Everything is an investment

The principal cause of recessions and depressions is lack of capital. Reduced capital stocks induce businesses and consumers to curtail their expenditures, in order to conserve their scarce stock of money.

What causes lack of capital? Poor return on investment is the primary culprit. During the preceding boom, consumers and business, and probably government as well, make what turn out to be poor investments. When capital and revenues are plentiful, people are less concerned with making the highest quality choices.

When I use the word "investment" here, I mean the allocation of any resource to any activity. We all think of stocks, bonds, money market funds, and real estate as investments, but what about time, purchases of durable goods, selections of educational topics, development of new skills? Home budgeting wisdom separates expenses from savings, but both come from the same income pool, and both have the capacity to return future gains.

Most expenses don't return cash, but they may return convenience, time, life satisfaction, and help you avoid costs. If you buy a reliable car instead of a flashy car, you may save thousands of dollars in maintenance over the life of the vehicle and spend dozens to hundreds of hours less time. Then again, if flashiness is supremely important, then buying a flashy car may return life satisfaction well in excess of any additional maintenance expense, or could induce you to extend your car maintenance skills, resulting in personal satisfaction and lower car repair bills.

If you don't think about which corn flakes to buy, you might buy the more expensive box, or the one with less quality per dollar. By not thinking, you lose money. When you don't pay attention, your resources go to the wrong place, and reinforce the wrong behavior in others.

These decisions get less consideration in boom times. If real estate is booming, people may worry less about what would happen if future prices fall than they otherwise would. The idea is that during bubbles the quality of many decisions about where to put capital may be reduced in quality. The result is a mis-allocation of resources, followed by substandard returns on those investments, further resulting in a reduced capital stock.

Hence, it isn't the lack of "animal spirits" that causes recessions, it the presence of "animal thinking" during the booms that causes capital to be allocated badly.

With this insight, the way out of a recession is clearer. Any policy or inducement for people to shortcut their thinking will make the capital deficit worse. Allowing people to sharpen the quality of their investments, to be frugal, insist on quality, and so on, directly adds to capital and immediately rewards those who are making the best efforts to allocate their capital.

Suppose burger chain A and burger chain B sell roughly equivalent value meals. Chain A sells theirs for $5.50. Chain B sells theirs for $4.00. If we assume that the psychological satisfaction of the two meals is roughly the same, the food has the same number of calories, the same quality, and same taste, then which chain is the better investment vehicle? Shareholders of Chain A might be better rewarded in the short term, but let's analyze what happens to society as a whole.

Say that Chain A "gets away with" selling its meals for $5.50. Over time, its employees might come to feel entitled to that $5.50. Or the price may reflect their higher costs, they may let costs rise because the price gives the company less impetus to cut their costs. In the long term, society gets fewer meals from Chain A for the same number of dollars.

Chain B, on the other hand, is generating more meals per dollar. Its customers have money left over, and their employees have succeeded at running the business on a leaner and meaner basis, which makes it more robust to economic shocks. In the long term, society gets more meals from Chain B for the same number of dollars.

In an economic boom, customers flush with extra cash may feel that they are able to show off their wealth by deliberating indulging in a meal from Chain A. Members of the opposite sex will be impressed: "Oh, he can afford the expensive burger! I want him to ask me out! Not that cheap Chain B guy!" Customers are then rewarding the less-efficient business, and making poor investment decisions because they get less for their dollars.

Society benefits from nurturing organizations that can produce and achieve more with fewer resources. Boom thinking, with conspicuous consumption, anti-frugality tendencies, and the success of even inefficient companies, is bad for the long term economy.

I hope that the point of the title of this posting is now clear. Even though a hamburger purchase may not feel like an investment, thousands of decisions to buy off the dollar menu are nevertheless the kind of capital allocation that sets the stage for long-term national economic growth.