If real GDP grows at 2%, and some investments return more than that, then you should be suspicious of how much real value they create.
Imagine two economies: in one of them everyone works to build more factories and increase output. In the other, 3⁄4 of all labor is spent making nicer food and movies and back massages. The first economy should grow faster for straightforward reasons.
In econ 101 world, investments should grow and create real value about as fast as the first economy (probably faster owing to diminishing marginal returns and gains from trade), while GDP growth should be like the second economy.
I can imagine an economy where 100% of money is invested into building factories. Then everyone starves to death, because nobody was making or buying food. Yes, it’s a silly example but it shows the obvious:
There is some optimal ratio of investment to consumption.
Clearly, you believe that we are doing too much consumption and too little investment. But what information you use to determine, what ratio is optimal and what the ratio is in our current world, I have no idea. I’m pretty sure econ 101 doesn’t have those answers, but perhaps more advanced economics might have them.
Personally, I believe the ratio is near optimum, and my only evidence is that the world is basically functioning. As it often is, I’m not claiming that we’re at the optimum, I’m only saying that I have no information to tell me on which side of the optimum we are.
Your example doesn’t work because if money is invested into building factories, then the workers must be getting paid, which means that there is demand for food. If there are not enough food companies to satisfy this demand, then food companies would be growing faster than factories, and therefore a better investment. So increasing investments would increase food companies rather than factories in that case.
Anyway, the evidence that we are not at an optimum is supposed to be the fact that stock market returns are higher than GDP growth. Although to be honest I am a little confused about this: if stock market returns are consistently higher than GDP growth, then won’t the stock market eventually take over the world economy? Why hasn’t this happened already? If it does happen, then I guess we’ll see what the mostly-investment world is like.
Your example doesn’t work because if money is invested into building factories, then the workers must be getting paid
Yes, the workers get paid, and then they spend their wages to invest into the next factory, because they’re idiots who think that investment is always better than consumption. Of course, no sane people would actually do this, they would instead realize that once you have a lot of investment, the relative value of consumption (or, not starving to death) increases, and then they would buy a meal. I’m only pointing out the obvious, that 100% investment is bad, and that, maybe, 99% investment and 1% consumption is better, but probably still bad.
Anyway, the evidence that we are not at an optimum is supposed to be the fact that stock market returns are higher than GDP growth.
I’m not sure what that proves. It could be that the stock market generates a lot of real value, or it could be that it only generates a lot of money. Considering the “everyone invests” example, I don’t think that the investments would have low returns, at least until people started dying (let’s assume that there was some food stockpiled, prior to everyone going insane, so the famine takes a while to start).
Imagine two economies: in one of them everyone works to build more factories and increase output. In the other, 3⁄4 of all labor is spent making nicer food and movies and back massages. The first economy should grow faster for straightforward reasons.
In econ 101 world, investments should grow and create real value about as fast as the first economy (probably faster owing to diminishing marginal returns and gains from trade), while GDP growth should be like the second economy.
I can imagine an economy where 100% of money is invested into building factories. Then everyone starves to death, because nobody was making or buying food. Yes, it’s a silly example but it shows the obvious:
There is some optimal ratio of investment to consumption.
Clearly, you believe that we are doing too much consumption and too little investment. But what information you use to determine, what ratio is optimal and what the ratio is in our current world, I have no idea. I’m pretty sure econ 101 doesn’t have those answers, but perhaps more advanced economics might have them.
Personally, I believe the ratio is near optimum, and my only evidence is that the world is basically functioning. As it often is, I’m not claiming that we’re at the optimum, I’m only saying that I have no information to tell me on which side of the optimum we are.
Your example doesn’t work because if money is invested into building factories, then the workers must be getting paid, which means that there is demand for food. If there are not enough food companies to satisfy this demand, then food companies would be growing faster than factories, and therefore a better investment. So increasing investments would increase food companies rather than factories in that case.
Anyway, the evidence that we are not at an optimum is supposed to be the fact that stock market returns are higher than GDP growth. Although to be honest I am a little confused about this: if stock market returns are consistently higher than GDP growth, then won’t the stock market eventually take over the world economy? Why hasn’t this happened already? If it does happen, then I guess we’ll see what the mostly-investment world is like.
Yes, the workers get paid, and then they spend their wages to invest into the next factory, because they’re idiots who think that investment is always better than consumption. Of course, no sane people would actually do this, they would instead realize that once you have a lot of investment, the relative value of consumption (or, not starving to death) increases, and then they would buy a meal. I’m only pointing out the obvious, that 100% investment is bad, and that, maybe, 99% investment and 1% consumption is better, but probably still bad.
I’m not sure what that proves. It could be that the stock market generates a lot of real value, or it could be that it only generates a lot of money. Considering the “everyone invests” example, I don’t think that the investments would have low returns, at least until people started dying (let’s assume that there was some food stockpiled, prior to everyone going insane, so the famine takes a while to start).