Hi,
I came across an idea and want to share with you. Wish you could opine on it.
We often hear that American people consume too much and save too little.
But what is consumption? In this non-government context, seems like the popular definition of consumption loosely means household purchase. Perhaps the term originated from the GDP component "private consumption," which roughly means the aggregate purchase by the household.
But household purchase is not strictly consumption.
When you buy a laptop, it is a consumption if you play games on it but it should be considered as an investment if you use it for study programming in the hope of landing a dream job. Lot of purchases can be argued as for investment in nature. Eating food is a prime example: a piece of bread can survive a poor to sustain his labor, leading to some income higher than the value of the bread; a wedding banquet can strengthen the family bond, leading to financial stability for every member; a lavish wine-dine can help a sales manager to impress a client, leading to lucrative contracts. Now back to the laptop example, even in the case of playing games, you'll feel mentally relaxed after playing, consequently improve the work efficiency the next day, then again it raises the future earning power and thus an investment.
When we see GDP data showing that Americans consume a lot, that just means they purchase a lot. If the purchase is largely used for investment in nature, bravo, it raises the future economic gain, just as the effect by any other investments, like those from corporates and governments. Note that to save is just one of many ways to invest, a passive way to invest. If the household is able to find more prominent investment opportunities in their private lives, why do they choose to save? So we should be careful not to automatically interpret low saving as a negative sign.
Do you agree? Let me know how you think.
Thank you.
Notice that all your examples of what could be "investments" are investments in human capital. National income accounts only records investment in physical capital as part of GDP (purchases buildings, machinery tools, etc.)
Nobel-prize winning economist Gary Becker is known for his research in human capital. These UChicago lectures (from a spring semester course) might sate your interest.
http://www.youtube.com/watch?v=QajILZ3S2RE&playnext=1&list=PL9334868E7A821E2A
You are reducing the definitions down to the point of absurdity. If you are seriously going to argue that physically consuming bread (as in, putting it in your mouth and eating it) is an "investment in your future health" then you might as well say there is no such thing as consumption and everything is investment.
But if you'd like a fuller look into this, Reisman has written quite extensively:
"Production versus Consumption"
"Reisman's net consumption, net investment theory of aggregate profit: exposition and comparison to Mises and Rothbard"
Thank you Claudius and John.
To address Claudius, I can argue that there are plenty examples of private investment on physical assets. If I buy a car for the sole purpose of being able to commute to a new job, this car purchase should be considered as a private investment on physical assets, not on human capital. But this car purchase will show up in the GDP consumption category. To address John, I can scale back the definition of private investment. True, pushing the definition to eating is too extreme and it seems unnecessary for the conclusion here. The conclusion I try to reach here is that, in a household decision, a purchase can be motivated by both consumption and investment, both have sizeable weight. In my laptop example, it's reasonable to assume that you use the laptop 50% for consumption in which you play video games, and 50% for investment in which you study in hope of landing a better job.
When we see GDP data showing that Americans consume a lot, that just means they purchase a lot. Not all purchases are consumed. We need to recognize the investment portion of the purchase and treat it the same as corporate investment or government investment. Since the household saving is just one of many ways to invest, a passive way to invest, the investment portion of household purchase, once recognized, is conceptually nothing different from household saving.
So we should be careful not to automatically interpret low private saving in a negative picture which entails Americans lavishly drinking, partying, credit card maxing, materialistic, irresponsible ...
What do you think of this revised argument?
The problem is it's impossible for an accountant to know whether the purchase of a car or consumption of food was "investment" in the sense that you understand it. The data only shows the types of goods and services that were bought - no detailed of accounts of how buyers utilized their purchases.
Investment in GDP is only considered to be purchases of what would be used to produce future output - tools, equipment, machinery, buildings, etc..
When you buy a new laptop (keyword being "new", used products not recorded in GDP), that will go down as consumption. Period. You using that laptop to study will be considered investment in human capital. This will not go down in GDP because there is no way to immediately give expenditures on investing in human capital a dollar value.
