Fixed capital encompasses the assets and capital investments such as property, plant, and equipment (PP&E) essential for starting and running a business, even at a base level. These assets aren’t consumed or destroyed in the production of goods or services but can be reused. Typically, these investments are depreciated over extended periods, often stretching to 20 years or more.
Key Takeaways
- Fixed capital includes assets reused in production multiple times without being consumed.
- Property, plant, and equipment are prominent examples.
- These assets are generally illiquid and depreciated over time.
- Variable capital contrasts sharply with fixed capital.
Understanding Fixed Capital
The concept of fixed capital originated in the 18th century through the work of political economist David Ricardo. For Ricardo, fixed capital referred to any physical asset that isn’t depleted in the creation of a product, differing from circulating capital such as raw materials and labor. In Marxian economics, fixed capital closely aligns with the idea of constant capital.
Fixed capital represents a portion of a company’s total capital outlay invested in long-term physical assets like factories, vehicles, and machinery. These assets remain within the business for more than one accounting period and can be acquired through purchase or structured long-term leases.
Conversely, circulating capital includes short-lived assets consumed during production, like raw materials and labor. Karl Marx highlighted the relative nature of fixed vs. circulating capital, noting their comparative turnover times. While fixed capital takes years or decades to turn over, circulating capital does so much quicker.
Fixed assets can also be resold or reused before the end of their useful lives, as seen in the resale of vehicles and airplanes. They contrast with variable capital, where dynamics change alongside the company’s production scale, leading to cost fluctuations analogous to production levels. In contrast, machinery used in production would be considered fixed capital due to its retention within the company despite changes in output levels.
Fixed Capital Requirements
Fixed capital needs for a business can vary greatly, especially across industries. Sectors like industrial manufacturing, telecommunications, and oil exploration require substantial fixed-capital investments. Conversely, service-based industries such as accounting have minimal fixed capital requirements, focusing on assets like office buildings, computers, and networking equipment.
Acquiring fixed capital can be a prolonged process, as it often requires significant funding. This can escalate risk, especially if unexpected equipment failures occur without sufficient redundancy, potentially leading to financial losses.
Depreciation of Fixed Capital
Fixed capital investments rarely depreciate uniformly. Some assets lose value rapidly—like vehicles that depreciate considerably as soon as they are transferred to new owners. On the other hand, company-owned buildings may depreciate much slower. Depreciation methods aid investors in gauging the value contribution of fixed-capital investments toward current company performance.
Liquidity of Fixed Capital
Despite its inherent value, fixed capital is often illiquid. The reasons include limited market demand for specific high-valued items like manufacturing equipment and the lengthy process required to sell such assets.
Related Terms: variable capital, circulating capital, depreciation, liquidity, constant capital.
