Learn about Investment vs. Consumption 1 Video

Get it off your chest – be the first to comment on this video!

Learn about Investment vs. Consumption 1

I've been wanting to make a video on a couple of terms that people are really thrown around for a while now and I think it really hits the core of some of the issues we’re dealing with now with the credit to buckle but its kind of it at a deeper level. So the things that I want to go over the ideas of savings, consumption and investment. And you here this lot everyone obviously says, “Oh, I've invested in those stock market or I've been invested in house.” And I really want to give you a framework for how I think about these ideas and frankly I haven’t seen them depicted this way in any economics book although they’ve kind of touch on this but I think this is really how you should think about these things. So if you save money, you know, when I think we all know what that means that’s money that you didn’t spend. There's a couple of things that you can do with it, you can either consume your money or you can invest you money. So let's just think about a bunch of different situations and think about whether those things are consumption or investment. So let say I have—I don’t know it’s a $100,000.00 that I'm dealing with. So let say I take that $100,000.00 and I build the factory, I build the factory and I think that that factory is going to be able to produce—I don’t know I'll make up some product that will be all produce cars more efficiently and cheaper than any other car factory out there. Well I think this we’d all agree that this is an investment. And why is it an investment? Because I'm taking this $100,000.00 and I'm putting it to some use that is creating hopefully more value than my original $100,000.00 dollar. In fact I'm expecting some type of a return on this investment and I've made a bunch of videos on whether return on investment is and you can usually qualify it, right? If I take a $100,000.00 and I build this factory and this factory splits out $50,000.00 a year it’s probably creating at least $50,000.00 a year of value assuming that nothing corrupt just happening in our system. In fact it's normally creating more than $50,000.00 a year value it maybe creating a $100,000.00 a year of value $50,000.00 of that maybe is going to the person who’s doing the production and then the other half of the value is actually going to the consumer of whatever this factory is making. And you have to think about because if all of the value went to the person who produces the factory then there's not a huge incentive for someone to use its product anymore. But anyway, that’s not the topic of this discussion we’re just trying to get a mental framework on what consumption is versus investments. So I think we all agree that if I were to build the factory that this is—let say I'll do everything in green as investment. So building the factory is an investment. Now let say that I'm homeless and I have this $100,000.00 and because I'm homeless I don’t have a place to go and eat dinner and rest and relax and because I don’t have that I can't get a job and I can't become a productive member of society so maybe I'm going to use this $100,000.00 to buy a simple house that meets all of my needs. So let say build a simple house and I'll do that in neutral color. Build a simple house so this is my other use of this $100,000.00 instead of building a factory I'm going to build a simple house. And this house it provide shelter for me and my family it allows us that kind of security that now my kids can go to school and they can themselves become more productive citizens I now have an address, I have a place to take a shower that allows me to go get a job and I can now create value for society as a whole instead of being, you know, on the corner and begging for money for people. I would argue that this is also an investment. Why is it? Because I'm taking this $100,000.00 that maybe I had or someone gave to me I'm taking this $100,000.00 and its generating your return and what is that return? Well, even a factory it’s maybe a little easier to qualify but at minimum its this work that I'm able to do because I now have a house because I have the security, I have the address, I have the shelter, I'm able to relax it’s that security and its also the return that probably my kids are going to be able to now contribute to society. Maybe if they grow up homeless they would have never been to contribute and now that they had a roof over their head and they're able to go to school et cetera they are be able to give some economic value back to society. Its hard to value you know, maybe I didn’t have any job before and now I have a job a job and I can contribute $30,000.00 a year to society, maybe I'm working at someone factory, maybe I'm providing some other and maybe I'm a farmer now, whatever I'm providing some source of value and maybe my kids if they never going to got education they would have been, you know, maybe they could have made out of 10000 of value per year that people and now they can add 20000 of value so that different would also be some of the return on this investment. So I also consider this to be an investment. Now my question to you is, let say that I already had a house—this is an investment. But let say I already had a house and my family is happy and we have everything we need, we have food on the table and my kids go to school and I'm able to get a job and all of that exist. But let say I still have a $100,000.00 and I use that $100,000.00 to put some granite counter tops and I have some money leftover let say I'm going to add a bathroom to my house and I will—I don’t know I'll put the latest hardwood floors so that my family will be impress hardwood floors and you can imagine and maybe I add 2000 square feet. You know I can’t get all of that for $100,000.00 but I think you bear with me. So I'm essentially doing some major home improvements so my question to you is this an investment of is this consumption? Now, in our everyday world the was most people we deal with they will call us so I've invested my house and why are they saying that because they say by sending a $100,000.00 in the house in this way that maybe and if you watch the Holman Garden Channel they're doing this all the time that if you pour this a $100,000.00 into your house that maybe the value of your house is going to increase by a $150,000.00 or someone else all of the sudden is going to perceive the value of your house is being, you know, $150,000.00 and they’ll say, “Well, you got a $50,000.00 return on investment.” I argue that that is not investment that is speculation you are essentially filling money into this stuff and I'll do this in red consumption is in red. So this is consumption, consumption is red. What's happening here truly economically? When you add granite or you add an extra bathroom, a hardwood floors for the size of 2000 square feet is it making anyone who’s living in that house more productive? Is it making you harder working, is it making you more likely to invent the cure for cancer and more like to invent a way of getting cheap energy or produce more widgets? No! If anything providing more things for you to have to take care of that you're not or focus as much on your work or more energy is going to have to be expended to maintain this type place, I mean to heat and cool of 2000 square feet house. So if anything by actually pouring the $100,000.00 here you're actually creating something that is going to suck more out of society in fact in no way is this going to contribute to the collective wealth of society. The last two examples I gave contributes to the collective wealth of society some of which you share and that is your return on the investment but as a whole this an investment to society and it's going to make the pie bigger. This right here does not make the pie bigger. It might make you a little bit happier, make you're ego feel a little bit better and let your pride grow and yourself righteousness grow and show other people that you’ve arrived. But it's not going to increase the wealth of society. And when you say that you’ve invested you really just saying I've speculated. What you're saying is the thing is $100,000.00 you're going to find essentially a greater pool out there who, you know, before they could have done the same thing they could have bought your house but the $100,000.00 and done this if this is what would have made them happy. But what you're saying is essentially that you're going to find somebody out there who’s willing to pay a $150,000.00 extra dollar for something should have only cost at $100,000.00. And in fact that anything if you uses it all the value of this is going to go down so you're just somehow assuming that and you're assuming that the granite counter tops that you choose are going to be the taste that someone else would like or the hardwood force are going to be the taste that someone else like I would actually argue that when you customized you house in this way you are creating a $100,000.00 of consumption to your taste and I would be surprise if someone else truly is going to pay more than a $100,000.00 unless they are being in some way irrational or they can finance this because it’s part of the mortgage. Anyway, this is—I think just the big picture. Investment adds value to society, investment a simple house as value to society. Consumption is something where you people might call it an investment because it’s kind of speculation that might find some other guy who’s willing to emotionally pay more for something but it is not in anyway it’s money that’s burn it’s not creating more value for society. I'll continue this in the next video.

