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Investment vs. consumption 2

More investment vs. consumption examples. Created by Sal Khan.

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  • blobby green style avatar for user yumeiw86
    I am a dancer(amateur) and sometimes will give performances just for entertaining people. So it seems that what i'm doing in my spare time is worthless? But dancing make me feel happy and i'm willing to spend my time on it. A bit confused.
    (19 votes)
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    • leafers ultimate style avatar for user shiningcat
      Well he's saying that if 200 people's time was used to entertain just 1 person, then that would be a waste since just 1 or 2 dancers could probably have done the same thing. Or he could have used 200 dancers to entertain 1000 people, or whatever. So the manpower of 200 people (200 worth of hours) were used to entertain 1 person for an hour, although that didn't create anything other than to boost his ego or whatever. That's a lot of waste of people's time. And the money got burned because it didn't create anything.

      I wouldn't say that it's a waste of time if you dance and that made you and others happy because that would make yourself and others more productive and creative and such. But if it's overdone then recognize that it doesn't actually create anything of value (like hiring 200 people to entertain 1 person). It took 200 worth of hours to entertain 1 person for an hour? That doesn't add up. The money was transferred but it didn't actually create anything of value. People had to dance for his money although they could have done something else that creates something (like maybe building a car or something) to make money instead. The whole thing wasted 200 man-hours to transfer $2000 (or however he spent).
      (58 votes)
  • blobby green style avatar for user shanthadurga
    At , Sal talks about a guy paying $2000 to have 200 people dance. Doesn't that sound like funding the arts?? Sal's arguing that that guy doing that is pure consumption. Is that what the music and movie industries are then?
    (8 votes)
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    • blobby green style avatar for user jonvaage
      Here's the question I'd ask you: How often is entertainment synonymous with art? Then, if you grant that some entertainment is art, does it still provide a larger social benefit if it's relatively exclusive? It really forces us to consider the social benefit of elitist art. Should the wealth of a society be measured by the exuberance of the most wealthy? I'm not so sure.
      (27 votes)
  • old spice man green style avatar for user steve.markham
    If I spend my $2000 to buy shares of a publicly traded company, is that consumption or investment? It is certainly referred to as an investment, but I don't see how it increases the total societal wealth.
    (3 votes)
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    • leaf green style avatar for user jake boyne
      etrody: I suggest you watch the video on stocks.

      If you buy the stock as part of a company offering, then yes, what you say is true. The company gets the money and can use it to improve itself.

      However, in the general case, the owners of the existing shares are probably not the company itself, so you aren't giving money to the company; you're giving some other investor the money and the company doesn't get to do anything with it.

      The only way the company could realize tangible benefits from the purchase of the stock is if your purchase caused the stock price to increase and the company wanted to issue additional stock; the increased market price per share could help them justify a higher price per share in the new stock offer.

      By the definition given in these two videos on consumption vs investment, I would not consider the stock purchase an investment.

      Even by the usual definitions of investment (which only requires a gain to the investor and not to society), purchasing stock is not technically an investment unless you have a justifyable high degree of confidence about the expected gain. Without such justifyable confidence, it would technically be speculation.
      (9 votes)
  • What if I am a dancer and I invest the 10 dollars in the building of a simple house or education for my child. What differs it with the louis Vouton example?
    (5 votes)
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    • male robot hal style avatar for user OmniTheWanderer
      I think the point that Sal is trying to make is that in your example, whoever paid you for dancing was transferring wealth, a result that is neutral to society as a whole (or even bad for society, if you would have spent that time teaching your child how to read instead of dancing.) Whoever buys a purse is transferring 2000 dollars in wealth to Louis Vitton in exchange for a purse that is worth 2000 dollars, an action that is neutral to society.

      If you spend the 10 dollars on education that will help you make more money in the future or produce a good that is better than the ones available, then those 10 dollars are an investment. So you made an investment, but whoever paid you just transferred wealth.

