Capital Formation Definition | Components & Importance

Capital Formation Definition & Importance:- The term which is used to describe the net capital is known as capital formation in the business world. The production activity of an economy requires investing, that is, allocating a portion of production as capital dedicated to the production of new goods and services.

The National Accounts measure this investment activity through gross capital formation. Gross capital formation and its components are of particular relevance to the economy for a number of reasons, including its importance in future production, its effects on the supply and demand of goods and services, its relation to expectations Of individuals or their role in improving human capital and the productivity of the economy, among others. In this entry I will try to explain what the gross capital formation consists of and what components it has.

Gross Capital Formation Components

1) Gross fixed capital formation includes the gross change in the fixed assets of the economy. Fixed assets are produced assets that are destined for production for more than a year. We speak of the gross variation because we must discount the consumption of fixed capital to obtain the net formation of fixed capital. Therefore, it has two components: 

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A) The  consumption of fixed capital is the loss of the value of the fixed assets that are possessed, as a result of normal wear and obsolescence. This means that in an economy, part of the production goes to investment in order to produce more goods and services, but over time these goods and services are losing their value, they deteriorate. With the use they wear out, the very passage of time subjects these assets to deterioration (to put a single example, by the inclemency of the meteorology), are emerging new alternatives to perform the same function, etc. The consumption of fixed capital intends to measure that wear and tear that the realized investment undergoes.

B) The net formation of fixed capital is the result of discounting this consumption of fixed capital to the gross formation of fixed capital. Gross fixed capital formation tells us the value of the resources that have been demanded for investment in fixed assets; The net formation of fixed capital informs us of the changes that are occurring in the value of the fixed capital of the economy once considered the wear and tear that the existing fixed assets are suffering.

Within gross fixed capital formation, investments in capital goods (such as transport equipment and machinery) and investments in intellectual property products (such as R & D results; Mining and oil prospecting, software and databases or the originals of recreational, literary and artistic works). Construction is also very prominent. By convention, although it has some characteristics of consumption, investment in housing construction is included in gross fixed capital formation. Also included are the construction activities of other buildings and those of other constructions that are not of building.

2) Stock change  is measured as the difference between the value of the inflows and outflows of inventories over the period and after discounting the current losses of the goods held in stock. They form part of the stock:

A) Raw materials.

(B) Work in progress, i.e unfinished production. Examples would be trees or livestock while they are growing.

C) Finished goods, which will no longer be subjected to any further processing before delivery.

D) Goods for resale, that is, purchased for sale in the same state.

Fundamentally, inventories, except for examples such as trees growing, are inventories of goods that remain less than a year in companies, as opposed to fixed capital, which remains for more than a year destined to productive activities.

3)  Acquisitions less disposals of valuables . Valuable objects are non financial goods that are not primarily used for production or consumption, nor do they deteriorate (physically) over time under normal circumstances and are mainly acquired and maintained as value warehouses.

Capital Formation Importance

In these revolutionary times official propaganda strives to highlight the exploitation that capitalism makes of workers, and even the necessary rescue of the just retribution of workers against those employers still expelling the class Through the exploitation of surplus value.

In our opinion, all this propaganda is pure straw, the exploitation of the worker by surplus value is a concept mostly demode, old fashioned, only useful as an element of propaganda.

In the nineteenth century, Marx’s times, there was certainly a strong exploitation of the working class, including women and children, basically because there were few job opportunities and many people starved and unemployed. This situation has gradually changed, to the extent that today it is possible to speak, especially in public companies, of an exploitation of the owners of capital by the workers, collecting abusive benefits that the company can only give of their livers.

Basically, the surplus value of the capital account of labor can be summarized considering that the employer pays less than worked. For example, those who work 10 hours a day are paid only 5, while the finished product is sold considering 10 hours, so the employer appropriates 5 hours in this case. Figure 1 exemplifies the situation.

Now, it can not be said that, in general, capital comes from the abuse of workers by capital surplus value, because a differentiation of origin would have to be established, as follows: (see Fig. 2)

Capital derived from the exploitation of Workers for the abuse of surplus value, that is, to pay less than the hours worked (at the same time form part of the cost and the sale price). At present a very scarce situation, we would say, depending on the strength of the unions.

Capital derived from work without any surplus value. They would be, for example, the savings obtained by the individual work of the entrepreneur, performing himself and the necessary work. The so-called “living labor” by some Marxists.

Capital derived from the use of workers without any exploitation, or paying the fair price of labor. What some Marxists would call “incorporated capital.”

Capital derived from the increase in price on the market for reasons beyond the company, an issue associated with the relative levels of supply and demand and consumers’ willingness to pay.

Capital derived from entrepreneurs’ initiatives, caused by special gains attributable to business strategies, from the creativity of managers or other employees.

Capital (negative) absorbed by the exaggerated (or abusive) remuneration of the workers above their fair value, appropriating from the income due the owners of the capital.

Under these conditions, the political propagation of the results of enterprises and the fact that “the enterprises are of the same Its workers “is a complete nonsense aimed at the appropriation of assets by a minority – which makes a misuse (false) of the theory as a screen version to improve” its part of the cake “. Some will say a better redistribution of income, though not necessarily.

Because no factor of production should be paid in excess, to the detriment of the others. Not even when seed capital has been the source and cause of business success. Equally, labor should not appropriate most of the benefits, when public capital has been the source of goods and services produced. What happens is that in private businesses managers defend the remuneration of owner capital, while in public companies the managers are generous with themselves and with the other employees. There are no mourners of the public thing, except for exceptions.

Account should be taken of the different sources of capital mentioned and include consumers (through prices) in the distribution of welfare. This is possible when it comes to companies that reduce prices (via subsidies) so as to make products and services available to “normally excluded” consumers – which is the lost utility of public works that Duplicity spoke of.

Consequently, to establish – within a socialism of the 21st century – a justification for workers to appropriate the income of public enterprises (on account of which they are the product of the old or current exploitation of the working class) is a Manichean and interested use of Marxist theory to use it as a “screen notion” to justify an unequal distribution of income in favor of workers against peddlers and other consumers. Just as it arises from the excess in management with the so-called “tropical co-management” or the EPS, when for the sake of an alleged evangelical socialism the initiative of personal gain is annulled that is the fundamental motor of economic development, that is, of development Social.