Khan Academy

The Khan Academy is a not-for-profit organization with the mission of providing a high quality education to anyone, anywhere.

http://www.khanacademy.org/

I've been wanting to make a video on a couple of terms that people are really thrown around for a while now and I think it really hits the core of some of the issues we’re dealing with now with the credit to buckle but its kind of it at a deeper level. So the things that I want to go over the ideas of savings, consumption and investment. And you here this lot everyone obviously says, “Oh, I've invested in those stock market or I've been invested in house.” And I really want to give you a framework for how I think about these ideas and frankly I haven’t seen them depicted this way in any economics book although they’ve kind of touch on this but I think this is really how you should think about these things.

So if you save money, you know, when I think we all know what that means that’s money that you didn’t spend. There's a couple of things that you can do with it, you can either consume your money or you can invest you money. So let's just think about a bunch of different situations and think about whether those things are consumption or investment. So let say I have—I don’t know it’s a $100,000.00 that I'm dealing with.

So let say I take that $100,000.00 and I build the factory, I build the factory and I think that that factory is going to be able to produce—I don’t know I'll make up some product that will be all produce cars more efficiently and cheaper than any other car factory out there. Well I think this we’d all agree that this is an investment. And why is it an investment? Because I'm taking this $100,000.00 and I'm putting it to some use that is creating hopefully more value than my original $100,000.00 dollar. In fact I'm expecting some type of a return on this investment and I've made a bunch of videos on whether return on investment is and you can usually qualify it, right?

If I take a $100,000.00 and I build this factory and this factory splits out $50,000.00 a year it’s probably creating at least $50,000.00 a year of value assuming that nothing corrupt just happening in our system. In fact it's normally creating more than $50,000.00 a year value it maybe creating a $100,000.00 a year of value $50,000.00 of that maybe is going to the person who’s doing the production and then the other half of the value is actually going to the consumer of whatever this factory is making. And you have to think about because if all of the value went to the person who produces the factory then there's not a huge incentive for someone to use its product anymore.

But anyway, that’s not the topic of this discussion we’re just trying to get a mental framework on what consumption is versus investments. So I think we all agree that if I were to build the factory that this is—let say I'll do everything in green as investment. So building the factory is an investment. Now let say that I'm homeless and I have this $100,000.00 and because I'm homeless I don’t have a place to go and eat dinner and rest and relax and because I don’t have that I can't get a job and I can't become a productive member of society so maybe I'm going to use this $100,000.00 to buy a simple house that meets all of my needs.

