Thread by @asymptosis

Thread: How Investment (Spending!) Creates Wealth

When economists talk about “investment,” they’re talking about spending: purchasing, or paying people to create, long-lived (productive) goods. 1/n

Say you’re in the farming business, and you pay your neighbor to clear some of your land for agriculture. That creates real value. But how does the land’s higher value materialize on your balance sheet as greater assets, net worth, wealth? 2/n

You transfer $10,000 to your neighbor to clear the land, and they do the work. You have $10,000 less, they have $10,000 more. Collectively, the two of you are net zero.

BUT: You also post a $10,000 value increase to your land account (valuing the improvement at cost). 3/n

So you and your neighbor collectively have $10,000 more assets than you did before the work. That “markup” accounting event is what effectively converts your neighbor’s work into additional assets on your balance sheet — wealth. 4/n

If the market value of the land actually increases by more than $10,000, you might mark the land’s value to market immediately — post even more assets to your balance sheet (a firm would post this extra markup under “other comprehensive income”). 5/n

Or you might mark it to market later, when you sell the land and “realize” the extra value. In either case, that mark-to-market accounting event creates yet more assets, net worth, wealth. 6/n

In either case, It’s your investment *spending* that causes the wealth creation. It mobilizes, incentivizes your neighbor’s labor, causes production. The value of that labor, producing long-lived goods, is posted to your balance sheet as newly created assets. 7/n

This wealth-creation-through-investment-spending process has nothing to do with our collective “saving” — spending less than our income.

Spending, not saving, is what causes production, and creates wealth. 8/8

Spending less than your income increases your wealth. It doesn't increase our wealth. Quite the contrary. 9/8