What "Investment" Means to Economists

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

What "Investment" Means to Economists

450625139
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.

Advertisement

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.

TODAY IN SLATE

Politics

The Democrats’ War at Home

How can the president’s party defend itself from the president’s foreign policy blunders?

An Iranian Woman Was Sentenced to Death for Killing Her Alleged Rapist. Can Activists Save Her?

Piper Kerman on Why She Dressed Like a Hitchcock Heroine for Her Prison Sentencing

Windows 8 Was So Bad That Microsoft Will Skip Straight to Windows 10

We Need to Talk: A Terrible Name for a Good Women’s Sports Show

Politics

Cringing. Ducking. Mumbling.

How GOP candidates react whenever someone brings up reproductive rights or gay marriage.

Music

How Even an Old Hipster Can Age Gracefully

On their new albums, Leonard Cohen, Robert Plant, and Loudon Wainwright III show three ways.

The U.S. Has a New Problem in Syria: The Moderate Rebels Feel Like We’ve Betrayed Them

Homeland Is Good Again! For Now, at Least.

Behold
Oct. 1 2014 11:48 AM An Up-Close Look at the U.S.–Mexico Border
  News & Politics
The World
Oct. 1 2014 12:20 PM Don’t Expect Hong Kong’s Protests to Spread to the Mainland
  Business
Moneybox
Oct. 1 2014 2:16 PM Wall Street Tackles Chat Services, Shies Away From Diversity Issues 
  Life
The Eye
Oct. 1 2014 1:04 PM An Architectural Crusade Against the Tyranny of Straight Lines
  Double X
The XX Factor
Oct. 1 2014 2:08 PM We Need to Talk: Terrible Name, Good Show
  Slate Plus
Political Gabfest
Oct. 1 2014 1:53 PM Slate Superfest East How to get your tickets before anyone else.
  Arts
Brow Beat
Oct. 1 2014 2:24 PM The New Interstellar Trailer Is the Most Exciting Yet
  Technology
Future Tense
Oct. 1 2014 2:26 PM The Apple Graveyard Leave a flower for a dead Apple product.
  Health & Science
Science
Oct. 1 2014 2:36 PM Climate Science Is Settled Enough The Wall Street Journal’s fresh face of climate inaction.
  Sports
Sports Nut
Sept. 30 2014 5:54 PM Goodbye, Tough Guy It’s time for Michigan to fire its toughness-obsessed coach, Brady Hoke.