What is Capital Formation?

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

Economic Views of 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. 

Adam Smith and Capital Formation

Adam Smith in his book, The Wealth of Nations, explained why some countries were rich and others were not. Smith proposed, 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. 

Karl Marx and Capital Formation

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.

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns