Modern Forms of Capital

     When I first began reading news dealing with finance, I was consistently stumped by the concept of capital.  Then, I read an amazing book.  It was probably one of the best informational books I have ever read, and I strongly recommend it to anyone with the same confusions.  The Mystery of Economic Growth by Elhanan Helpman has entire chapters dedicated specifically to the meaning of capital and its impact on an economy.  I wouldn't exactly call it a beach read, but the time spent wrapping your head around the content is definitely worth it.  Anyways, in this post, I'll briefly describe the different forms of capital that haunted me for so long.
     Financial capital, in simple terms, refers to money that is saved up or given by lenders.  Usually this money then goes towards starting a business or any other type of enterprise.  Businesses include financial capital in their finance reports and use capital almost synonymously with assets. It can be measured in nominal monetary units (Historical Cost Accounting), in which a company only maintains its capital if it has the same amount of capital at the end of the period as it did at the beginning.  In theory, this makes sense.  If you have six pieces of candy at the beginning of the month, and six pieces of candy at the end of the month, you successfully maintained your capital.  Congratulations!  However, in actuality, Historical Cost Accounting does not take into account inflation or deflation, so it is not as accurate if those factors play in.  Financial capital can also be measured in terms of constant purchasing power.  With constant purchasing power, capital maintenance can be accurately accounted for in times of low inflation and deflation or hyperinflation.  We continue to use Historical Cost Accounting because it is the standard form of accounting.  Okay, so financial capital, to me, was always the most complicated form of capital.  The rest are much easier to comprehend.
     Natural capital deals with ecological benefits, such as water that supports a village.
     Social capital involves relationships between humans that promote economic benefits.  For example, if I have a lemonade stand, I will need to buy sugar.  You have a business that sells sugar, so I will need to come to you and buy sugar, thus we have a mutual agreement to depend on each other for profits.  We both benefit economically from this relationship.
     Instructional capital is the knowledge gained from a teacher.  Never in my entire life would I have understood the concept of logarithms on my own.  They still mystify me.  However, my math teacher can transfer her knowledge of logarithms to me, and I can then use the knowledge to benefit society (If I am lucky, I will find a way to benefit society WITHOUT logarithms). This is instructional capital.
     Human capital often includes social capital and instructional capital.  Human capital is the pure value of a human.  Your dog cannot invent the light bulb, create a vaccine for polio, or write the Great American Novel.  Humans can do all of these things; therefore, human capital is valuable.
     Physical capital refers to manufactured items that are used in production.  An example would be the machines used to make the fabulous L.L. Bean boots.
     These are the different forms of modern capital.  In The Mystery of Economic Growth, Helpman explained that a country needs all of these different forms of capital in order to grow economically.  Each form of capital contributes a necessary addition to society.  Yay for modern capital!