Since capital are means of production e.g. machinery, how does that relate to the reward being interest? Business owners borrow money and pay interest but how does capital goods reward interest to business owners?
In economics "captial" generally means one of two things. First is physical capital which is, as you state, a means of production e.g., machinery. The second is financial capital e.g., cash. Now then, it is a bit easier to relate financial capital to interest income. However, the same principals apply to both kinds of capital In particular, what is the opportunity cost of financial capital? Say you have a large pile of cash which you want to use for a business. The opportunity cost would be the foregone interest income that you would have received. And if you kept the cash in a bank and earned interest, the opportunity cost of that interest income is the foregone rate of return on investing.
I hope this helps.
Economyst, Do you mean that ROCE (return on capital employed) is the interest on capital as a factor of production, to all those(owners and creditors) who put permanent money into the business.
and
The the value that a capital good created for a buisness in a given time period is interest of capital when considered as a factorof production
The relationship between capital goods and the reward of interest to business owners is more indirect. Let me explain how it works.
1. Role of Capital Goods: Capital goods, such as machinery and equipment, are essential for businesses to produce goods and services efficiently. They increase productivity, enable economies of scale, and enhance the overall operational capabilities of a business.
2. Borrowing Capital: In order to purchase or acquire capital goods, businesses often need to borrow money from external sources, such as banks or financial institutions. This borrowing is done through loans or other forms of debt financing.
3. Interest on Capital: When a business borrows money, they agree to pay interest on the borrowed capital. Interest is the cost associated with borrowing money and serves as compensation for the lender's risk and forgoing the use of their capital.
4. Revenue Generation: Once the capital goods are acquired, the business uses them to generate revenue. For example, a factory may use machinery to produce goods that can be sold in the market. The revenue generated is a return on the investment made in the capital goods.
5. Surplus Value: The revenue generated from the productive use of capital goods is often higher than the cost of borrowing and maintaining the capital. This surplus value is typically what allows business owners to not only cover their expenses but also earn a profit.
6. Interest as Return: The surplus value, or profit, generated through the productive use of capital goods can be seen as the return on investment. It is this return that compensates the business owner for the interest they pay, as well as for the risks they undertake to operate the business.
Therefore, while capital goods themselves do not directly reward interest to business owners, the productive use of those capital goods creates a surplus value that can serve as a source of profit and thereby compensate for the interest paid on borrowed capital.