Are long-term investments a good way to help the future?
[Epistemic status: I am very confused, possibly about very basic Econ 101 things. Probably there is more research I could do to resolve my confusion but I don’t have the time or motivation for that right now.]
[Update: Paul Christiano’s comment resolved a reasonable part of my confusion, and gjm’s comment seems to indicate this is probably the wrong discussion to be having.]
Recently there has been some discussion regarding the question of whether the fact that most people don’t make long-term investments to help the future means that people don’t care much about the future. To me this argument seems kind of silly: EAs have a hard enough time already getting people interested in ideas of how to help other people without one more weird idea in the mix. But I am more interested in the object-level question: is long-term investment actually a good way to help the future?
The basic argument in favor is simple. The power of compound interest means that if you invest, you will end up with more money (inflation-adjusted) than you started with, which in turn means that you can help more people. If we value all people equally, then this means a higher utility.
There are many possible objections but to me, the most obvious one is that it’s not clear making $1000 by investing in the stock market means that you have added $1000 worth of value to the world, it could just mean that you have taken it from someone else. I do know enough Econ 101 to know the obvious counterargument: if you assume rational decision-making together with no negative externalities, then you have to have added $1000 worth of value to the world, because every deal that happens as a result of your investment was rationally consented to by the parties making the deal, and so can be assumed not to hurt them (according to the rationality assumption) nor anyone else (according to the assumption of no negative externalities). So everyone else is better off or at least not worse off than they were before, and you are $1000 better off. So $1000 of value has been added to the world. [Edit to clarify: The point of this argument is not supposed to be that the assumptions are always satisfied (they aren’t), but that maybe they are satisfied often enough that we can expect a generic investment that makes $1000 to have added close to $1000 of real value to the world.]
Those seem like pretty strong assumptions to me though, and the conclusion seems pretty weird if you think about it. Namely, you are saying that just by making some trades that at the time don’t make anyone better off or worse off, you end up creating something of real value. But the trade itself clearly isn’t what’s creating the real value, so it must be being created in some hidden way. What is the causal mechanism linking the trade to the creation of value? I can’t see it.
As an example, suppose someone sells you a stock, which you intend to keep for a long time, whereas otherwise you would have just kept the money for a long time. If we assume that the person you are buying the stock was also going to hold on to it, and will hold onto the money as well, then the trade actually does not create value. Now this scenario contradicts the rational decision-making assumption because if the other guy is just going to keep the money, then it would be better for him not to sell the stock. So he is going to spend it instead, and that will cause some sort of ripple effects throughout the economy. Somewhere in these ripple effects, it seems, we are to believe that the real value is created. But the longer the ripple, it seems, the more chance there is for irrational action, so that in the end maybe you are just taking money from someone stupid. How can we estimate the chance of this versus the chance that the ripple effect will cause real value?
Here is another way that I tried to wrap my mind around it. Consider a simplified model where everyone has to choose whether to consume resources or create resources. Then maybe by doing this trade, you are moving the incentive structure in the direction of incentivizing resource creation. People “could have” created resources anyway, but they didn’t want to. So in the end you are basically paying people to create resources, which is an action that doesn’t help them but helps the future. But its effect on them is essentially the same as if you had paid them to do something else.
So, am I thinking about this the right way? Is there any good way to empirically estimate how much value is created by an investment? Or am I concentrating on the wrong objection and other objections are actually more important? (Another possible objection is that maybe mitigating X-risk now is more important, or equivalently maybe our ability to use resources to mitigate X-risk is decreasing at a rate comparable or faster to the growth rate of investments. How fast is our ability to mitigate X-risk decreasing? Is it decreasing?)
(Note: The comment threads of the two posts I linked to in the first paragraph contain some valuable discussion I won’t reproduce here; so does the comment thread of this old post. Also, this post summarizes some discussion on the related question of whether short-term investment (by which I mean years or decades rather than centuries or millenia) is worthwhile from an EA perspective.)
Suppose you’d written the same post about whether buying popcorn creates popcorn:
The popcorn argument is mistaken for exactly the same reason. In fact people buying popcorn causes people to make popcorn, by driving up demand. The mechanism is not speculative or mysterious. And people buying investments causes people to make investments by the same mechanism.
