How do you know that they aren’t strongly correlated? You don’t seem to be addressing the argument in the third paragraph of my post, which gives an intuition for why they might be strongly correlated. Although it’s not so clear why the trades that would happen as a result of investment are more valuable than the trades that would result in buying a lot of popcorn, the claim seems to be that we have a way of measuring which trades are more valuable (i.e. which ones gives a better return on investment), and that these measurements show that the investment does in fact create more value. If this is wrong, why is it wrong?
I have the same suspicion about the point of long term investment, but right now it is only a suspicion.
They are not correlated in the sense that there are many investments that don’t create global value but return a profit. Those are often called “rent-seeking” . You may have intuitions why rents shouldn’t exist, but they clearly do.
Rent-seeking surely exists, but what proportion of a generic investment does it represent? You seem to have a strong opinion on this and I’m not sure why.
I’ve said before that most investments (and trades), do create positive value. I’m not claiming that rent-seeking is very common. And I don’t have a strong opinion on what proportion it represents. You pointed to your third paragraph, which contains an intuition why rent seeking shouldn’t exist, and I pointed out that it does.
At this point I’m not sure what we’re talking about. You seem to understand why an investment might create real global value, and you seem to understand that it might create no value (or destroy some) and still return a profit. So, what questions remain?
You said “I don’t know why [consumption] should create less value then long term investment,” that’s a real disagreement (and a place where the overwhelming majority of economists would disagree with you—they’d all say that investment benefits the future at the expense of the present). Your position roughly corresponds to 100% of investment being rent-seeking.
Your position roughly corresponds to 100% of investment being rent-seeking.
Are you saying that when I spend $1000 on popcorn, that creates literally 0 value? Is the popcorn vendor not able to use the profit from my transaction to invest into his own business, for some reason?
Both trades may incidentally create value, e.g. if there is market power or economies of scale, that part is analogous. The part you were confused about is the part where the investment creates value more directly.
Why is “more directly” good? Why is “incidental” value bad? I only care about the total value eventually created. That is the claim that was made, as I understand it—that investment eventually results in more total, global value.
Both trades may incidentally create value
Then I don’t understand why you said “Your position roughly corresponds to 100% of investment being rent-seeking”. It is my understanding that rent-seeking does not create any value, incidentally or otherwise. If buying popcorn “incidentally” creates value, then my position does not correspond to 100% of investment being rent-seeking at all.
The distinction between direct and indirect value is useful because consumption and investment have roughly similar indirect value, while investment has an additional direct value.
If investment and consumption are just as good as each other, then the direct value of investment must be zero, which corresponds to 100% rent-seeking.
If investment and consumption are just as good as each other, then the direct value of investment must be zero, which corresponds to 100% rent-seeking.
You are right, I was wrong: rent-seeking can also indirectly create value. Though it can also “destroy” some value by discouraging useful trades. And that doesn’t really work with 100% investment being rent-seeking (to be honest, I don’t really know what that would look like—is it just two people passing money between them, back and forth?).
Let’s also take a step back. It seems likely to me that we don’t really disagree much, but instead are confusing each other. It’s also very likely that you have a better understanding of econ 101, though it’s not clear to me how much.
The explanations you use seem to be based on fairly arbitrary (even if useful) categories and known relationships between those categories. I don’t find this very helpful. I’d like to see how the money actually moves, and what is done with it, step by step, to create different amounts of value in different scenarios (though I understand that is more work).
It is also unclear to me, which of your statements are “in practice, on average, true” and which are “a logical necessity”.
So, if rent-seeking doesn’t represent very much of a generic investment, then it seems the money you make by an investment and the value it adds to the world are strongly correlated (and my third paragraph suggests that they should be roughly equal most of the time). Since you said you didn’t think these things were strongly correlated I inferred that you must think rent-seeking represents a significant proportion of a generic investment. But maybe I was reading too much into what you wrote.
We may be interpreting the word “strongly” differently. Anyway, to decide how much real value investing creates, it would be good to have a measure for that real value. I wonder how relevant GDP growth is. Maybe, 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.
Also, rent-seeking, is, I think, a sort of special case. Rents only prove that your intuition is wrong. And if your intuition is wrong, then we can expect many other trades not to be rational, and not to create as much value as they claim, even if they don’t strictly fall into that category.
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).
OK I think we agree now, except I don’t think my intuition was wrong, I think I just didn’t make my beliefs clear enough at the start. I’ve edited the post to clarify.