      I think the reason the economy needs consumption to function is because every time someone "consumes" they transfer their wealth. Eventually, the wealth transfers to someone willing to invest it, which would not have happened if you earn your money and then bury it in the backyard.
      (4 votes)
  • blobby green style avatar for user jesse
    So perhaps we should distinguish between a "good" investment and a "bad" investment.

    I would argue that consumption and investment are the same at time of purchase. What differs is how that produces future economic output and this is, obviously, only known in the future. Is consumption, then, the accounting of an investment that didn't pay off?
    (4 votes)
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    • blobby green style avatar for user volenin
      I'd agree - consumption is an investment with zero return. For example, if it takes 200 dancers to give Bill Gates (or Steve Jobs - whatever) an inspiration to come up with a new product which will generate billions of dollars in wealth for millions of ppl (manufacturing, software design, etc), then those 2K is money well spent. On the other hand, wrestling, soap operas, ultimate fighting, ie, smth that is executed by few, but consumed by many - these are the examples of pure consumption in my opinion (on the part of the 'viewers' of course) - time has been spent with no or minimal benefit (all those examples are purely personal opinion :) ). I'd say soap operas are really at the top of the list.
      (1 vote)
  • leaf green style avatar for user dave
    ok say i go to disney and spend money you could say that i burned that money talking about in an economic way but wouldnt the money i spend be productive because that money goes throught the workers hands and to the government thru taxes and that would be productive and i was wondering what your thoughts on that is
    (1 vote)
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    • male robot hal style avatar for user Andrew M
      Once a labor resource is consumed, its gone for good. There would have been ripples from paying those people no matter what they got paid for. But in paying them to entertain you, you directed their efforts in a way that is not particularly productive, and there's no undoing that.

      Look at it this way: I can pay you to dig a hole and fill it back up again, over and over. You can take the money I pay you and pay someone else to dig another hole, over and over. If we all do that, and nothing else, then we accumulate no wealth at all. It doesn't matter that we made lots of ripples; we wasted our labor.

      An unfortunate real-life example of this is war: you try to destroy my wealth (and life) and I try to destroy yours. Lots of ripples. Happy defense contractors. Devastating to society. This is why it always bums me out to hear people say that WWII helped the US emerge from the Great Depression. Imagine what could have been done with all that money had it not been necessary to fight a 4-yr global war with it. Imagine what could have been accomplished during the lives of all those lost.
      (5 votes)
  • male robot hal style avatar for user Tanak Nandu
    Another example would be watching videos on the internet. When you watch Sal's videos on Khan Academy it is an investment, however watching cat videos on youtube, that is consumption. Right?
    (2 votes)
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  • male robot hal style avatar for user João Nuno Cardoso
    Ok, so 200 people dance for you is pure consumption.
    How about those same 200 people making a movie? For you and for another 200 million...
    A movie about dancing that is an amazing 200mUSD on the first day?
    Is that investment? Or 200mUSD of a pure first day consumption?
    (2 votes)
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  • marcimus pink style avatar for user YaoYao Wang
    I get what you're trying to teach about investment vs consumption, but man, you have to pick better examples of things that can't be taken literally. Everyone values money differently so as an educator to come off and be very objective on the value of money, which is very subjective, is taking advantage of that role. Purses? Man I could go on and on about that. A Target purse, while cheap, may last you 6 months of use. Isn't that pretty wasteful then? Is contributing to landfill space good for society? Whereas an LV purse, will probably last two generations of use.
    Maybe those 200 people danced and created art and culture. Is that wasteful?
    (2 votes)
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  • leaf blue style avatar for user Bfarnham46
    If going on vacation makes you happy and is an investment why wouldn't making your home more comforting and fitting of your style not be an investment? Couldn't one argue that would increase your productivity/overall well being and happiness? Is consumption relative to ones overall monetary worth? What is 200,000 to a billionaire?
    (2 votes)
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    • duskpin ultimate style avatar for user Cara
      It is arguable. Your argument is based on the assumption that happiness causes one to be more productive. I'm not sure whether that is proven. What is proven, however, is that taking breaks from something increases one's productivity.