nofrills_econ: When we see GDP data showing that Americans consume a lot, that just means they purchase a lot. Not all purchases are consumed. We need to recognize the investment portion of the purchase and treat it the same as corporate investment or government investment. Since the household saving is just one of many ways to invest, a passive way to invest, the investment portion of household purchase, once recognized, is conceptually nothing different from household saving. So we should be careful not to automatically interpret low private saving in a negative picture which entails Americans lavishly drinking, partying, credit card maxing, materialistic, irresponsible ... What do you think of this revised argument? It's a step in the right direction but ultimately you're still fighting windmills. For one thing, very few goods that are purchased by an end-consumer, regular citizen are for investment purposes. So you might use a computer to study. You might use your car to get to a job, or better yet, as a taxi cab that you earn money driving. What else you got? Of the literally millions of products and services that regular citizens buy, how many of them can even be considered partially an investment, even with your extremely loose, extremely broad, and almost non-sensical definition of "investment"? They are called "consumer goods" for a reason. So even if we could somehow calculate what you're talking about and figure some percentage of consumer goods actually being "investment" purchases, the difference would likely be quite negligible. But let's get to the heart of your point. Your whole thesis with all of this is to try to claim that a low savings rate isn't necessarily a bad thing. Well...yeah, I guess...I mean, if you really put it to someone, (someone who has some degree of economic understanding, anyway) I doubt they would disagree with you. But not because of some contrived "well actually some of that consumer spending is not really consumption so that means it's actually investment, which is a good thing." The truth is much simpler than that. Just as "spending" isn't inherently "good", "saving" isn't either. What's good is producing. And yes, investment generally allows for increased future production, which is ultimately a good thing...but not if people aren't interested in sacrificing consumption in the present term. Savings is literally underconsumption...which means that people are willing to forgo some degree of present satisfaction in the hope that they will attain greater satisfaction in the future. So yes, savings is good in the sense that it allows for capital investment and greater output in the future, making everyone better off...but people have to be willing to save. If they are happier consuming in the present, so be it. This means that interest rates will be higher, and capital investment will be more expensive, as there will be less savings to pull from, meaning less investment will take place. But the higher interest rates go, the more people will be enticed to underconsume and lend instead, as it will pay them a greater return. And at some point a match between the amount of savings and the amount of funds demanded for investment will be attained. This is simply the law of supply and demand at work. The problem comes in when this process of coordination between consumer preferences and and producer output is distorted...usually by a manipulation of the money supply by a central bank. The main reason you hear "savings is good" is because we currently overconsume...meaning not only do we consume everything we produce, we borrow from the rest of the world and consume what they lend us too. You can't do that for very long...and we're starting to see the effects of it...as well as the beginning of the process that will bring it to an end. "Saving is good" now because that's what we need now...we need to consume less. And we also need to increase capital available for production. Saving makes both of those things happen. This is all at the heart of Austrian Business Cycle Theory: The Ultimate Beginner meta-thread Learn the economics of freedom | Post Points: 20
It's a step in the right direction but ultimately you're still fighting windmills. For one thing, very few goods that are purchased by an end-consumer, regular citizen are for investment purposes. So you might use a computer to study. You might use your car to get to a job, or better yet, as a taxi cab that you earn money driving. What else you got? Of the literally millions of products and services that regular citizens buy, how many of them can even be considered partially an investment, even with your extremely loose, extremely broad, and almost non-sensical definition of "investment"? They are called "consumer goods" for a reason. So even if we could somehow calculate what you're talking about and figure some percentage of consumer goods actually being "investment" purchases, the difference would likely be quite negligible.
But let's get to the heart of your point. Your whole thesis with all of this is to try to claim that a low savings rate isn't necessarily a bad thing. Well...yeah, I guess...I mean, if you really put it to someone, (someone who has some degree of economic understanding, anyway) I doubt they would disagree with you. But not because of some contrived "well actually some of that consumer spending is not really consumption so that means it's actually investment, which is a good thing." The truth is much simpler than that.
Just as "spending" isn't inherently "good", "saving" isn't either. What's good is producing. And yes, investment generally allows for increased future production, which is ultimately a good thing...but not if people aren't interested in sacrificing consumption in the present term. Savings is literally underconsumption...which means that people are willing to forgo some degree of present satisfaction in the hope that they will attain greater satisfaction in the future. So yes, savings is good in the sense that it allows for capital investment and greater output in the future, making everyone better off...but people have to be willing to save. If they are happier consuming in the present, so be it. This means that interest rates will be higher, and capital investment will be more expensive, as there will be less savings to pull from, meaning less investment will take place. But the higher interest rates go, the more people will be enticed to underconsume and lend instead, as it will pay them a greater return. And at some point a match between the amount of savings and the amount of funds demanded for investment will be attained. This is simply the law of supply and demand at work.
The problem comes in when this process of coordination between consumer preferences and and producer output is distorted...usually by a manipulation of the money supply by a central bank. The main reason you hear "savings is good" is because we currently overconsume...meaning not only do we consume everything we produce, we borrow from the rest of the world and consume what they lend us too. You can't do that for very long...and we're starting to see the effects of it...as well as the beginning of the process that will bring it to an end. "Saving is good" now because that's what we need now...we need to consume less. And we also need to increase capital available for production. Saving makes both of those things happen.
This is all at the heart of Austrian Business Cycle Theory:
Thank you John. Let me comment on your first paragraph with a short story.
I've observed an immigrant rising from very poor to modest rich in 20 years. In order to realize his ambition of getting rich, majority (say 90%) of his income goes to sustain a self-education for a more lucrative job. This included paying to outsource part of his current job in order to have time study. Only a small amount of his income (say 10%) went to pure enjoyment: e.g., watch a movie, take a day off to have a sound sleep, etc. In the next period, 6~7 years, his career investment materialized the intended gain and then he repeated the same process.