Another way to think about it is to think about loans rather than equity, you might find these less confusing. If I loan someone $10, and get paid back $11 tomorrow, it’s not crazy to assume that they now have more stuff than they had before, otherwise why did they pay me the $1? (I might have instead duped someone into taking out a loan that they’ll regret, in which case I’ve transferred money from them to me, but if you are saying “most of the time when people buy something, it makes them worst off” then I think you are the one with the weird claim.)
Now what if you loan someone money, and then I merely buy the loan from you, so that I give you money today and then I’ll get paid back instead of you? Now am I doing anything?
Yes, because you were going to sell the loan to someone else. I’ve increased the number of people “buying loans” by 1, which means that I also need to increase the number of people “selling loans” by 1, i.e. I need to increase the number of loans by 1. (This isn’t quite right—I can also raise the price of loans and thereby discourage another buyer, but the basic analysis ends up nearly the same.) It’s just like buying popcorn from someone who doesn’t make it themself, in a world where popcorn is non-perishable. It’s all the same.
Loans and equity are very close substitutes, the main difference is the risk profile of repayment (loans pay a fixed amount, equity pays an amount that depends on how well the company does).
Let me see if I understand what you are saying. People have set up supply chains that can produce popcorn from nothing, so when you buy popcorn then it sends a message to this supply chain that it should create one more, and then it does. So it sounds like you are saying there is a similar type of supply chain for the abstract good “use some resources now to create more resources in the future”. When you buy a loan or equity it sends the signal “we need one more of those” and so one more ends up being produced.
Of course I was not saying “most of the time when people buy something, it makes them worse off”, but I was concerned that this might happen often enough that if the way investment works is by initiating a long chain of transactions, then maybe there is a high likelihood that at least one of those transactions is a bad one.
What I understood from your comment is that we can probably ignore this concern at least until the point where people are no longer just trading loans or equities. Because there may be a bunch of people that you have changed who they are buying/selling loans from, but not how many they bought/sold because they were pretty sure about how many they wanted to buy/sell and won’t change that in response to the infinitesimal change in market price. The one person who does change what they do is not a typical buyer/seller, but someone who was just on the edge of deciding what to do, which means that the money now or the more money later are of roughly equal value to them. This presumably means that they have a way of getting the more money later from the money now that doesn’t involve just trading loans, so then they will do that.
So, this does make me update in the direction of that the value created is mostly real, but I still don’t feel completely comfortable with it. “Use some resources now to create more resources in the future” is still pretty abstract, it would be nice to have a better idea of what is a typical example of it, and how there could be a supply chain for it similar to the supply chain for popcorn. Although maybe it is wrong to try to focus on examples.
Also if I’ve understood you right, then cata’s comment is almost completely a red herring? It seems like your argument would apply even if you were just trading abstract financial instruments with a defined interest rate, without any direct connection to companies.
I do think that you get the full effect by trading abstract financial instruments, because investors are comparing those opportunities to other opportunities in individual companies and other places, ready to take the best return slash do arbitrage of various types, so you absolutely move investment into everywhere that investment is being demanded by increasing the overall investment supply. You also push up the value of the thing you purchase, and the things it’s tied to, relative to other things.
I don’t think that makes cata’s comment a red herring, though, because it’s another way to think about it slash another method of action. And it points out that exactly how you invest does, to some extent, matter—if you want the maximum effect you’ll want something as tied to the things you want as you can, which you trade off against returns.
But it is sounding like the main effect is just “create more demand for investment” and that infinitesimally changing the price of the particular instrument you buy is just a side effect. Right now my impression is that the side effect is much smaller than the main effect—and also more sensitive to questions like does the company own equity in itself or plan on issuing more equity, which don’t matter for the main effect.
To put it another way, in the case where the company itself is the marginal seller/issuer of equity, then it matters which company you invest in. And yes, this is more likely if you buy the company’s stock rather than an abstract financial instrument. But it’s still not very likely, if the company has issued a lot of stock.
From your response it’s clear that I didn’t do a good job explaining.
Another short-form attempt: The details matter, but the magnitudes aren’t that different. If you invest in a financial instrument, the people who sell it will hedge or redirect their funds into other instruments until it’s all diffused into various places, driving down remaining supply of available investment by the amount you invested. Now supply and demand must match, so price goes up to do that. If there’s lots of similar available investment opportunities this will mostly be more supply and the price won’t move much. If there’s no remaining places to invest, it will mostly raise prices and reduce demand, instead. If the additional value in the companies slash making the funds available to those companies doesn’t itself increase supply, a fair prior would be 50⁄50 here, so it’s somewhat more than that, plus in addition there’s the anticipation effect—you’ve made past returns look better and future returns look better as well, so investment is now more attractive. (Plus any acausal effects, if you think they count).
