In reading a recent book on economics I was struck by the author’s constant complaint that the standard definition of capital in economics was completely inadequate because capital that refers to new machinery and equipment cannot explain the dramatic returns to capital that are seen in the real world.
This does not come as much of a surprise to me. I was a graduate student in economics in the early 1960s at UC Berkeley. I wrote my doctoral thesis on capital.
My thesis ended up being 80 pages long. I argued that the predominant form of capital in any modern society was information and innovation embedded in institutions. For example: early drop line soundings of a bay became numerical measurements on maps. Those numerical measurements became embedded as isobars in newer maps. Finally the map details disappeared as sonar measurements became common on large ships. This was information embedded in institutions which is ‘capital’. I gave other examples and explained why bombed-out cities in post war Germany were able to recover so quickly. Capital is embedded in the layout of cities and in the design of buildings.
Since this definition of capital was in direct contradiction to the arcane Marxist definition used exclusively in economics at UC Berkeley, I realized I had no future in economics. I left Berkeley.
I submitted my paper to the AER, American Economic Review. It was returned, after peer review, with the requirement that it be less than 20 pages, per the journals publishing requirements.
I was young and too arrogant to tolerate such editing. A decade later I learned the value of editing on my first book The Seven Laws of Money published by Random House.
If you still think of capital as being machines and equipment it is time to rethink. Capital is embedded technology and improvements in every business form and structure including personnel and training.