What "Investment" Means to Economists

A blog about business and economics.
Nov. 20 2013 12:08 PM

What "Investment" Means to Economists

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Construction is investment is savings. Get it?

Photo by STR/AFP/Getty Images

Something that I find comes up time and again in public policy discussions is that you end up with a state of confusion because macroeconomists use words like "investment" and "savings" in ways that are a little bit at odds with normal English-language usage of these words. My personal view is that economists' habit of appropriating ordinary words as terms of art is unfortune and introduces a lot of confusion into the system. But it's what they've done. So if you want to understand what Ph.D.-wielding policymakers are up to, it's worth trying to get yourself up to speed.

The key thing is what are known as "accounting identities." It's important to be clear that these are stipulations, not empirical propositions.

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One of them is that Gross Domestic Product = Household Consumption plus Government Purchases plus Investment plus Exports minus Imports.

Another is that National Savings = National Investment.

Which is to say that by definition whatever is produced but not exported or consumed is investment.

This is not, in my experience, how normal people talk. If your company orders 1,000 cans of frozen concentrated orange juice and sells 900 cans of frozen concentrated orange juice, you're probably not going to say, "Well, I invested in frozen concentrated orange juice." You're going to say, "Someone screwed up." Conversely, if you hear that your buddy John decided to buy a bunch of frozen concentrated orange juice futures because he just watched Trading Places, you're probably not going to say, "John's saving up his money."

In the ordinary language use of the words, intentionality and subjectivity matter a great deal. Inventory accumulation could be investment (if, say, Apple is stockpiling iPhones in advance of a product launch) or it could be a miscalculation. People more or less passively stashing money in a bank account or a 401(k) are "saving," people actively picking stocks are "investing," and people buying OJ futures on a whim are being goofy. But the economist balancing national accounts doesn't know and doesn't care what's happening in your head. He's just counting things. Some output is sold to the government. Some output is sold to households. Some output is sold to foreigners. The rest of output has been invested.

This becomes relevant when people say that the point of monetary stimulus (say) is to get people to "save less" and "spend more." In regular English you might say you're "saving your money" to make a down payment on a house, and then you "spend the money you've saved" to buy the house. Or else you might say that Apple is "saving a huge share of its profits" rather than "spending billions on opening new Apple retail stores." But in NIPA terms, buying houses and building stores is investment and investment is equal to savings by definition. In NIPA terms what you're doing here isn't actually getting households and firms to "save less" and "spend more" but to shift into a more aggressive posture.

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