The price change being a ‘side effect’ isn’t quite right, it’s more like it’s an intermediate effect.
I hope that helped but I worry the best way to understand this is actually to just understand microeconomics, and that would require a full blogpost. Although I’m not convinced it requires two!
It sounds like you are responding to my first paragraph, in which case I agree with your criticism. I think my second paragraph is closer to the way I am thinking about things. For me the main question here is whether it matters what company you invest in, not whether the price change should be counted as a “side effect”.
We can even say something more. When they manufacture popcorn, they do so because they expect to sell popcorn. If you choose to be the type of person who would buy popcorn, this is plausibly correlated to others’ similar decisions to buy popcorn and to the perception of demand for popcorn by those making popcorn. One way they observe popcorn demand is through popcorn sales, and there are many others. So if you buy a unit of popcorn, you are not only causing them to create the popcorn to replace it (since they now own less popcorn to sell to others or future you) but you also raise anticipated future demand for popcorn (and you’d also do that in any number of other ways). And you can make a case that you actually acausally caused the manufacturing of more popcorn in the past, as well. Markets can be weird, man.
If you’re willing to buy or own equity in some particular company, your demand is driving up the price for that company’s equity. That company may own some of its own equity, or can issue new equity, and can then sell it at a higher price, or use it to pay for things (e.g. employee compensation, deals with third parties) directly. As a result, they can acquire capital to do whatever kind of presumably-profitable endeavor they can think of, presumably creating real economic value (or else it shouldn’t be making a profit.) Your trade returns and dividends are a portion of that value. At least, you know, in theory.
I think Tesla is a good example of this.
They’re not profitable, and haven’t been since inception (aside from a couple of unusual quarters here and there). But the money wasn’t lost so much as spent on increasing capacity each year. And that spending has been working—their revenue has grown on average 55% per year since 2013, the first full year of Model S production. (That’s a lot!)
They’ve had the cash to spend more than they made in part by selling additional equity every year or two. (They’ve also taken out loans.) For example, last March, Tesla raised over a billion dollars by selling stock and convertible notes.
They’re able to do that only because investors like me believe in the long-term vision, expect the company to eventually be profitable, and are willing to buy and hold the stock in the meantime.
1. If I understand right, according to this model if the company doesn’t own any of its own equity and doesn’t plan on issuing new equity, then the value is lost?
2. It sounds like I can paraphrase the argument as saying that it is better for companies to have resources than individuals, because they will use them to produce more resources whereas individuals will not. Is that right?
If I earn some money and give it to (what I take to be) an effective charity, then as far as my charitable activity is concerned it more or less doesn’t matter whether my money-earning has added value to the world or merely transferred resources from someone else to me—because I am giving the money to an effective charity and they probably wouldn’t have.
Put differently: If you believe that donating to effective charities does much, much more good to the world than almost anything else one could do with the money, then most likely the dominant effect of any transaction that yields more money for donating to such charities is the charitable effect, and other things like gains from trade are negligible.
So, long-term investment. It may or may not do the world any other good, but at least it has the effect of transferring money from elsewhere to your fund, and from there to an effective charity. If your choice of effective charity is good, this should improve the world considerably via what the charity does, and in comparison it may scarcely matter what other effects there are.
(Some people think the EA idea that some charities are super-effective is all wrong, and some of those people think that investing in almost any company is better because businesses improve the world. If they’re right, then of course the most important effects of that long-term investment will be those of whatever it’s invested in. But if they’re right then you shouldn’t be thinking about investing to give to effective charities in the first place.)
So, this is an important point and one which is I think particularly relevant to short-term investing. I’ve added a link in the OP to a summary of the debate regarding whether short-term investing is good from an EA perspective.
However, I think when you talk about long-term investing as I am in this post, the situation is different. There are opportunities for effective charity now, but we don’t really know whether they will still exist centuries from now. There is also the issue of how to identify these opportunities long after you are dead, though I suppose you can pick some EA institution to give the money to and hope that they are still around by then (and that their values haven’t drifted in a bad direction).
