Why Capital Is Never Homogeneous

What is Capital?

1. It is a function of savings.

Capital goods come into existence by saving. A part of the goods produced is withheld from immediate consumption and employed for processes the fruits of which will only mature at a later date. All material civilization is based upon this "capitalistic" approach to the problems of production. "Roundabout methods of production," as Böhm-Bawerk called them, are chosen because they generate a higher output per unit of input. (Mises)

2. It is the “fundamental concept of economic calculation” (Mises)

Capital is an applicable concept only for market economies.

3. Capital is everything that goes into the entrepreneurial process that produces a final output.

Capital is the sum of the money equivalent of all assets minus the sum of the money equivalent of all liabilities as dedicated at a definite date to the conduct of the operations of a definite business unit. It does not matter in what these assets may consist, whether they are pieces of land, buildings, equipment, tools, goods of any kind and order, claims, receivables, cash, or whatever. (Mises)

4. It is specific and limited usage.

For instance, materials that go into a pencil production won’t be the same as those in car or semi-conductor production.

5. It is complimentary.

Example, a semi-conductor chip fits into the motherboard. A carburetor enhances the engine.

6. It has opportunity costs.

A doctor may know how to do the work of the secretary but opts not to. That’s because he is more efficient in being a doctor and instead hires a secretary. The opportunity cost here is the division of labor.

So is capital homogeneous? Never!

Therefore, any models predicated from the assumption that capital is homogeneous should automatically be thrown to the garbage bin and should not be wasted a second of precious time.