Investment vs. consumption 2 | Finance & Capital Markets | Khan Academy

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.

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