To whatever extent you’re in doubt about the future existence of big effective-charity opportunities and the ability of future EAs to find them, you should be skeptical about long-term investment for the sake of EA donation.
This may be a strong reason to give sooner rather than later; if you expect the state of the world’s most-in-need people to improve drastically over (say) the next 50 years, as it seems like they have over the last 50 years, then a given sum 50 years from now may do them a lot less good than it would now—perhaps enough to make up for the expected growth if you invest the money now.
How big a deal this is is likely to depend on what sort of thing you consider most effective. E.g., if you’re concerned about global poverty and expect existing efforts to improve that a lot over 50 years, probably better to give sooner; if you’re concerned about AI safety and expect it to be 100 years before there’s anything to worry about, maybe invest (or maybe not—you might decide that early foundational work is super-important); etc.
But if what you’re contemplating is investment just for the sake of putting more money into businesses, because business growth is good, then I think most people wouldn’t see that as a variety of EA (though they might be wrong not to) and my guess is that most people thinking about “long-term investments to help the future” have in mind an invest-now-to-give-later model rather than an invest-now-for-the-sake-of-investment model. E.g., Robin Hanson’s blog post that you link to is all about whether the most effective way to address global warming is to invest now in order to use the proceeds to fight global warming later.
So, I think I might have been anchoring too much on Robin’s original post where he says “Usually the best way to help far future folk is to invest now to give them resources they can spend as they wish”, suggesting that it doesn’t matter too much how you spend the money at the end. So in this post I was trying to explore the possibility of an investment-for-the-sake-of-business-growth model, but maybe that was the wrong thing to focus on. Maybe I’ll have to study the investment-to-give-later model in more detail and see what I think of it.
OK, but what about the following argument: Even if effective-charity opportunities decline over time, maybe we can expect that the minimal value of doing something stupid with our money will stay roughly constant. So that the graph of good done relative to time horizon of investment may be V-shaped: decreasing as the effective-charity opportunities go away at first, but then increasing again once they are all gone and so that the effect of declining opportunities doesn’t matter anymore. Maybe if we wait long enough then the right end of the V will be higher than the left end?
Promoted to frontpage.
No, investing $1000 creates a lot less than $1000 of value, but, usually, the value is more than 0 (though it can be 0, or even negative).
I’d be suspicious of this. If I spend the $1000 on popcorn, rather than investing it, the $1000 doesn’t evaporate, it merely moves to someone else. And then that person can do something useful with it. I don’t know why this should create less value then long term investment, but then my Economics 101 is lacking too.
IANAE, but it seems to me that if you want to think about whether value was created or lost, you shouldn’t focus on whether the dollars evaporated or not. Whether there should be more or fewer dollars is a question about the optimal money supply, and it’s not clear that more is always better.
Instead, it seems to me that one should think about money as a communication tool. Whenever money is spent or invested, it tells the economy, “More of this, please!”
So if you spend $1000 on popcorn, you’re incentivizing more popcorn. If you invest it in a speculative venture, you’re saying, “More of this kind of speculative venture.”
Alternatively, you could ignore all the money, and look at what’s happening in the physical world—ah, this person got food, this person got a car, etc.
So if you want to know whether $1000 is better spent on popcorn, or long-term investments, it seems to me that you’d want to ask which is better for the world: a marginal increase in the supply of popcorn, or a marginal increase in long term projects. I think the answer to that question is not trivially obvious—it depends on how much new popcorn you get for a marginal $1000 spent, and on how much new long-term planning, and also on what the supply of those things was like when you started, compared to what would be optimal.
But my guess based on the existence of instant gratification bias is that long-term projects are generally underinvested in, and so the additional long-term investment is better for the world, on the margin. (I do like popcorn though.)
And if you invest into a company that makes popcorn, presumably you’re also saying “more popcorn please”.
I also think it’s non obvious. I’m not saying that consumption is better than investment. And I understand why we could expect less investment than optimal, but still I suspect that the difference between the two is very small.
It’s not well thought out, but I have an intuition that there should be some efficiency in this regard. If investment was a low hanging fruit, in terms of value creation, then a few rich people could invest until it isn’t a low hanging fruit any more.
Oh, yes, I didn’t mean to imply that destroying money destroys value, it was just a lazy metaphor for, I don’t know what, whatever people think is wrong with consumption. Indeed I can’t say that bruning my money, is necessarily a bad thing (although there is some waste, if it causes new money to be printed).
