to be creating or adding value in and of itself?
byu/TheExquisiteCorpse inAskEconomics
Posted by TheExquisiteCorpse
1 Comment
I think you would be served by defining what you think “capital” is. The way economics thinks about it is very different than what you going on about. “Capital” comes about when we don’t consume all available resources in the previous period. “Capital rent” is what we pay people who had a claim on those resources in the previous period to “save” them instead of consuming them. This can be as simple as saving seeds from last year’s crop for the next season’s or the more complicated (and more like “capital”) redirecting of your claims on resources from goods you would like to consume today to goods that will help you or someone else produce even more goods to consume tomorrow. But, either way, the putting off of consumption today is made worthwhile by the continuing, and generally increased, consumption tomorrow.
But, yes, labor and capital work together, you cannot have next year’s crop without the labor to sow and harvest it, or the seeds to plant it. And it is the relative availability of labor and saved seeds that determine the proportional split of the returns. This is the central driver of Malthus’ model.
Fundamentally everything derives from nature, including us. Land, Labor, and Capital is a human framework, not a natural one, that people have found it useful to model the “economy”. For example some intro text books will introduce a fourth fundamental segment of the economy; “entrepreneurship”. I personally do not think that complication adds enough to the our simple use case for the intro 101 model to be worthwhile. But we also will model multiple types of, complementary and substitutable, labor in Econ 801, when trying to think about the impacts of immigration on wages, for example. This splitting and recombining can be done as much as is worthwhile for whatever question you are asking.