I was debating a friend and really don't have a very good response to this question. Is home equity capital? Does the decrease in home prices in of itself therefore represent a decrease in capital?
It may help if you define "capital" first.
I would think not. Home equity is just about subjective value. There are capital goods associated with the house, such as the wood, the copper wire, etc. Equity is just the value of the home. You can borrow against the equity in order to obtain capital goods, but the equity itself does not represent capital.
Though this is more hand-waving than speaking as an authority on the subject.
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It is tricky. I think of my stock portfolio as capital, but technically that is only subjective/speculative value until til actually sell something.
Well, with stocks I would think that the money you used to buy it is used for capital, but I wouldn't call the stock certificate capital.
Uh...are you planning on actually defining the term you're basing this whole discussion on?
I guess that's the real issue. What is generally accepted definition of capital? You tell me.
Well that's kind of my point. If you don't even have a working definition of what capital is, why the hell are you trying to determine if something fits that non-existent definition? I mean, why do you even care? If the word "capital" has no meaning to you then what difference does it make if home equity qualifies as "capital"? You might as well be asking if home equity is "pacntwal".
Someone asks you: "what's 'pacntwal'"? And your response is "I don't know. You tell me."
I guess I figued there was a more established economic answer to that question.
Personally, I define a businesses capital is the goods and resources available for the means of production (the cash in the accounts, the tools in the toolbox, machinery, building, etc.).
For an individual I tend to equate that into the relm of whatever they have produced minus what they have expended for basic existance. The closest term I can come up with here would be net worth.
I am being told I am wrong for assuming Net Worth = Capital.
Wanted to see if more knowledgeable people than he or I agree.
This is really a sticky subject because you're combining what amounts to basically three different subjects here: economics, finance, and accounting...all of which use a lot of the same terms to mean sometimes very different things.
And it doesn't help that multiple words are used to describe the same thing (especially finance. There's at least two names for everything in finance. Seriously.) So really, again, the question is why do you care?...meaning, what exactly is the bottom line you're trying to get to? Do you have some actual consequential reason for needing to reach a conclusion here, or is it just for its own sake? Do you just want to expand your knowledge of one or all of these worlds? If that's the case you'll have to decide how interested you really are, because there is plenty to keep you busy.
Capital - Need some help understanding
What Capital, according to Böhm-Bawerk?
What is a capital good?
What is 'capital consumption'?
and probably most precise:
Ludwig von Mises and The Theory of Capital and Interest
In AE capital is a man-made good used to make consumption goods. It is not totally clear-cut, but, that is not the important matter here. The important matter is that capital is not a value.
"The paper value of our stocks and real estate." "All that phony wealth." "No increase in productive capacity."
Peter Schiff's description of home equity and stocks right before our Great Recession.
In other words, for the country as a whole, what counts is not the numbers you label things with, but of what usefulness they are for you. If we have the same amount of houses as five minutes ago, but the prices of them go up or down, we are not truly wealthier nor poorer. This was the essential insight that ended mercantilism.
For the individual home owner, he calls it phony wealth. Because it was, he thought, a temporary price doomed to drop because there was no demand for houses to live in, but rather to speculate with.
As the other posters pointed out, the technical definition may vary. But if we are talking about how one should look at things to understand the reality around us, I think Peter nailed it.
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Caley McKibbin:In AE capital is a man-made good used to make consumption goods. It is not totally clear-cut, but, that is not the important matter here. The important matter is that capital is not a value.
Perhaps you should read this too.
Smiling Dave:If we have the same amount of houses as five minutes ago, but the prices of them go up or down, we are not truly wealthier nor poorer. This was the essential insight that ended mercantilism.
Careful...do not forget the other side of the coin. You're only talking about supply...and are assuming demand is constant. If I own a widget and all of a sudden the rest of the world really wants a widget, I have become wealthier...even though the same amount of widgets exist.
The difference is, in the housing bubble situation, the demand was phony...the result of funnymoney printed out of thin air.
Perhaps you should read this too.
c. The concept of capital (as well as of its correlative income) is strictly a tool for economic calculation and hence has meaning only in the context of a market in which monetary calculation is meaningful. Thus, capital is properly defined as the (subjectively perceived) monetary value of the owner's equity in the assets of a particular business unit. Capital is therefore to be sharply distinguished from capital goods.
I meant capital goods. I didn't know that just "capital" was specifically defined.
Caley McKibbin:I meant capital goods. I didn't know that just "capital" was specifically defined.
Not only that, but I was also meaning for you to be made aware of the sloppiness of saying things like "In AE _____ is..." As if Austrian economics were some kind of code language which had its own definition for everything, different from the rest of the world, but exactly the same and perfectly agreed upon among all scholars.