Yes, I’d like more of that.
Wait, you seem to be conflating the concept of investing $1000 with the concept of making $1000 by investing. Certainly if you invest $1000 then you will make a lot less than $1000, and may even lose money. But the question is whether the money that you make or lose is representative of real value added or lost in the world.
In the popcorn example there’s no analogue of “the money you make by investing” because spending money on popcorn doesn’t make you earn more money. This means that what I wrote about how rational decisionmaking and no negative externalities implies that real value has been created, doesn’t apply to the popcorn case. I agree that if you buy popcorn, there is a chance that the person you buy it from will decide to invest the money, in which case the value ends up getting created anyway. However, it seems that this is not the only thing that could happen, and also if you are making truly long-term investments (e.g. centuries) then the other person will almost certainly not invest for as long as you would have.
No, I’m not conflating them (but, oops, I misread your quote). I am talking about real value added to the world. The money you make by investing is an entirely different thing, and the two aren’t strongly correlated, although, usually, they are both positive (but it’s very easy to think of an “investment” that makes money, and destroys some real world value).
The point of the popcorn example is that most trades create a little value, and I don’t see why the trades which would happen as a result of your long term investment are more valuable than the trades that would happen as a result of you buying a lot of popcorn.
I have a suspicion that the point of “long term investment” is that it gives you a lot of maney, and, supposedly, you are a special genius, who knows how to spend the money to help the world, better than anyone else. But that’s a little silly, and I’m only guessing that it might be the case, I haven’t read the original arguments. It’s also possible that we’re not talking about helping the world in the future, we’re talking about helping your personal future. Then investment makes a lot of sense.
When you buy popcorn, someone else gives you popcorn. That required labor and resources, that don’t benefit them directly. Others are worse off, except for the part where they now have some extra green slips of paper. You are better off.
When you invest, someone else gives you money. So at least they believe they are ending up with more stuff than they started with (in expectation). Yes, they might have gotten more stuff by taking someone else’s, e.g. if you invested in a criminal enterprise, or an advertising company, but that’s completely disanalogous to the popcorn case where you always make other people worse off even if there are no externalities.
In this case, past you is worse off, and the current world is better off.
Both consumption and investment also incidentally create some extra value, e.g. because the popcorn vendor has some monopolist power or because there are economies of scale. Those parts of the trades are analogous. But that’s not the main mechanism by which investment makes future people better off.
That’s a weird way to say that they’re better off.
Suppose that paulfchristiano invests $1000 into my company. Suppose that I then spend it all on popcorn. And suppose I later return him $1001. Is the world better off? Surely, this case is exactly like the case where I buy popcorn myself, except that I am now $1 worse off. Who knows, maybe I worked extra hard to earn that $1? Is that where the new value comes from?
My point is that investment is not inherently good. The way investment creates value is by enabling useful consumption. It’s possible that other people know how to use money better than me, but that’s not necessarily true.
Do you also mean to be saying that it’s not good on average, in expectation. Or just that it’s not always, necessarily good?
The latter. We can have high confidence that investment is good on average. And so is consumption.
How do you know that they aren’t strongly correlated? You don’t seem to be addressing the argument in the third paragraph of my post, which gives an intuition for why they might be strongly correlated. Although it’s not so clear why the trades that would happen as a result of investment are more valuable than the trades that would result in buying a lot of popcorn, the claim seems to be that we have a way of measuring which trades are more valuable (i.e. which ones gives a better return on investment), and that these measurements show that the investment does in fact create more value. If this is wrong, why is it wrong?
I have the same suspicion about the point of long term investment, but right now it is only a suspicion.
They are not correlated in the sense that there are many investments that don’t create global value but return a profit. Those are often called “rent-seeking” . You may have intuitions why rents shouldn’t exist, but they clearly do.
Rent-seeking surely exists, but what proportion of a generic investment does it represent? You seem to have a strong opinion on this and I’m not sure why.
I’ve said before that most investments (and trades), do create positive value. I’m not claiming that rent-seeking is very common. And I don’t have a strong opinion on what proportion it represents. You pointed to your third paragraph, which contains an intuition why rent seeking shouldn’t exist, and I pointed out that it does.
