Not Spending is Not Investment

I see this logical error so constantly, almost every day, that I feel the need to reiterate. Personal saving, virtuous and useful as it is for individuals, does not increase investment. This is what I call the “lump of money” fallacy (a.k.a. the loanable funds model).

Ask yourself:

If you transfer $10K from your bank account to mine for a vacation package (spend), do the banks have more money to lend for investment?

If you don’t transfer the $10K to my account (save), do the banks have more money to lend for investment?

In which scenario am I more likely to invest in cabaña improvements? In which scenario will my employees produce more massages?

A huge amount of the thinking you see out there re: spending, saving, consumption, and investment is crippled by this simple error of composition.

“Saving” ≠ “Saving Resources”

“Saving” Versus Saving for the Future

Cross-posted at Asymptosis.

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