His career path, during the 1991~2011 labor environment, was carpenter --> electrician --> C++ programmer --> actuary. (no offense to carpenters, electricians, or programmers)
My example maybe idiosyncratic in that he is too ambitious. But generally, to achieve any upward social mobility without lottery windfalls, this pattern of investment-oriented spending seems to be the only path. So at least for the cohort moving upward in the social class, they have to have a relative non-negligible percentage of "investment portion" in their purchases. Do you agree?
nofrills_econ: Thank you John. Let me comment on your first paragraph with a short story. I've observed an immigrant rising from very poor to modest rich in 20 years. In order to realize his ambition of getting rich, majority (say 90%) of his income goes to sustain a self-education for a more lucrative job. This included paying to outsource part of his current job in order to have time study. Only a small amount of his income (say 10%) went to pure enjoyment: e.g., watch a movie, take a day off to have a sound sleep, etc. In the next period, 6~7 years, his career investment materialized the intended gain and then he repeated the same process. His career path, during the 1991~2011 labor environment, was carpenter --> electrician --> C++ programmer --> actuary. (no offense to carpenters, electricians, or programmers) My example maybe idiosyncratic in that he is too ambitious. But generally, to achieve any upward social mobility without lottery windfalls, this pattern of investment-oriented spending seems to be the only path. So at least for the cohort moving upward in the social class, they have to have a relative non-negligible percentage of "investment portion" in their purchases. Do you agree?
No I do not agree. You're literally saying that for anyone to move up the economic ladder they have to spend money on "investments". However, the primary things you point to as allowing this man to grow economically are education and work skill. I can give you a thousand examples of individuals who have gained in those areas without buying a single thing.
First your argument was that "savings" isn't automatically a good thing because "investment" is a form of "spending" and even when "consumers" spend money on "consumer goods" there is still a possibilty that they are utilizing the consumer goods in an investment capacity, and therefore not all of the money being spent should be considered "consumption"...therefore low savings isn't automatically a bad thing.
That wasn't so bad. Your entire process was flawed but at least your conclusion that low savings isn't inherently "bad" was correct. Now you're telling me that for someone to move up the economic ladder they pretty much have to spend a significant percentage of their income on "investments". Which is total nonsense.
Even taking the case of your success story here. Your contention is that 90% of his income went to "investment" to "sustain a self-education for a more lucrative job", and the other 10% when to entertainment and leisure. So...how did the man cover his living expenses? You conceded earlier that food needed to sustain one's life should not be considered an "investment"...and I would have to think you would also be honest enough to admit such a necessity should not be considered "pure enjoyment" spending either. So how did this man live? Was he on the government dole? Living with his mom? And what's more, anyone who can live off of 10% of their income (and still afford to take days off to sleep and go to movies apparently) is not "very poor".
John, Thank you for your comment.
From your tone looks like you are a little offended by what I said. We are still discussing it and no conclusions yet. I wonder why you have to put languages like "nonsense" or "entire process is flawed ..."
I'm just trying to figure out some economic ideas, not trying to defend the America consumption culture, and not even trying to take any political/cultural positions.
No I'm not offended at all, and I apologize if those words offended you. I only use them because I feel they accurately describe what I'm talking about. You're process was flawed. The notion you presented was nonsense. I didn't think those were offensive words and I wasn't trying to offend you. I assumed you were interested in actual, honest discussion of your topic. If you wanted people to only voice agreement or to censor out any possible critique or assessment, you should say so. Honestly I don't know of a nicer way to say "you're basically wrong" than "your process is flawed." Many people use words like "full of shit" or "retarded"...and even others choose to attack the person making the argument, saying stuff like "you're an idiot" and the like. That is common all over the Internet. I did nothing of the sort. I didn't even call you "wrong". All I said was there were flaws in your argument and reasoning.
Maybe I'm ignorant or naive but I honestly don't know of a more intellectually honest and courteous way to reword "your process is flawed."
A step up the economic ladder ussually involves opportunity met with action. One might increase the breadth of opportunity through personal investments in education, social networking, etc. but this doesn't guarantee a step up. Some folks get lucky, some stay unlucky. Most of us are dealt the same cards over time, the successful folks just tend to play them better.
The American's low savings rate is mostly driven by forced use of a money which inflates at 15%/year while safely returning less than 5%/year.
We are the soldiers for righteousnessAnd we are not sent here by the politicians you drink with - L. Dube, rip
You are not ignorant and naive but indeed "retarded" as you put it. Plus I would think you are also in some degree emotionally unbalanced. You are using this scientific forum to air your personal grievance. So behave yourself.
nofrills_econ:You are not ignorant and naive but indeed "retarded" as you put it. Plus I would think you are also in some degree emotionally unbalanced. You are using this scientific forum to air your personal grievance. So behave yourself.
So let me get this straight. I make a statement about how your analysis is flawed, and you respond as if I insulted you in some way. I make it clear that I was not intending to offend you in any way, and that I saw nothing discourteous about the words I used, and even still apologized for the possibility of offending you. And you respond by calling me retarded, saying I have an emotional disorder, and then tell me I should behave myself.
You may wish to take a look in a mirror at some point.
One must also find it interesting how your latest two posts are focused entirely on commenting about me and don't even make a single reference to anything being discussed. You make absolutely no point (let alone a coherent rebuttal) on the topic at hand, and instead elect to berate and insult the other person. What a novel concept. Not sure I've ever seen that one before.