Most generally, the accumulation of capital refers simply to the gathering or amassment of objects of value; the increase in wealth; or the creation of wealth. Capital can be generally defined as assets invested for profit or consumption.
In economics, accounting and Marxian economics, capital accumulation is often equated with investment, especially in real capital goods. The concentration and centralisation of capital are two of the results of such accumulation (see below).
But capital accumulation can refer variously to:
- working and consuming less than earned--saving or accumulating the residual
- relying on the effects of compound interest to increase initial capital
- real investment in tangible means of production.
- financial investment in assets represented on paper.
- investment in non-productive physical assets such as residential real estate that appreciate in value.
- consuming less than produced by productive assets like farm land--saving or accumulating the residual
- "human capital accumulation," i.e., new education and training increasing the skills of the (potential) labour force.
Non-financial and financial capital accumulation is usually needed for economic growth, since additional production usually needs additional money to enlarge the scale of production. Smarter and more productive organization of production can also increase production without increased capital. Capital can be created without increased investment by inventions or improved organization that increase productivity, discoveries of assets --oil, gold, minerals, etc., sale of property, etc.
In modern macroeconomics and econometrics the term capital formation is often used in preference to "accumulation", though UNCTAD refers nowadays to "accumulation".
In macroeconomics, following the Harrod-Domar model, the savings ratio (s) and the capital coefficient (k) are
regarded as critical factors for accumulation and growth, assuming that all saving is used to finance fixed investment.
The rate of growth of the real stock of fixed capital (K) is:
where Y is the real national income. If the capital-output ratio or capital coefficient 
is constant, the rate of growth of Y is equal to the rate of growth of K. This is determined by s (the ratio of net fixed investment or saving to Y) and k.
A country might for example save and invest 12% of its national income, and then if the capital coefficient is 4:1 (i.e. $4 billion must be
invested to increase the national income by 1 billion) the rate of growth of the national income might be 3% annually. However, as Keynesian
economics points out, savings do not automatically mean investment (as liquid funds may be hoarded for example). Investment may also not be
investment in fixed capital (see above).
Assuming that the turnover of total production capital invested remains constant, the proportion of total investment which just maintains
the stock of total capital, rather than enlarging it, will typically increase as the total stock increases. The growth rate of incomes and
net new investments must then also increase, in order to accelerate the growth of the capital stock. Simply put, the bigger capital grows,
the more capital it takes to keep it growing and the more markets must expand.
The measurement of accumulation:
Accumulation can be measured as the monetary value of investments, or as the change in the value of assets owned. Using company balance
sheets, tax data and direct surveys as a basis, government statisticians estimate total investments and assets for the purpose of national
accounts, Input-output tables national balance of payments and Flow of funds statistics. Usually the Reserve Banks and the Treasury provide
interpretations and analysis of this data. Standard indicators include Capital formation, Gross fixed capital formation, fixed capital,
household asset wealth, and foreign direct investment.
Organisations such as the International Monetary Fund, UNCTAD, the World Bank Group, the OECD, and the Bank for International Settlements
used national investment data to estimate world trends. The Bureau of Economic Analysis, Eurostat and the Japan Statistical Office
provide data on the USA, Europe and Japan respectively.
Other useful sources of investment information are business magazines such as Fortune, Forbes, The Economist, Business Weekly etc. as well as various corporate "watchdog" organisations and NGO publications. A reputable scientific journal is the Review of Income & Wealth. In the case of the USA, the "Analytical Perspectives" document (an annex to the yearly budget) provides useful wealth and capital estimates applying to the whole country.
Psychology, sociology and ethics of capital accumulation:
There have been numerous psychological and sociological studies of the motivations of investment behaviour by individuals. Most of these suggest that the propensity to accumulate capital is associated with qualities such as an intelligent understanding of property ownership, a positive attitude towards money, the ability to seize a money-making opportunity, and a desire to acquire more wealth. These are not innate or genetic qualities, but learned through social experience.
However, even if a strong motivation for enrichment or social improvement exists, the business, government, legal, climate, local culture or social instability may prevent this motivation from being realised. Hernando de Soto for example argues that the reason why poor countries are poor is mainly because of the absence of a legal-cultural infrastructure of "asset management" and of formalised and enforced private property rights. Many systems seemed designed to keep a small minority in power so they can consume more. This power minority exist as a parasite on the common people--consuming much more than they produce. One popular argument in this respect remains the vicious cycle of poverty: the poor are poor because they are poor. Critics of this argument object it is an uninformative and unhelpful tautology.
