Capital Formation Defined

Cite this article as:"Capital Formation Defined," in The Business Professor, updated December 12, 2018, last accessed August 13, 2020, https://thebusinessprofessor.com/lesson/capital-formation-defined/.

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Capital Formation Defined

Capital formation refers to the accumulation of capital goods, financial capital, and human capital.

A Little More on Capital Formation

There are two divergent view on the role of capital formation:

  • Liberal economists: They think that capital formation is the engine of economic growth. Savings and investment are key parts of the development of countries. As long as capital formation remains at optimal levels, it will aid the advancement of society. They do not believe in the concentration of capital.
  • Anti-capitalist economists: They think that the accumulation of wealth only produces inequality and poverty. Capital must be invested but in favor of all. They believe in the concentration of capital.

Between these two radical and opposite positions, many midpoints are included. Many authors and economists who have collected their thoughts about it. Yes, with nuances that makes it peculiar.

One of the first economists who referred to the concept was Adam Smith in his book, The Wealth of Nations. In his work, he explained why some countries were rich and others were not.

One of the explanations he gave was that of the accumulation of capital or wealth. That is, if a nation saved and invested, it would gradually become richer. By having more and more machines (capital goods), more savings (financial capital), and more education (human capital), it would be able to produce more and better.

Almost a century later the famous economist Karl Marx would give a twist to the concept. In this case, Marx argued that inequality in the world and the exploitation of workers had to do with the accumulation of capital.
Marx defined the accumulation of capital as primitive. He claimed that this accumulation was responsible for the separation between the means of production and direct producers.
According to Marx, the accumulation of capital was followed by:

  • The bankruptcy of the peasants: They no longer owned the farmland.
  • The concentration of wealth: All wealth was concentrated in a few.

References for Capital Formation

http://www.businessdictionary.com/definition/capital-formation.html
https://www.investopedia.com/terms/c/capital-formation.asp
https://en.wikipedia.org/wiki/Capital_formation
https://marketbusinessnews.com/financial-glossary/capital-formation/

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