How do you know that they aren’t strongly correlated? You don’t seem to be addressing the argument in the third paragraph of my post, which gives an intuition for why they might be strongly correlated. Although it’s not so clear why the trades that would happen as a result of investment are more valuable than the trades that would result in buying a lot of popcorn, the claim seems to be that we have a way of measuring which trades are more valuable (i.e. which ones gives a better return on investment), and that these measurements show that the investment does in fact create more value. If this is wrong, why is it wrong?
I have the same suspicion about the point of long term investment, but right now it is only a suspicion.
They are not correlated in the sense that there are many investments that don’t create global value but return a profit. Those are often called “rent-seeking” . You may have intuitions why rents shouldn’t exist, but they clearly do.
Rent-seeking surely exists, but what proportion of a generic investment does it represent? You seem to have a strong opinion on this and I’m not sure why.
I’ve said before that most investments (and trades), do create positive value. I’m not claiming that rent-seeking is very common. And I don’t have a strong opinion on what proportion it represents. You pointed to your third paragraph, which contains an intuition why rent seeking shouldn’t exist, and I pointed out that it does.
At this point I’m not sure what we’re talking about. You seem to understand why an investment might create real global value, and you seem to understand that it might create no value (or destroy some) and still return a profit. So, what questions remain?
You said “I don’t know why [consumption] should create less value then long term investment,” that’s a real disagreement (and a place where the overwhelming majority of economists would disagree with you—they’d all say that investment benefits the future at the expense of the present). Your position roughly corresponds to 100% of investment being rent-seeking.
Are you saying that when I spend $1000 on popcorn, that creates literally 0 value? Is the popcorn vendor not able to use the profit from my transaction to invest into his own business, for some reason?
Both trades may incidentally create value, e.g. if there is market power or economies of scale, that part is analogous. The part you were confused about is the part where the investment creates value more directly.
Why is “more directly” good? Why is “incidental” value bad? I only care about the total value eventually created. That is the claim that was made, as I understand it—that investment eventually results in more total, global value.
Then I don’t understand why you said “Your position roughly corresponds to 100% of investment being rent-seeking”. It is my understanding that rent-seeking does not create any value, incidentally or otherwise. If buying popcorn “incidentally” creates value, then my position does not correspond to 100% of investment being rent-seeking at all.
The distinction between direct and indirect value is useful because consumption and investment have roughly similar indirect value, while investment has an additional direct value.
If investment and consumption are just as good as each other, then the direct value of investment must be zero, which corresponds to 100% rent-seeking.
You are right, I was wrong: rent-seeking can also indirectly create value. Though it can also “destroy” some value by discouraging useful trades. And that doesn’t really work with 100% investment being rent-seeking (to be honest, I don’t really know what that would look like—is it just two people passing money between them, back and forth?).
Let’s also take a step back. It seems likely to me that we don’t really disagree much, but instead are confusing each other. It’s also very likely that you have a better understanding of econ 101, though it’s not clear to me how much.
The explanations you use seem to be based on fairly arbitrary (even if useful) categories and known relationships between those categories. I don’t find this very helpful. I’d like to see how the money actually moves, and what is done with it, step by step, to create different amounts of value in different scenarios (though I understand that is more work).
It is also unclear to me, which of your statements are “in practice, on average, true” and which are “a logical necessity”.
(I’m not sure if you’re confusing me for Paul. I just interjected with what I saw to be the reason Paul was talking about direct and indirect value.)
(I’m not confusing you with him, but I am assuming your view to be largely the same.)
So, if rent-seeking doesn’t represent very much of a generic investment, then it seems the money you make by an investment and the value it adds to the world are strongly correlated (and my third paragraph suggests that they should be roughly equal most of the time). Since you said you didn’t think these things were strongly correlated I inferred that you must think rent-seeking represents a significant proportion of a generic investment. But maybe I was reading too much into what you wrote.
We may be interpreting the word “strongly” differently. Anyway, to decide how much real value investing creates, it would be good to have a measure for that real value. I wonder how relevant GDP growth is. Maybe, 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.
Also, rent-seeking, is, I think, a sort of special case. Rents only prove that your intuition is wrong. And if your intuition is wrong, then we can expect many other trades not to be rational, and not to create as much value as they claim, even if they don’t strictly fall into that category.
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).
OK I think we agree now, except I don’t think my intuition was wrong, I think I just didn’t make my beliefs clear enough at the start. I’ve edited the post to clarify.