Mark In Mayenne left a new comment on Surprisingly astute comment in The Daily Mail...
Help me out here Mark please.
If I have spare cash that I wish to invest, how is buying a house to rent out less productive than buying shares or gold or putting it in a bank account or whatever to store my wealth while I don't need it?
Thanks, Mark
If an "asset" already exists, then one person selling it to another (with the intention of collecting rent or capital gains*) does not add to the sum total value of human wealth by one penny, does it? And if you pack in your job (stop creating wealth) and become a BTL landlord (just collecting rents), then the total amount of wealth created goes down. It's only people creating new stuff and exchanging it with other people's output that creates or adds to wealth.
So for that matter, buying shares or gold is not "productive" either. If you buy £20,000 of Volkswagen shares, then no wealth is created or added. If you want to spend your £20,000 on a new Volkswagen, then £20,000's worth of wealth will be created in response to that demand (the new car). Bank accounts are meaningless, it all depends on what the bank does with the money (do they use it for productive or unproductive lending?).
* Of course, part of the rent relates to actual services provided (maintaining and insuring the house, bearing certain risks such as damage or non-payment) and a capital gain might partly relate to improvement expenditure. That is not rent or capital gain for these purposes.
Friday, 1 March 2013
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Thanks, Mark. OK re the other ways of investing the money - I didn't think they were productive in the way you meant either.
Of course if anyone retires to live off investment income, they cease to be productive. One might argue that this situation is the result of having over - produced in the past, and is just compensation for having done so.
The buy - to - let market is distorted since it is one of the few way an average guy can get a loan for what is essentially an investment.
The basic principle of modern retirement saving/investment is not that you have a stockpile of goods that you've built up over 50 years that you then consume in retirement (most of what you'd want to stockpile doesn't last anywhere near that long). What you're *meant* to be doing is saving capital (ie by investing rather than consuming, you enhance future production by enough to provide for your continued consumption). Living off retirement income is not in and of itself non-productive, it's the source of the income that's important.
What about if you build a house and then let it out, or do up an empty house and let it out? Does that add wealth?
Housing is about far more than being productive.
The idea of being "productive" stems from the Industrial Revolution, which produced societies where the central belief is that people should always become richer by doing everything faster, cheaper, quicker, more cleanly etc.
But housing is a basic human need that has always existed, long before the Industrial Revolution.
To answer Bayard's question, building a house is productive because it converts money into goods and assists production by giving somebody somewhere to live. Renovating a building is certainly productive because it brings a disused asset back into use.
MIM, agreed, agreed and agreed.
F, actually there is a difference between "saving" and "investing". Households save. Businesses invest.
Of course, we get the best of both worlds if households save by giving money to businesses to invest.
Buying shares, for example, might be saving but it is not investing. If a business borrows £1m and spends it on useful gadgets, then that is investing (but not saving) and so on.
B, as RT says, doing up houses is definitely productive. Building new ones probably is as well, but taking society as a whole, we make ourselves worse off if we build a house which is not lived in afterwards, of if we build houses while there are existing houses standing empty.
RT, being kept warm and dry and safe is as important as being fed. Farmers are productive and so houses are productive. Just because it is a basic need being satisfied, doesn't make it unproductive.
"if we build houses while there are existing houses standing empty"
but only if the empty ones are nearby (which they surprisingly often are).
B, yes, obviously. If there are empty houses in Glasgow, that's no reason not to build new ones in Guildford. It all depends on your definition of "nearby".
That 'investing' v 'saving' definition troubles me every day. I absolutely agree that for individuals salting away accumulated wealth is not directly productive, but these 'savings' are made available for business investment. (In fact it is the distortion of this process, i.e. the creation of false savings / aka the unwarranted expansion of money and credit, that precipitated the current mess). The difference I think lies in the risk. There is more risk in buying equities than there is in holding cash, and equity savers are compensated proportionately.
L: "salting away accumulated wealth is not directly productive, but these 'savings' are made available for business investment."
Correct. In an ideal world, the only form of saving would be actually investing. Which brings me back to my other campaign, that buying and selling shares is only saving but it is not investing.
Far better for companies to be financed by deposits, so that you place your money directly into businesses and they use that to invest in real capital
You don't have to pay a big premium for the difference between the share price and the actual capital required/used in the business, and you can't make big windfall gains or losses when you withdraw your deposits later on.
MW Remind me of the mechanics of that, please.
L, I explained it e.g. here.
Rather ironically, you were the second person to leave a comment on that post :-)
MW. Thanks for the link - I was too lazy (er, busy) tro look for it myself...
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