Greed and desire can play a very important role in capital accumulation, but are not a necessary requirement. Indeed according to Max Weber's study of capitalism and the Protestant ethic, frugality, sobriety, deferred consumption and saving were among the key values of the rising bourgeoisie in the age of the Reformation.
Some economic historians (e.g. David Landes, Gregory Clark (economist)) refer to national psychology and argue that some nations or cultures (e.g. Europe) are inherently better equipped for capital accumulation, due to cultural habits, customs and values.
Other economic historians (e.g. Paul A. Baran) have argued that psychological factors explain very little, because a nation which previously had a low level of accumulation can suddenly "take off". In that case, the causes must be sought in the prevailing social relations.
Controversies about the ethics of accumulation have occurred ever since commercial trade began. If informal and formal prostitution is regarded as the oldest profession, the first ethical debate about accumulation must have occurred tens of thousands of years ago at the very least. The problem is that trade or market forces do not create any particular morality of their own, beyond the requirement to meet contractual obligations that settle transactions. Some forms of trade may be accepted, others rejected, but there exists no general moral principle for this which can be derived from the trade itself.
A good contemporary illustration of this problem is the gigantic increase in total reported crime and the grey economy or shadow economy after the deregulation of world markets from the 1980s, and the marketisation of the USSR and China. But ancient philosophers and theologians already knew about the problem, which is why they were intensely preoccupied with the politics of the “rule of law” and its enforcement.
The main ethical questions concern which routes to wealth are morally justifiable, and what entitles individuals and groups to appropriate amounts of wealth, in particular wealth which they have not themselves created. The medieval economists invented theories of a just price and the moral debate surfaces again these days e.g. in the controversies about fair trade, imperialism and Islamic banking. Neo-liberal theory emphasises that a "good" person is one who creates new wealth by deferring consumption or improving production, while socialist theory says a "good" person should be forced to share their wealth however accumulated. The most popular moral theories are similar to that of John Rawls.
Karl Marx illustrated his analysis with sarcastic comments about “Christian accumulation”; some forms of accumulation were believed to be compatible with Jesus Christ, while other were not; some forms of accumulation were forgiven by God afterwards, others were not. Martin Luther for example raged against usury and extortion.
Marxism-Leninism is hostile to all private property and market activity. It must be kept in mind that the "private property" that Marx refers to is the ownership of the means of production by a generally small elite of wealthy entrepreneurs. The proletariat, or laborer, is inferior to all aspects of production--including labor, the products or services made, and revenue; and therefore the division of labor and its products must be equally redistributed to avoid the control and degradation of an unknown bourgeoisie.
But because capital accumulation does not presuppose any particular or specific "moral system", accumulation can also continue regardless of any particular morality advocated by popes, presidents, queens, journalists, pop stars, business tycoons or anybody else. All that is required is (1) the ability to own assets and trade in them and (2) sufficient income beyond subsistence and (3) the will to defer consumption to be able to accumulate capital.
Marxian concept of capital accumulation:
In Karl Marx's critique of political economy, capital accumulation refers to the chrematistic operation whereby a sum of money is transformed into a larger sum of money (capitalism is this money-making activity, although Marx often equates capitalism with the capitalist mode of production). Here, capital is defined essentially as economic or commercial asset value in search of additional value or surplus-value. This requires property relations which enable objects of value to be appropriated and owned.
According to Marx, capital accumulation has a double origin, namely in trade and in expropriation, both of a legal or illegal kind. The reason is that a stock of capital can be increased through a process of exchange or "trading up" but also through directly taking an asset or resource from someone else, without compensation. David Harvey calls this accumulation by dispossession. Marx does not discuss gifts and grants as a source of capital accumulation, nor does he analyze taxation in detail. Nowadays the tax take is so large (i.e. 25-40% of GDP) that some authors refer to state capitalism.
The continuation and progress of capital accumulation depends on the removal of obstacles to the expansion of trade, and this has historically often been a violent process. As markets expand, more and more new opportunities develop for accumulating capital, because more and more types of goods and services can be traded in. But capital accumulation may also confront resistance, when people refuse to sell, or refuse to buy (for example a strike by investors or workers, or consumer resistance). What spurs accumulation is competition; in business, if you don't go forward, you go backward, and unless the law prevents it, the strong will exploit the weak.
