Every business needs capital for it to kickstart and function optimally. However, sometimes, a business may need extra capital to boost its production. The process of buying extra capital stock and using it in the productive process is known as capital accumulation. Although it appears straightforward on the surface, there are important points you need to know ranging from its measurement to how capital accumulation works.
This article covers all these and more. Let’s dive right in.
What Is Capital Accumulation?
Capital accumulation is growth in assets either from profits or investments. It is a major building block of any capitalist economy. Basically, it aims to grow the value of an investment as an ROI (return on investment). This can happen in different ways like appreciation, interest, capital gains, or rent.
How Does Capital Accumulation Work?
Primarily, this process focuses on growing wealth through investing in savings and profits. The investment can be done in different ways. One way to grow capital is by buying tangible goods that will increase production. A good example of a tangible good that increases production is a physical asset like machinery. Also, human capital, such as research and development can increase production.
Investing in financial assets like bonds and stocks is another method of capital accumulation as long as the value of the assets continues to increase. Appreciation is another important factor. Generally, appreciation is investing in physical assets, such as real estate, whose value tends to grow over time.
It is important to note that you do not always have to spend money to accumulate capital. Another way to do it is by practising better organisation. For instance, your company can grow its output by organising its factory to be more orderly and efficient. It does not really have to involve investing in physical assets or human capital.
Measuring Capital Accumulation
The major way you can measure your accumulated capital is by measuring the change in the value of your assets. Also, you can measure the level of depreciation (gross fixed capital formation).
How does capital accumulation occur?
Here are ways an economy or a business can accumulate capital:
1. Investing profits from business.
2. Foreign direct investment in an economy. This kind of investment is very important for countries with developing economies.
3. Technological innovation. This boosts the productivity of capital.
4. Increase in human capital. For example, having a better-educated workforce promotes an increase in production and profits.
5. Finding out new sources of raw materials in a country, e.g. oil reserves.
6. Increased level of savings. Higher savings will lead to more investment and an increase in economic growth.
Capital Accumulation and Inequality
The ability for capital accumulation to lead to inequality is a constant debate amongst economists. The belief behind it is that since capital accumulation usually occurs from the dividend or profit of previous investments, it is continuing. Hence, it can easily become a self-reinforcing cycle, making the wealthy capable of increasing their capital assets.
In turn, this enables them to make more rent/profit/dividends to finance future investments. Other economists, on the other hand, argue that the general growth in the wealth of a country will lead to the redistribution of overall wealth.
Capital accumulation has to surpass the amount of capital needed before it can overcome depreciation. This means that some capital tends to wear out, so you will need to invest more capital to overcome this.
Bottom Line
Capital accumulation is simply growth in the assets of a business or economy, either from profits or investments. Usually, this growth is substantial enough to surpass depreciation. There are different ways to achieve this and some of these ways have been listed above. In all, the process of accumulating capital is very beneficial to any business or economy.
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