Capital refers to anything that produces a “stream of income” over time for individuals or communities. That is how the Scottish economist Adam Smith defined capital in his book The Wealth of Nations (1776). Economists still use the word in this sense, even though the definition makes little distinction between the various means of production—such as machines and factories—and the money used to purchase them.
There are three principal kinds of capital: (1) physical capital, also known as capital goods; (2) human capital; and (3) financial capital.
Physical capital refers to resources that are applied directly to production and that are themselves produced. They include equipment and certain other assets but exclude labor. Such items as land and water—known as _natural resources—_are also not counted as capital.
Human capital refers to the productive skills of workers. According to some estimates, at least half of the total capital in the world consists of human capital. Investments in human capital take the form of education, job training, or work experience. Economists consider these investments an important source of economic growth.
Financial capital consists of the funds that firms spend to purchase or rent equipment and land and to hire labor.
There are several other common uses of the word capital. For example, the term capital markets refers to markets in which various financial assets, such as stocks and bonds, are traded. Likewise, financial economists often use the capital asset pricing model to explain the risk-and-reward trade-offs that are reflected in stock prices.
