THE NATURE OF CAPITAL

Mieczysław Dobija

http://ssrn.com/author=518110

Cracow University of Economics

What is capital?

„When economists reach agreement on the theory of capital, they will shortly

reach agreement on everything. Happily, for those who enjoy a diversity of views and beliefs, there is very little danger of this outcome. Indeed, there is at present

not even agreement as to what the subject is about…”

Ch. Bliss [1975]

What is capital?

Outstanding and astute research has been carried out by P. Mirowski [More Heat than Light. Economics as Social

Physics: Physics as Nature’s Economics, 1989] on the appearance of energetics metaphors and concepts in

the economic thought.Much on the subject has been said but the idea of capital still remains tangled,

unsolved and not clear.

What is capital?

Capital is an ability of doing work.

ENERGY is the ability to perform labour.

Value is concentration of capital in objects.

What is capital?

Since capital can be discerned as ENERGY, it has to fulfill the LAWS OF

ENERGY.

1st Law of Thermodynamics:„energy neither arise from nothing, nor

disappears”

2nd Law of Thermodynamics:„energy spontaneously disperses and

does not keep its concentration forever”

1st Law of Thermodynamics in economy:„it is the source of Duality Principle and

Debit – Credit Rule”

2nd Law of Thermodynamics in economy:„capital tends to disperse if not restrained;concentration of energy does not maintain

its value in time”

How does Thermodynamics manifest itself in economy?

2nd Law of Thermodynamics in economy reveals itself as Uncertainty

2nd Law is also arrow of time. This is also the fundamentals for understandig the

nature of percent and profits.

How does Thermodynamics manifest itself in economy?

RISK versus Uncertainty

Towards model of capital

Ct = C0 · e – s · t

The result of diffusion of initial capital:

s = coefficient of dispersion

But who would like to invest if his/her

initial capital would deteriorate ???

CAPITAL EQUILIBRIUM PRINCIPLE

Ct = C0 · e E (s) · t

EFFECTIVE MARKET = the market which grants each investor an adequate risk

premium.

What is the source of the risk premium?

It is Nature; the Earth and the Sunshine

Economic constant of potential growth

p = E(s) = 0.08 [1/year] (8%)

Model of CAPITAL in DYNAMIC EQUILIBRIUM

Ct = C0 · e [ E (s) – s ] · t

Through labour and good management, one can change that dynamic equilibrium

in a profit creating system.

Ct = C0 · e [ p – s + M ] · t

Nature of Income

Periodic income is determined by the formula, that

describes some essential sources of income:

Income = ΔC = C1 - C0 = C0 (p – s + M)

Thus, the sources of income are the initial capital

working by year in form of business activities, the

destructive processes hidden in Nature, free market,

constant p, and clever management.

What is labour?

Labour is always a transfer

Labour is the transfer of HUMAN CAPITAL into products.

Labour is therefore the expense of personal human capital.

Labour in physics

coscos

tPtvFtvFsFL

F

s

Labour in economy

What is labour unit? What is money unit?

Labour = Power x time3 kWh = 300Watt x 10 hours

Labour in physics means cost of labour in economy

Cost of labour = productivity coefficient · time of labour · social usefulness coefficient

Cost of labour = productivity coefficient · time of labour · social usefulness coefficient

Cost of labour = 3/5 · 200 hrs · 1

Cost of labour = 120 labour units

Let us say: An employee has worked for 200 hours. His pay is $3 000 per monthThe pay of CEO is $5 000. Thus wpc = 3/5. What is his cost of labour?

$ 3 000 = 120 labour unitsConlusion:

Labour unit is money unit

Wage payables Wage receivables

Products

Labour costsl.u.=wp*h

Wage payable6/8 * 10h = 7.5 l.u.

Wage receivable6/8 * 10h = 7.5 l. u.

6/8 * 10h = 7.5 l.u.

6/8 * 10h = 7.5 l.u.

Wage payoff

3.5 l.u.

3.5 l.u.

Three Account Model of Monetary Economy

The risk premium is an economic constant

• What is a constant in sciences?• The risk premium is the constant• We do not need to predict it• It does not change in time• Economic policy criterion• The risk premium in human capital

consideration• The risk premium and fair

compensations