At this point I’m not sure what we’re talking about. You seem to understand why an investment might create real global value, and you seem to understand that it might create no value (or destroy some) and still return a profit. So, what questions remain?
You said “I don’t know why [consumption] should create less value then long term investment,” that’s a real disagreement (and a place where the overwhelming majority of economists would disagree with you—they’d all say that investment benefits the future at the expense of the present). Your position roughly corresponds to 100% of investment being rent-seeking.
Are you saying that when I spend $1000 on popcorn, that creates literally 0 value? Is the popcorn vendor not able to use the profit from my transaction to invest into his own business, for some reason?
Both trades may incidentally create value, e.g. if there is market power or economies of scale, that part is analogous. The part you were confused about is the part where the investment creates value more directly.
Why is “more directly” good? Why is “incidental” value bad? I only care about the total value eventually created. That is the claim that was made, as I understand it—that investment eventually results in more total, global value.
Then I don’t understand why you said “Your position roughly corresponds to 100% of investment being rent-seeking”. It is my understanding that rent-seeking does not create any value, incidentally or otherwise. If buying popcorn “incidentally” creates value, then my position does not correspond to 100% of investment being rent-seeking at all.
The distinction between direct and indirect value is useful because consumption and investment have roughly similar indirect value, while investment has an additional direct value.
If investment and consumption are just as good as each other, then the direct value of investment must be zero, which corresponds to 100% rent-seeking.
You are right, I was wrong: rent-seeking can also indirectly create value. Though it can also “destroy” some value by discouraging useful trades. And that doesn’t really work with 100% investment being rent-seeking (to be honest, I don’t really know what that would look like—is it just two people passing money between them, back and forth?).
Let’s also take a step back. It seems likely to me that we don’t really disagree much, but instead are confusing each other. It’s also very likely that you have a better understanding of econ 101, though it’s not clear to me how much.
The explanations you use seem to be based on fairly arbitrary (even if useful) categories and known relationships between those categories. I don’t find this very helpful. I’d like to see how the money actually moves, and what is done with it, step by step, to create different amounts of value in different scenarios (though I understand that is more work).
It is also unclear to me, which of your statements are “in practice, on average, true” and which are “a logical necessity”.
(I’m not sure if you’re confusing me for Paul. I just interjected with what I saw to be the reason Paul was talking about direct and indirect value.)
(I’m not confusing you with him, but I am assuming your view to be largely the same.)
So, if rent-seeking doesn’t represent very much of a generic investment, then it seems the money you make by an investment and the value it adds to the world are strongly correlated (and my third paragraph suggests that they should be roughly equal most of the time). Since you said you didn’t think these things were strongly correlated I inferred that you must think rent-seeking represents a significant proportion of a generic investment. But maybe I was reading too much into what you wrote.
We may be interpreting the word “strongly” differently. Anyway, to decide how much real value investing creates, it would be good to have a measure for that real value. I wonder how relevant GDP growth is. Maybe, if real GDP grows at 2%, and some investments return more than that, then you should be suspicious of how much real value they create.
Also, rent-seeking, is, I think, a sort of special case. Rents only prove that your intuition is wrong. And if your intuition is wrong, then we can expect many other trades not to be rational, and not to create as much value as they claim, even if they don’t strictly fall into that category.
Imagine two economies: in one of them everyone works to build more factories and increase output. In the other, 3⁄4 of all labor is spent making nicer food and movies and back massages. The first economy should grow faster for straightforward reasons.
In econ 101 world, investments should grow and create real value about as fast as the first economy (probably faster owing to diminishing marginal returns and gains from trade), while GDP growth should be like the second economy.
I can imagine an economy where 100% of money is invested into building factories. Then everyone starves to death, because nobody was making or buying food. Yes, it’s a silly example but it shows the obvious:
There is some optimal ratio of investment to consumption.
Clearly, you believe that we are doing too much consumption and too little investment. But what information you use to determine, what ratio is optimal and what the ratio is in our current world, I have no idea. I’m pretty sure econ 101 doesn’t have those answers, but perhaps more advanced economics might have them.
Personally, I believe the ratio is near optimum, and my only evidence is that the world is basically functioning. As it often is, I’m not claiming that we’re at the optimum, I’m only saying that I have no information to tell me on which side of the optimum we are.
Your example doesn’t work because if money is invested into building factories, then the workers must be getting paid, which means that there is demand for food. If there are not enough food companies to satisfy this demand, then food companies would be growing faster than factories, and therefore a better investment. So increasing investments would increase food companies rather than factories in that case.