      Consider it this way - I could invest more money in healthy food for myself, because it will increase my energy, health, and overall well-being to do so. Conversely, I could invest my money in painting my house purple, because I like purple houses and that would also make me happy. One of these things I think would definitively contribute to my productivity by making me less likely to get sick, more energetic, and so on, which are resources I can invest elsewhere, while the other would merely make me happy. Which result is more important depends on what you value more as a person, but from a strictly financial perspective, buying healthier food would be a better investment since I would be getting a return I could then invest in other areas.
      (2 votes)

Video transcript

Let's continue with this example and I welcome you to throw examples my way, and we can think about whether something is consumption or investment. And my argument, in general, is that investment is something good for society. It's good for you. It is capital, right? Or money that's being put to work to create more wealth or more capital or more good for society. While consumption is capital that is, essentially, being burned in some way, usually for some type of social status or ego gratification. Well, let's think about that. What about a going out once a month-- Let's say a vacation, this is an interesting case. A simple vacation with family. Maybe it's a family reunion, depending on your family, it might be simple, or it might be relaxing, it might not. But let's assume this is a relaxing vacation. You're going camping, or you're going to Yosemite or something. It's a very peaceful, tranquil thing to do. So your original gut reaction would be, well, if we take a vacation, me and my family, we're going to take time off, we're not going to work, my kids aren't going to be in school. So you might say, oh, well, that's consumption because we're going to spend money. Let's say, the vacation cost $2,000, right? We're spending $2,000 on this vacation. So that might be an investment, or that might be consumption. So, at first you might say that's consumption, you're not going to be working. Once you go on that vacation, there's nothing left over. But there could be a counter argument here. There could be an argument that, by taking this simple vacation with the family, it recenters you, it bonds with your family, it makes you a happier human being. And it makes you more likely to be able to contribute to society once you get back home. And if you didn't take this vacation, you would eventually burn out. So in this example, and it depends on what you consider a simple vacation, I would consider that actually, probably an investment. Especially if it makes you more relaxed, it eases your brain, it allows you to become more creative and more productive for society. That could be an investment. That's why I think it's important that people don't overwork. Now, what if I were to take me and my family and we were to have someone carry us or we rode on someone's back as they swam across the ocean to go stay in golden thrones while an army of people danced for us. Right? So let's say, an extravagant vacation. So you could argue a lot of things, this is, I have a family of four and let's say it costs me $200,000. Well here, there's a couple things. There might be some part of this vacation that makes you more relaxed and might make you more productive. I'd argue that it is probably the opposite, the extravagant vacation is probably going to make you more stressed and probably feed your ego in ways that are in some ways self-destructive. But let's say that there is some component, let's stick to the benefit of the doubt, that does relax you. And I would say that that component is an investment. But you know what? You probably could have gotten that for $2,000. So we could say that $2,000 of this is something of an investment and that $198,000 of this probably is consumption. Because it's not making you more productive. Sure enough, when you go to this place, it is giving those people something to do and it is giving them jobs, but I would call that a transfer of wealth. This isn't investment. When you go to whatever country you decide to go to and you blow, essentially, $198,000 that you didn't need to just because it feels good to have the locals dote on you, you're transferring money to them. And then, maybe, they transfer that money to someone else, but it in no way is increasing the wealth of the world. It's not leading to innovation; it's not leading to more factories; and it's not leading to the pie getting bigger. And you know what? I don't even think this is, necessarily, a bad idea because, frankly, this is just the transfer of wealth from someone who needs ego gratification to a transfer of wealth from someone who's willing to do fairly simple things to, essentially, take that wealth from them. But, at the end of the day, it is consumption. And I think you can imagine, let's say, a simple purse. My wife goes out and buys a purse from Target and it costs $20. Is that consumption or is that an investment? Well, I'd argue