Fixed Capital

Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital (fixed asset) that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like.

Fixed capital is that portion of the total capital that is invested in fixed assets (such as land, buildings, vehicles, plant and equipment) that stay in the business almost permanently, or at the very least, for more than one accounting period. Fixed assets can be purchased by a business, in which case the business owns them, but also leased, hired or rented, if that is cheaper or more convenient, or if owning the fixed assets is practically impossible.

Refining the classical distinction between fixed and circulating capital in Das Kapital, Karl Marx emphasizes that it is really purely relative, i.e. refers only to the comparative rotation speeds (turnover time) of different types of physical capital assets. Fixed capital also "circulates", except that the circulation time is much longer, because a fixed asset may be held for 5, 10 or 20 years before it has yielded its value and is discarded for its salvage value. A fixed asset may also be resold and re-used, which often happens with vehicles and planes.

In national accounts, fixed capital is conventionally defined as the stock of tangible, durable fixed assets owned or used by resident enterprises for more than one year. This includes plant, machinery, vehicles & equipment, installations & physical infrastructures, the value of land improvements, and buildings. The European system of national and regional accounts (ESA95) explicitly includes produced intangible assets (e.g. mineral exploitation, computer software, copyright protected entertainment, literary and artistics originals) within the definition of fixed assets. Land itself is not included in the statistical concept of fixed capital, even though it is a fixed asset. The reason is that land is not regarded as a product (a reproducible good). But the value of land improvements is included in the statistical concept of fixed capital, being regarded as the creation of value-added through production.