Anyway, the evidence that we are not at an optimum is supposed to be the fact that stock market returns are higher than GDP growth. Although to be honest I am a little confused about this: if stock market returns are consistently higher than GDP growth, then won’t the stock market eventually take over the world economy? Why hasn’t this happened already? If it does happen, then I guess we’ll see what the mostly-investment world is like.
Yes, the workers get paid, and then they spend their wages to invest into the next factory, because they’re idiots who think that investment is always better than consumption. Of course, no sane people would actually do this, they would instead realize that once you have a lot of investment, the relative value of consumption (or, not starving to death) increases, and then they would buy a meal. I’m only pointing out the obvious, that 100% investment is bad, and that, maybe, 99% investment and 1% consumption is better, but probably still bad.
I’m not sure what that proves. It could be that the stock market generates a lot of real value, or it could be that it only generates a lot of money. Considering the “everyone invests” example, I don’t think that the investments would have low returns, at least until people started dying (let’s assume that there was some food stockpiled, prior to everyone going insane, so the famine takes a while to start).
OK I think we agree now, except I don’t think my intuition was wrong, I think I just didn’t make my beliefs clear enough at the start. I’ve edited the post to clarify.
So I didn’t answer this at first because it seemed like a distraction from the main point, but since gjm brought it up:
You don’t need to believe that you are a special genius to believe that you would be able to spend the money better than an average person would spend it. The question of how best to spend money to help people is one that an entire community of people (i.e. effective altruists) is dedicated to answering, so the epistemically humble thing to do is probably just to believe that they are right about it. Most people aren’t trying to spend money with the purpose of helping people, so it is not very surprising that you can do better if you try.
Would you rather have $1000 or $2000 to spend on improving the world? And if you have the option of spending $1000 now or $2000 in ten years, which do you think would allow you to improve the world best? That in a nutshell is the argument for investing, and it doesn’t rely on [flattery arguments?} any more than any other argument for something that most people disagree with.
Part of my point is that I would rather not spend any money and leave the spending to other people (e.g. to whoever is giving me all that money). I have no reason to believe that my spending would be more efficient than theirs.
No idea. There are a few obvious cases where $1000 now is far superior (e.g. if I care about saving some endangered animal, I should spend $1000 now since in 10 years it may already be extinct), but those are a bit special. Regarding other forms of charity, I don’t really know how much goodness they create compared to investment. But it seems reasonable to me that the two are comparable.
Curiously, from a civilisational perspective it doesn’t matter whether you invest the money or just stuff it in your mattress; either way you’re creating capital relative to the alternative, which is to spend it now on some form of consumption. (Note that, in this view, charitable giving is a consumption good rather than a capital good. In practice, of course, it’s more complicated, because Africans with mosquito nets are more likely to generate endogenous economic growth than Africans with malaria. But to first order, saving African lives is that-which-you-value, rather than a means of producing more of that-which-you-value; ergo, it’s a consumption good.)
The key idea I think you might be missing is that capital is deferred consumption. That is, whenever we postpone our consumption from time X to time Y, we create capital that exists for the interval [X, Y). If we invest the money, this is obvious: the factory built with our investment is a capital good, and the profit we make depends on the stuff the factory makes being worth more than was invested to build it.
But suppose instead of investing the money, we just bury it for ten years. During those ten years, there is less money in circulation than otherwise, which drives up the value of money. I.e., it drives down the prices of goods. This means that all other holders of money now have access to slightly more capital, and can fund larger investments with the same number of banknotes. The capital is still created, and still produces a dividend, it’s just that that dividend is now paid to people who are actively investing, instead of to us.
How can this be? Well, how did we earn the money in the first place? We produced some good or performed some service, and in return received only these green pieces of paper. If we just sit on them, they are sterile to us; but we still performed the service. Essentially, we are only paid for our work when we spend our wages on consumption goods (or services); it is in those goods that we are really paid. So burying our money for ten years is waiting ten years to present our claim upon society to be rewarded for the work we previously furnished. If that work was to build someone a factory, then for those ten years the factory is producing goods for a society that hasn’t paid for the factory yet; if that work was to supply someone with consumption goods, then just follow the chain of substitutions / opportunity costs until you get to a capital good.
