In this article, we will discuss two factors of production: Capital and Intellectual Capital. Factors of production are all the things that are needed to make a product. There are usually four types of factors of production. These are land, labor, capital, and intellectual capital. Land is all the free available resources provided by nature. Labor, on the other hand, is the work done by people. Here, we shall discuss Capital and Intellectual Capital.
Let us begin with Capital first. Capital are the financial assets used by a company to start a business, or to earn more money. Let us understand this further. The first thing to understand is that money and capital are different. Many people and books use the two as meaning the same thing. In economics, that is not the case. Money is simply used to buy goods and services to consume. Capital is not used for that. Capital lasts longer than money (it is more durable) and it is used by the businesses to earn more money in the future. This is done through investment. Let’s understand what investment is. Investment is what businesses spend to add to capital. It helps increase the capital. Business buy machinery, trucks, car, computers, buildings and other such things. All these things add to the capital that a business has. They also help the business earn more money. This is what investment is.
Capital can also be used as other things. For example, let’s say a business has a building. But they don’t need it now. This could be because they don’t want to produce more or because they bought it as extra. The business does not want the building to lay idle and it wants to earn money from it. So the business can do multiple things. The business can sell the building and try to earn profit. The business can also use the building for production. But these two things cannot happen if the business wants to keep the building as extra. It also can not happen if the business does not want to produce more. Then the business can use the building, which is capital, and rent it to others. This way, the building can be used and the business can earn money as well. Capital can be rented as well to earn an annual fee.
Things can only be called capital if they do certain things for the business. First, they must give the business a way to earn money and get wealth. It must also allow the business to produce more in the future, if the business wants to. Capital must take the long term view as well. It is very important for the business to survive. This is basically what capital is.
Now let’s talk about the last factor of production. This factor of production is called intellectual capital. Intellectual capital can be defined as the capital that a business has that cannot be touched, felt, or seen (it is intangible). This is an important difference between intellectual capital and capital. Capital usually consists of things that can be touched, felt, and seen. Intellectual capital does not have this property. Intellectual capital covers many things. It covers its people, also called human capital. It talks about its relations with others. It is important for business to have good relations with others. If they don’t, they may have problems in production. This is called relational capital. The most important part of intellectual capital is the knowledge that a business has. Let’s discuss this further.
If a business has the same knowledge as everyone else, it is the same as everyone else. There is nothing that makes it better. In this case, it is not possible for the business to be the best. A business must be the best to earn the most money. It is important for a business to have extra knowledge. This is why intellectual capital is very important. Apple makes the best phones because they have knowledge that others don’t. Coca Cola’s recipe is a knowledge that only that business knows. BMW cars have better knowledge than Maruti Suzuki. That is why their car are better. For Apple, Coca Cola, BMW, and many other companies like these, knowledge makes them the best. This allows them to earn the most money. Good intellectual capital allows the businesses to be better and earn more money than other businesses. Intellectual capital is sometimes, also called Entrepreneurship.
This covers the discussion of intellectual capital.
We have discussed land and labor in a previous article. Here, we have discussed capital and intellectual. These four make up the factors of production. All four work together in long processes to give the final product that is needed. Land provides labor and capital a space to work. Labor and capital work together to produce the goods. Intellectual capital allows labor and capital to work better than everyone else and make a better product. In the absence of one, production would remain incomplete or not good. This is what covers the discussion of factors of production.