Capital Accumulation

What Is Capital Accumulation?

Capital accumulation refers to an increase in assets from investments or profits and is one of the building blocks of a capitalist economy. The goal is to increase the value of an initial investment as a return on investment, whether that be through appreciation, rent, capital gains, or interest.

Understanding Capital Accumulation

Capital accumulation primarily focuses on the growth of existing wealth through the investment of earned profits and savings. This investment is focused in a variety of ways throughout the economy. One method of growing capital is through the purchase of tangible goods that drive production. This can include physical assets such as machinery. Research and development can also drive production and is known as human capital. Investment in financial assets, such as stocks and bonds, is another means of capital accumulation if the value of those assets increases. Another important factor of capital accumulation is appreciation. This is typically investments in physical assets whose value grows over time, such as real estate.

One important idea to note is that capital accumulation does not necessarily have to come through the expenditure of money. It can be done through simple means such as better organization. For example, a company can increase its output by better organizing its factory to be more efficient without having to purchase any additional machines or hire more workers. The increased output would then increase profits.

Measuring Capital Accumulation

The main way to measure capital accumulation is to measure the change in the value of assets. In regards to a corporation, this would look at the reinvestment of profits into the business. Depending on the type of business this can be a reinvestment into tangible goods or human capital and then determining the value-added of the reinvestments. A company’s capital structure and capital health can be identified through an analysis of its financial statements.

The income statement provides a comprehensive report on profits, which contribute to capital accumulation as noted above. The cash flow statement is broken down into three sections: cash flows from operating activities, investing activities, and financing activities. Commonly, cash flow from operating activities is positive while cash flows from investing and financing activities are negative. Net negative cash flows are not necessarily a sign of a poorly run business but can indicate an investment in the long-term health of a company. This is so because it is imperative that capital accumulation outpaces depreciation.

Capital Accumulation and Inequality

Many economists argue that capital accumulation leads to inequality in society. This is a fundamental component of Marxist Theory. The idea behind it is that because the majority of capital accumulation comes from profits from business or investments, and those profits are continually reinvested, creating a self-realizing cycle, the wealthy continue to accumulate more capital and wealth and therefore further control aspects of the economy and society. On the other hand, others argue that a general increase in the wealth of a nation results in a redistribution of overall wealth.