There are three activities that a capitalist firm does. Every firm engages in all three at different times, but the balance and the timing bring about radically different outcomes: Financially, in immediate human welfare, for development, and morally. I therefore call these the three faces of capitalism.
- Capital formation:In capital formation the firm consumes financial assets (usually cash) and builds real assets that it will later use for production or extraction. Capital formation thus takes two forms:
- Productive capital formation, such as technical innovation, the building of customer relationships and goodwill, channels to market, facilities or machinery, organizational and human capital.
- Extractive capital formation, such as the acquisition of monopoly licenses or exclusivities, financial muscle, commodity stocks, control over suppliers or distributors, land, and all IP assets.
- Production: Production is what an industrial, agricultural, or service firm does. Resources come in, labor and and devices are applied, and goods or services come out. The goal of production is to sell the goods or services at a profit, while minimising the share paid to suppliers and labor, and the running cost of devices.
- Extraction: Extraction is what a landlord, bank, media company, utility, mining company, or retailer does. These firms have a productive function, but their dominant mode of business is to extract rents from assets that they own, while rationing those assets so as to command the maximum price.
The companies that people admire, Google, Apple, the great electrical and electronic firms, the venerable auto and aviation firms, the computer companies, the large and small software houses, big infrastructure, big science, universities, and medicine are all admired because of their productive capital formation: R&D, innovation, bright ideas, making what previously didn’t exist or wasn’t possible. Productive capital is seen as a beacon of hope and progress for humanity, and great store is set by it wittingly or unwittingly.