that that's an investment. Maybe her old purse is falling apart and by having a new purse, maybe it helps her get a job, be more productive; maybe it helps her get more organized. So this could be an investment. And what about a Louis Vuitton-- not to pick on them in particular-- but what about a Louis Vuitton purse. I don't know how much they-- I don't even know how to spell it. I think these cost upwards of $2,000, or whatever. Well, this, clearly, is some form of consumption. You could maybe make some argument that in certain circles, you could get a job if you carry around one of these purses. But there's some basic core value to it that you probably could have gotten with a simple purse. So that, maybe, is $20 of investment. And then the rest of it, I don't know, the other $1,980, is consumption. Now, I'll ask you a further question: do you think that this is bad or good for society? Well, I'd actually argue that it's probably neutral for society, because it does look like a quote, unquote, waste of money, this extra almost $2,000 that you spent that you really didn't have to, to get something of fairly basic utility, but that those resources weren't burned. Those resources went from, frankly, someone who just wanted some ego gratification. It went from someone's ego, essentially. So let's say this is you, or your ego. And this is Louis Vuitton, the company. So you gave them $1,980 that you didn't have to. Their cost of making the purse probably didn't cost a lot more than that simple purse. And in exchange, they gave you ego gratification. So they really didn't have to waste a lot of resources. They gave you all of this brand imagery that makes you feel better about yourself. So I would argue that this capital actually didn't get lost, it just got transferred from someone who was probably a little insecure to someone who knows how to sell to insecure people. And then Louis Vuitton will then have that $1,980 and then who knows, maybe they give that to their private equity friend or their venture capital friend, and then that gets invested in some new start-up idea, some solar-cell company that actually can create energy from the sun. And in which case, that money did not go wasted. So they might actually invest it in solar. So this, actually, was not a waste of money. Although, this transaction, I would agree, is consumption. I would say that the waste of money is all of the advertising and all the sponsorship that Louis Vuitton has to do to convince you that this will make you, somehow, a better person if you buy that purse. Because those ads you see on TV with those people you want to look like, that will not give you-- that is not creating any net wealth for the world, or is not making the pie any bigger. Anyway, let me think of another example here. Well, let's say, so this example with the Louis Vuitton purse, this is just a transfer of wealth. But let's say, instead of doing that, you had your ego and instead of buying a Louis Vuitton purse, you just-- so this is you-- you thought it would be nice-- but let's say, you thought it was nice, instead of buying a Louis Vuitton purse, which we established would just be a transfer of wealth-- it is consumption, but at least that money doesn't disappear-- let's say that you wanted to pay $2,000 to have-- I don't know-- $10 an hour, you can have 200 people dance for you and recite your name and talk about what an amazing person you are. This, I would argue, is pure consumption. Because those 200 people, sure this money gets transferred to them, but they didn't do anything productive with that time. Right? Those 200 people, they could have been tilling the soil; they could have been working in a factory; they could have been teaching their children how to read; they could have been doing something that was productive for society. But instead, they spent one hour dancing for you for your ego gratification. And this is, in my mind, the worst form of consumption because, not only-- it's not just the transfer of wealth, it is the destruction of wealth. Because 200 people's time is wealth, that is capital that could be used to improve someone's life. But instead, this $2,000 was, essentially destroyed. Sure, it goes to those people, right? But in the end, they didn't create anything in that amount of time. And I'll touch more about that anyway. In essence, the amount of money didn't change in the system, but the amount of value in the system got degraded because all these people time got wasted. And, In the end, that actually leads to inflation. If you have more money in a system with less productive goods and services, the price for our productive goods and services goes up. But anyway, I'm out of time again. But I encourage you to think as much as you can about just this idea: when you spend money, is it consumption or is it investment? And I'll continue this more into kind of a lot of what the government tells you to do when the economy goes down. How they say, go by yourself a nice dress, instead of saying, hey why don't you go build a factory? Or why don't you save your money and invest in your child's education? Anyway, see you in the next video.