ABSTRACT
This chapter presents a definition of capital and a theory of capital formation found persuasive by a number of institutional economists and explains the grounds on which the theory rests, and distinguishes it from the orthodox definition and theory. The man-made agents possessing productive potency are a community’s technology and its technically serviceable institutions. Thorstein Veblen initiated the institutionalist pattern of thought when he challenged the convention of imputing to capital goods an autonomous productive potency. In short, the institutionalist theory of capital formation asserts that a community accumulates the agents possessing productive potency by all activities that raise its level of technology and its effectiveness in coordinating behaviors that apply technology. The institutionalist theory agrees that technical progress is an agent of economic growth, and therefore labels that achievement capital formation. Economists borrowed the term “capital” from business usage in the Middle Ages.
