Financial capital, though important, is not the only kind of capital we're talking about in economics.
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The “American dream” is rooted on the idea that people can go from “poor” to “not poor” in this country with a can-do attitude and strong work ethic. Although we’ve heard a handful of these “rags to riches” stories, research shows that it ain’t as easy as it used to be.

In this series, we explore the economic factors, particularly the four types of capital, that facilitate (or hinder) the path up the economic ladder of today’s modern economy.

The debate

The political debate of income inequality has put experts in economics at center stage to find out what the heck is going on. Some economists claim that income inequality is bad because it restricts opportunities for some members of society, thus exacerbating divisions in social class and hindering growth. Other economists say that income inequality is good because it is a natural phenomenon that rewards people for bringing value to other people in the form of innovation and entrepreneurship; thus technological progress and economic growth.

"Both sides should definitely be taken into consideration, but that debate will get us nowhere if we do not focus on income mobility."

Both sides should definitely be taken into consideration, but that debate will get us nowhere if we do not focus on income mobility. That is, the ability to move in and out of different levels of socioeconomic classes. In today and tomorrow’s economy, the worry is: “I’m poor now, but what needs to happen for me to be not so poor later on?”

Economic capital may be the answer.

Okay, so what is “Capital”?

It may seem like this homonym gets spouted around loosely, drawing an air of importance to whatever it is being used to describe. Capital essentially means asset. And, assets are important because they are not only useful, but valuable. That means that state capitals to Capital Letters are all different types of assets that are valued because they are productive. Just imagine a world without capitalization and read this: “Once, I helped my uncle Jack off a horse.” Pretty darn useful if you ask me.

In economics, the term “financial capital,” is used more often as economists are known to discuss banking, financial markets, and monetary policy regularly. But economics is more than that. It is about how people make everyday decisions through several facets of their lives — including how to improve their financial standing. Financial capital, though important, is not the only asset necessary to make this endeavor more accessible. The four main inputs of economic capital are:

1.) Financial Capital — aka, stocks, shares, and bonds, which takes the form of money and is used to acquire and measure other types of capital. Physical capital, like a house, a crane, or a pizza oven, is lumped into this type. This has a huge impact on our ability to get ahead.

2.) Human Capital — located in the brain (sometimes muscles), is the “smarts” possessed by an individual or a group. This is the knowledge, skills, and experience people acquire to make them useful humans in society.

3.) Social Capital — the collective value of our “social networks” or “who you know” and the tendency to want to do things for people. It’s the backbone of the phrase, “You scratch my back and I’ll scratch yours.”

4.) Cultural Capital — essentially the glue that binds and regards the different forms of capitals within a society. It is the stock of cultural value (history, collective values, norms, morals, that type of stuff) within the other forms of capital that give rise to innovation, entrepreneurship, i.e. green energy, online schools, just about everything. No worries there will be plenty more on this later.

It ain’t all about “Makin’ dat cheddar!”

This may be obvious to some, but life isn’t all about just making money. Most humans understand this, but in a world of stagnant real wages for some, student loan and revolving credit card debts, and substantial wealth inequality, we often forget.

Income inequality is mainly due to disproportionate levels of the listed capitals possessed by individuals. However, the wealthy have easier access to the different capital inputs, like their diverse networks and number of digits in their account balance, making it easier to further increase their wealth.

The changes that have taken place in the modern economy have taken place because of changes in economic capital, holistically, but capital, in all its forms, is broadly intertwined. For example, cultural capital, such as fashion, style of speech or language, directly affects our social networks, or who we know.

Both cultural and social capital directly translate into how we acquire our human capital, which are the actual skills we need to be productive humans. In turn, this translates into (hopefully) more money in the bank: aka financial capital. Keep in mind this setup is fluid and changes depending on the cards the individual has been dealt. What’s important is that they are all distinct and necessary to increase economic mobility for people in a society.

Capital in a “gig economy”

As 40 percent of the workforce transforms into freelancers, understanding and (excuse the pun) capitalizing on these economic factors needed to go up and down the ladder is of dire importance. Who you know, what you know, and what other people value, will dictate how you acquire and grow your financial capital that pushes you up the ladder.

The focus toward specialization not only puts emphasis on our human capital —the skills — we acquire, but will bring to light the importance of leveraging our social capital. Being a part of communities and networks that are advantageous will require actively networking, sometimes moving to a different community or city, and being able to adapt to many different social settings, including the uncomfortable ones. This may mean turning off the laptop, leaving the basement or studio apartment, and heading to a local watering hole to talk to people. Yes, talk.

Additionally, as globalization continues, the political and economic implications will make cultural capital indispensable. It will dictate how we do things, where our passions lie, and how to direct our actions in a way that lead us to be entrepreneurial and a valued member of society, whatever job we may have. Being able empathize with the historical foundations of different customs, values, and norms will prove to pay dividends in the long run.

Not surprisingly, how we invest into retirement accounts, homes, and other financial vehicles will also change in this economy. Fusing all of these capitals together will be the key in having that increased economic mobility.

The takeaway

We all just want to get ahead in life. We want our narrative to have that rags-to-riches story. Really, we’d probably be alright with making enough money to live comfortably and actually being able to pursue happiness. However, to get the financial resources necessary to make that happen, we have to take into account the importance of the other classifications of capital and how to easily acquire or make use of them.

In the next installments, we’ll dive into each one of these economic assets to better prepare ourselves for the future, but more importantly, to make us more economically mobile and give credence to that darn American dream of ours.

 

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Posted 01.11.2017 - 03:02 pm EST