If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:10:13

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 in 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 and and you know maybe maybe it is for some type of well well let's think about that what is what about a a going out once a month let's say let's say a vacation this is an interesting case a simplification simple vacation with family maybe it's a family reunion depending on your family it might be that might be simple or it might be relaxing it might not but let's assume this is a relaxing vacation you know 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 you know if I if I 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 you know I don't know the vacation let's say it cost $2000 right we're spending $2,000 on this vacation so that's that might be an investment that's not 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 a family it recenter zyou 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 it depends on what you consider a simplification I would come 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 that could be an investment and that's why I think it's important that you know people don't over work now what if I were to take me and my family and we were to have someone carry us I don't know or you know we we wrote on someone's back as they swam across the ocean to go stay in golden Thrones while a bunch of you know an army of people danced for us right so let's say an extravagant vacation extravagant vacation so you could argue a lot of things but I says you know I'm a family for unless it cost me $200,000 $200,000 well here there's a couple of 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's probably the opposite the extravagant vacation is probably going to make you more stressed and probably feed your egos in ways that are in some ways self-destructive but let's say that there is some component that is that you know let's take the benefit of 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 $2000 so let's say we could say that 2,000 of this is something of an investment and that ninety eight thousand dollars or one hundred ninety eight thousand dollars of this probably is consumption because it's not making you more productive you know sure enough it is when you go to this place it is giving those people something to do and it is it is giving them jobs but I would call that a transfer of wealth this isn't investment when you go to you know 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 you know to have the locals dote on you you're transferring money to them and then you know maybe they transfer that money to someone else but it isn't 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 to to any type of the pie getting bigger you know what I don't even think this is necessarily a bad idea because frankly this is just a transfer of wealth from someone who needs eager gratification to a transfer of wealth from someone who's willing to do you know 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 you know like let's say a simple purse a simple purse you know my wife goes out and buys a purse from Target and it cost twenty dollars is that consumption or is that an investment well I'd argue that that's an investment if she doesn't maybe her old purse is falling apart 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 I don't know how to spell it Louis Vuitton purse I think these costs you know upwards of $2,000 or or whatever well this clearly is is is some form of consumption because it's well you maybe make some argument that in certain circles you could get a job if you carry around one of these perp purses but there's some basic basic core value to it that you probably could have gotten with a simple purse so that maybe is 20 dollars of investment 20 dollars of investment and then the rest of it I don't know the other $1,980 is consumption now 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 a fairly basic utility but that those resources weren't burned those resources went from frankly someone who just wanted some evil gratification it went from someone's ego essentially so let's say this is you or your ego and this is Louis Vuitton Louis Vuitton the company so you gave them 1980 dollars that you didn't have to write their cost of making the purchase 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 ego gratification so I would argue that not this capital actually didn't get lost it just got transferred from someone who is 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 their private equity friend or their venture capital friend and then that gets invested in some you know new startup idea that act you know 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 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 that purse because that those ads you see on TV with those people you want to look like that will not give you that that is not creating any net wealth for the world or is not making the work the pie any bigger anyway let me think of a another example here well let's say so this is 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 let me see my phone is ringing no I don't know who that is I think it's junk but let's say you thought it was not instead of buying a Louis Vuitton purse which reestablish 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 you know I don't know let's see $10 an hour you can have 200 people 200 people dance for you 200 people dance for you 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 instead of sure this 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 for your ego gratification and this is in my mind the worst form of consumption because not only its it's not just a transfer of wealth it is the destruction of wealth because though 200 people's time is wealth that is capital that is capital that could be used to improve someone's lives but instead this $2,000 was essentially destroyed sure it goes to those people right but at 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 of these people's 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 you have more money over less productive goods and services so the price for a productive good and surface 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 then 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 how you go buy 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 in the next video