So let say build a simple house and I'll do that in neutral color. Build a simple house so this is my other use of this $100,000.00 instead of building a factory I'm going to build a simple house. And this house it provide shelter for me and my family it allows us that kind of security that now my kids can go to school and they can themselves become more productive citizens I now have an address, I have a place to take a shower that allows me to go get a job and I can now create value for society as a whole instead of being, you know, on the corner and begging for money for people.

I would argue that this is also an investment. Why is it? Because I'm taking this $100,000.00 that maybe I had or someone gave to me I'm taking this $100,000.00 and its generating your return and what is that return? Well, even a factory it’s maybe a little easier to qualify but at minimum its this work that I'm able to do because I now have a house because I have the security, I have the address, I have the shelter, I'm able to relax it’s that security and its also the return that probably my kids are going to be able to now contribute to society. Maybe if they grow up homeless they would have never been to contribute and now that they had a roof over their head and they're able to go to school et cetera they are be able to give some economic value back to society.

Its hard to value you know, maybe I didn’t have any job before and now I have a job a job and I can contribute $30,000.00 a year to society, maybe I'm working at someone factory, maybe I'm providing some other and maybe I'm a farmer now, whatever I'm providing some source of value and maybe my kids if they never going to got education they would have been, you know, maybe they could have made out of 10000 of value per year that people and now they can add 20000 of value so that different would also be some of the return on this investment. So I also consider this to be an investment.

Now my question to you is, let say that I already had a house—this is an investment. But let say I already had a house and my family is happy and we have everything we need, we have food on the table and my kids go to school and I'm able to get a job and all of that exist. But let say I still have a $100,000.00 and I use that $100,000.00 to put some granite counter tops and I have some money leftover let say I'm going to add a bathroom to my house and I will—I don’t know I'll put the latest hardwood floors so that my family will be impress hardwood floors and you can imagine and maybe I add 2000 square feet. You know I can’t get all of that for $100,000.00 but I think you bear with me.

So I'm essentially doing some major home improvements so my question to you is this an investment of is this consumption? Now, in our everyday world the was most people we deal with they will call us so I've invested my house and why are they saying that because they say by sending a $100,000.00 in the house in this way that maybe and if you watch the Holman Garden Channel they're doing this all the time that if you pour this a $100,000.00 into your house that maybe the value of your house is going to increase by a $150,000.00 or someone else all of the sudden is going to perceive the value of your house is being, you know, $150,000.00 and they’ll say, “Well, you got a $50,000.00 return on investment.” I argue that that is not investment that is speculation you are essentially filling money into this stuff and I'll do this in red consumption is in red.

So this is consumption, consumption is red. What's happening here truly economically? When you add granite or you add an extra bathroom, a hardwood floors for the size of 2000 square feet is it making anyone who’s living in that house more productive? Is it making you harder working, is it making you more likely to invent the cure for cancer and more like to invent a way of getting cheap energy or produce more widgets? No! If anything providing more things for you to have to take care of that you're not or focus as much on your work or more energy is going to have to be expended to maintain this type place, I mean to heat and cool of 2000 square feet house. So if anything by actually pouring the $100,000.00 here you're actually creating something that is going to suck more out of society in fact in no way is this going to contribute to the collective wealth of society.

The last two examples I gave contributes to the collective wealth of society some of which you share and that is your return on the investment but as a whole this an investment to society and it's going to make the pie bigger. This right here does not make the pie bigger. It might make you a little bit happier, make you're ego feel a little bit better and let your pride grow and yourself righteousness grow and show other people that you’ve arrived. But it's not going to increase the wealth of society. And when you say that you’ve invested you really just saying I've speculated. What you're saying is the thing is $100,000.00 you're going to find essentially a greater pool out there who, you know, before they could have done the same thing they could have bought your house but the $100,000.00 and done this if this is what would have made them happy.

But what you're saying is essentially that you're going to find somebody out there who’s willing to pay a $150,000.00 extra dollar for something should have only cost at $100,000.00. And in fact that anything if you uses it all the value of this is going to go down so you're just somehow assuming that and you're assuming that the granite counter tops that you choose are going to be the taste that someone else would like or the hardwood force are going to be the taste that someone else like I would actually argue that when you customized you house in this way you are creating a $100,000.00 of consumption to your taste and I would be surprise if someone else truly is going to pay more than a $100,000.00 unless they are being in some way irrational or they can finance this because it’s part of the mortgage.

Anyway, this is—I think just the big picture. Investment adds value to society, investment a simple house as value to society. Consumption is something where you people might call it an investment because it’s kind of speculation that might find some other guy who’s willing to emotionally pay more for something but it is not in anyway it’s money that’s burn it’s not creating more value for society. I'll continue this in the next video.

Transcription by: Scribe4you Transcription Services