In general, Marx's critique of capital accumulation is that the human chase after wealth and self-enrichment leads to inhuman consequences. The enrichment of some is at the expense of the immiseration of others, and competition becomes brutal. The basis of it all is the exploitation of the labour effort of others. When the "economic cake" expands, this may be obscured because all can gain from trade. But when the "economic cake" shrinks, then capital accumulation can only occur by taking income or assets from other people, other social classes, or other nations. The point is that to exist, capital must always grow, and to ensure that it will grow, people are prepared to do almost anything.
Concentration and centralization:
According to Marx, capital has the tendency for concentration and centralization the hands of richest capitalists. Marx explains:
"It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals ... Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many ... The battle of competition is fought by cheapening of commodities. The cheapness of commodities demands, caeteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals beat the smaller. It will further be remembered that, with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, therefore, crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of. Here competition rages ... It always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, partly vanish." ("Das Kapital", vol.1, ch. 25)
The rate of accumulation:
In Marxian economics, the rate of accumulation is defined as (1) the value of the real net increase in the stock of capital in an accounting period, (2) the proportion of realised surplus-value or profit-income which is reinvested, rather than consumed. This rate can be expressed by means of various ratios between the original capital outlay, the realised turnover, surplus-value or profit and reinvestments (see e.g. the writings of the economist Michal Kalecki).
Other things being equal, the greater the amount of profit-income that is disbursed as personal earnings and used for consumptive purposes, the lower the savings rate and the lower the rate of accumulation is likely to be. However, earnings spent on consumption can also stimulate market demand and higher investment. This is the cause of endless controversies in economic theory about "how much to spend, and how much to save".
In a boom period of capitalism, the growth of investments is cumulative, i.e. one investment leads to another, leading to a constantly expanding market, an expanding labor force, and an increase in the standard of living for the majority of the people.
In a stagnating, decadent capitalism, the accumulation process is increasingly oriented towards investment on military and security forces, real estate, financial speculation, and luxury consumption. In that case, income from value-adding production will decline in favour of interest, rent and tax income, with as a corollary an increase in the level of permanent unemployment.
As a rule, the larger the total sum of capital invested, the higher the return on investment will be. The more capital one owns, the more capital one can also borrow and reinvest at a higher rate of profit or interest. The inverse is also true, and this is one factor in the widening gap between the rich and the poor.
Ernest Mandel emphasized that the rhythm of capital accumulation and growth depended critically on (1) the division of a society's social product between "necessary product" and "surplus product", and (2) the division of the surplus product between investment and consumption. In turn, this allocation pattern reflected the outcome of competition among capitalists, competition between capitalists and workers, and competition between workers. The pattern of capital accumulation can therefore never be simply explained by commercial factors, it also involved social factors and power relationships.
The origin of capital accumulation in trade:
In the simplest circuit of commercial trade, a sum of money M is loaned and returned with interest as the larger sum M'. Or, as a variation, M is traded for another currency, which rises in value. In counter-trade (a form of barter in which money may be used only to value goods and services), a commodity C exchanges for another commodity C', which may also result in a larger sum of value. Marx calls the additional value surplus-value.
In a slightly more complex trading circuit, a sum of money M buys a commodity C which upon sale yields a larger sum of money M', which can be reinvested. Alternatively, the circuit C - M - C' could substitute for M - C - M' but in this case the enlarged value consists of commodities rather than of money. These circuits are basic to merchant trade.
In the more developed trading circuit of capitalism, however, M buys inputs C (means of production and labour-power) which through new production creates outputs C' and upon sale yield a larger sum of money M'. In this case, we are no longer dealing with merchant capitalism, but with capitalist industry (the capitalist mode of production: all or most of the inputs and outputs of production are available as marketed commodities, and the costs & benefits of total production are rationally calculated in price terms.
In modern capitalism, the circuits of finance, commerce and production have become exceedingly complex, often lack transparency and may involve multilateral exchanges or a lot of fictitious capital. The daily trading volume in the world's foreign exchange markets was estimated at $1.88 trillion in 2004, as against $590 billion in 1989 (current dollars) (Der Spiegel, special edition 4/2005, p. 107). By comparison, the New York Stock Exchange daily volume is said to be around $25 billion a day, and the international futures markets are said to trade about $35 billion worth of contracts a day. Speculative trading makes up the bulk of the daily trading volumes. Most rich people do not want to bother with the financial management of most of their wealth, and know little about it. Investment specialists make their money from investing the money of the rich using their superior market knowledge, contacts, networks and commercial skills.
Home, Distribution of Wealth,
Capital Accumulation (Part 1),
Capital Accumulation (Part 2),
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