Sunday, March 1, 2009

Consumption and Investment

What is the difference between consumption and investment? A first pass answer is that consumption is the use of resources to provide immediate pleasure, while investment is the use of resources to provide a means for procuring additional resources or reducing the work required to achieve the same results. An example of consumption would be spending on fine food, or television, or a massage. These are immediate pleasures that do not in general provide benefits in obtaining other resources. An example of investment is the purchase of washing machine, which reduces the time needed to was clothes, allowing it to be used for other purposes.

Most examples are not so simple. Is purchasing a new computer consumption or investment? It likely has characteristics of each. To the extent that it allows you to be more productive at writing, doing your taxes, or programming it is an investment. To the extent that you play games on it or surf the net, it begins looking much more like consumption.

The picture gets murkier still when you look at intangible, or even just nonfinancial benefits. Is a liberal arts education an investment? If it does not improve your job prospects, many would argue that it is not. However, if it enables you to enjoy life more, engage in more meaningful relationships, and better understand the world these seem like long term benefits enabled by the education, implying that it was investing in something, if not the ability to generate financial wealth.

A lot of the difficulty seems to come back to a question of value. If an investment is an expenditure of time or money that returns long-term value, what is it that we believe has long-term value? Limiting it to only things that have obvious financial benefit seems too limiting, while extending it to anything that makes someone happy seems too broad. Where is the line here?

Maybe its wrong to assume we need to draw a line. We certainly need to keep in mind the long term impact of any spending that we are doing, but there are no absolutes here. Borrowing endlessly in order to buy more fancy clothes, shiny cars, and oversized houses is almost certainly a problem, and we're seeing much of the after-effect in the current economic collapse. However, if we were to only invest in the future, today would be pretty miserable. In the end, some middle way seems indicated. Consume enough today to stay healthy and happy, but don't eat the seed corn, and give up a little bit of comfort to invest in a better future.

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