Of course, for this to work, someone has to be investing in actual capital goods; and the more people are doing so independently, the more loci of initiative are searching for profitable opportunities (and the fewer possibly-irrational trades you have to follow before hitting a capital good). So investing the money does slightly improve the system’s efficiency at finding and making the best available investments. But it’s the earning the money, not the investing it, that creates the value which, by deferral of consumption, becomes capital. (Thus, investing unearned income / ill-gotten gains does not create capital!)
So, my understanding of the economic theory is that burying the money under a mattress should create capital that grows at the rate of GDP growth, whereas investing it should create capital that grows at the (faster) rate of the stock market. However, this doesn’t answer the question I was trying to address in this post, which is how much should we trust the economic theory? My intuition is that the better causal models we can come up with to explain why the theory works, the more we should trust it, as long as those causal models don’t predict that the theory is likely to break down when you apply it to reality. I don’t really see anything that I would call a causal model in your comment.
I’m not quite sure how you’re defining “causal model” here, but the bit about “get paid to build a factory, which then produces goods, meanwhile you don’t consume the goods you were paid” seems causal to me. By not consuming the proceeds of your work, you have caused society to have more capital than otherwise. Heck, the paragraph beginning “But suppose…” is also describing a series of causes and effects, although it glosses over exactly how removing money from circulation drives up the value of money (that’s just basic microecon, though, I’m assuming you already understand that).
The rate of GDP growth isn’t really the right thing to use (GDP is the total value of all transactions in the economy, which is fundamentally a meaningless number and is certainly irrelevant here). Burying the money creates capital that grows at the rate of return on capital. Investing the money does the exact same thing. The only difference is to whom the interest is paid.
Actually, on re-reading your post, I see another sign of confusion where you talk about “real value” and claim that trades can’t create it. Value is a two-argument function; when you buy the stock, it’s because the stock (or rather, the future consumption-opportunity it represents) is worth more to you than the present consumption you could buy with it. Meanwhile, the seller values present consumption (or whatever else he buys with the money today, which may even be just the security of having larger reserves of liquid currency as opposed to holding less-liquid, potentially risky shares of stock) more than the future consumption the stock represents. Value has been created, not by creating ‘stuff’, but by moving existing stuff to higher-valued uses.
Similarly, when you defer consumption into the future, you are moving current stuff from consumption to capital uses (because at least some of the resources you are no longer consuming will end up as capital formation (though not all of it because the price of consumption goods will fall slightly relative to the price of capital goods, but it can only do so because the equilibrium quantities shift)), and simultaneously moving future stuff (some of which is created by the capital uses of the current stuff) to consumption uses. As long as the rate of return on capital × your value ratio of future to present consumption is greater than 1, the combined effect is an increase in value. If you invest the money saved, then you capture the value thereby created (you’re trading your future consumption against your current consumption); if you bury it, you don’t: you’re trading society’s future consumption against your current consumption, but if you’re a selfless utilitarian that’s irrelevant.
When I wrote about trades not creating real value, I just meant that any value created in the trade is incidental and not the main thing we are talking about. Like, economic theory says we should expect $1000 of value to have been created even if our trade didn’t create any value (perhaps because both buyer and seller were indifferent to whether or not to trade). Of course I understand the point about moving existing stuff to higher-valued uses.
The idea that burying money is as good as investing it seems to contradict Paul Christiano’s explanation of why investing it creates real value, which I found fairly convincing. I’m not sure what to make of the claim that GDP is a meaningless number. Again, Paul Christiano seems to think there are two different levels of growth that one can meaningfully measure, and he seems like he knows what he is talking about. And intuitively it seems to me like most people will spend their money on things that don’t grow as fast as investments. Though perhaps I will just have to let you two argue about it.
I’m not sure if I can explain why what you wrote doesn’t feel like a causal model to me, but maybe it is because it seems to gloss over too many details. Like, the main detail I was interested in was “how does there arise a connection between investment and factory-building?” although Paul Christiano’s comment may have mostly answered that. In your comment, maybe what I want to know is if you perform a service, how does the value of that service end up getting compounded at the same rate regardless of what the service was? This seems a little odd to me… Also, according to your theory, if we perform a service but then don’t accept money for it, is that the same as performing a service and then burying the money? (My understanding of economic theory is that these are basically the same, but my understanding is also that they are different from investing the money.)