Capital

The term Capital by itself means “wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose such as starting a company or investing”. In other words it is money that can be used for expansion within a business, or for personal gains. Capital can also be in the form of property, or goods that can be used to create wealth or the opportunity for investment. Capital is the driving force for a nation’s government, because it gives them that same ability to grow and expand, and allow for the same effect to carry over for the people the said government represents. The more capital a business or government has, the more successful they become, because it gives them more liberty to buy, sell, or invest to make that business or government more successful. Capital also has multiple other meanings, two of which have direct correlation with this class; economic capital and political capital.

The basic definition of Economic capital is “is the amount of risk capital that a bank estimates in order to remain solvent at a given confidence level and time horizon”. If you are anything like me that definition makes very little sense, so the most important thing to know about economic capital is that it is solely the calculation of risk within the economy, there is no actual capital or money involved. It is calculated by the probability of a future risk and potential losses. The use of economic capital is important because it allows for a pricing system to be used that includes projected losses, and has the ability to put a dollar value on losses that haven’t even occurred yet. This is important because it allows for businesses and governments to spend, and invest while knowing (at least in the ballpark) the losses that loom ahead; if they already are expecting to lose capital going forward, they can plan for it, which means it won’t cripple them when those losses do actually occur.

Political Capital is the idea that “a politician or political policy can build up a certain amount of “goodwill” with the public through the pursuit of popular policies”. An example of this would be a politician passing numerous voter friendly policies in the beginning of his or her term to gain trust among the voters, and further down the line attempting to pass a questionable bill, relying on the political capital he’s built to make that happen. This is equally as important as financial capital, because without politics, and policies, a government cannot function properly. A government also needs support from the electorate so they can make decisions based on what is best for the body they represent. In order to make that happen the politicians and the government are dependent on that political capital to drive them forward.

As we can see from above, capital can come in various different forms. It isn’t always in money form, but it is all equally important. One is money in its physical form that allows businesses and governments to spend and invest; another form is calculation based that allows for projected losses which is important for budgeting investments and spending; and finally the last is based on public trust in politicians as well as their government which allows for them to make better decisions for their electorate, which ties right back into the spending and investing they do. The various forms of capital tie together to make the world we live in today possible.

 

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