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What is Capital?

2 min readBy: Andrew Lundeen

Capital is a term to describe the tools that people use to work. More capital is a good thing. Generally speaking, the more tools we have, the more productive we can become.

Think of a man who is hungry. He lives by a stream, which is home to plenty of fish. The man walk down to the stream, steps into the water and attempts to grab a fish with his bare hands. He won’t be very successful will he?

Now let’s give the man a fishing pole, line, and flies. His job suddenly becomes much easier, because he has capital. He catches a fish and satisfies his hunger.

If we were to add more capital, his job becomes even easier. If we give him a basket, he can catch multiple fish in one outing and store them in his basket. If we give him different types of flies and lures, he can change them until he finds one that looks attractive to the fish. If we give him a boat he can go out on to lakes and catch the large fish that swim in the deep.

The capital enables the man to catch many multiples of the amount of fish he could have caught without it. He has become exponentially more productive. This saves him time (he no longer has to stand in the river all day and try to catch fish) and indefinitely increases the amount of fish that he will have to eat.

The same is true in other situations and occupations. Think of a farmer. If he only had his hands to work with, it would take him forever to sow a field. Give him a shovel or a hoe, a mule and a plow, or, better yet, a farm combine, and his life becomes that much easier.

But capital doesn’t just benefit the farmer and the fisher; the productivity the capital enables has the opportunity to benefit those around the fisher and the farmer as well.

Maybe the fisherman catches enough fish that he’s able to trade some to the farmer in exchange for some corn, carrots, and beets. Both parties benefit from the other’s productivity.

It’s important that government taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy not discourage the creation of capital. Unfortunately, it currently does through high taxes on businesses, poor cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. schedules, and the double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of capital that we see in the form of capital gains and dividend taxes.

The added expenses created by taxes make it more expensive for the fisher to buy a boat or the farmer to buy a tractor. When this happens, it limits our productivity and hampers the potential of an economy. After all, we’d all go hungry if we try to fish without a pole.