When Hell Froze Over

I didn’t read through all the comments to a recent post on Free Advice, but a substantial number of them focus on a disagreement on whether public investment in infrastructure falls under investment or consumption. Blogger “Lord Keynes” (LK; his blog) defends infrastructure spending as investment, and a number of other people have taken the opposite stance. The title of this post is meant to be a joke, but I really can’t believe that some Austrians are arguing that infrastructure spending can’t be investment.

“Investment” is one of those words that’s used in different ways. Holding cash can be considered an investment, just like exchanging cash for a financial asset with a higher return is also called investment. When economists use the word, outside of the finance world, oftentimes what they have in mind is spending directly on the production of capital goods — that is, the purchase of inputs that will go towards manufacturing certain output. This second definition, I think, is how everyone is using the word in the above-linked comments thread. To make it more Austrian we can say that investment is the use of a good for something other than direct satisfaction.

Based on the criteria of that last definition, I’m not sure how public spending on infrastructure can be considered consumption. The inputs used to build roads, bridges, lighting, et cetera, are all capital goods. The final product — the roads, bridges, et cetera — can either be used as consumer goods or capital goods, but that’s just the nature of something that can be used by multiple people. But, we wouldn’t call the construction of a WalMart consumption; likewise, we wouldn’t call the production of bottled orange juice consumption, either.

But, that final product isn’t always used to directly satisfy an end. Oftentimes roads and bridges are used by transportation companies to export their goods to other locations. People use roads and bridges to get to work. The private road built by the farmer to access his farm land isn’t a consumption good when used by him for that reason, but a capital good. The purpose of these uses is to indirectly satisfy an end — they’re means towards an end.

Just because the government can target investment doesn’t mean that the resources were used towards the highest priority end; i.e. it doesn’t mean they were allocated for their best use. A government can redistribute all of its resources towards investment, and the economy can still suffer a net loss (opportunity cost). But, this isn’t a reason to argue that public spending on infrastructure must be consumption — I completely agree with LK, it isn’t.

  • Bala

    For once, I have to disagree with you. You said

    “but I really can’t believe that some Austrians are arguing that infrastructure spending can’t be investment.”

    This, unfortunately, is not the argument. The argument was (and is) that government spending on infrastructure (or anything for that matter) cannot be called an investment.

  • Bala

    You said this.

    “To make it more Austrian we can say that investment is the use of a good for something other than direct satisfaction.”

    I disagree. A more Austrian definition would be the act of offering capital to procure the services of factors of production (i.e., exchange present goods for future goods) with the idea of applying the factors of production in a transformative process to churn out goods (producers’ or consumers’) that are exchanged for present goods. The key, as I see it, to investment is the exchange of present for future goods at the start of the process with a corresponding exchange of less remotely future goods for present goods at the end of the process. Do tell me if I am making sense.

    • http://economicthought.net/blog JCatalan

      That’s exactly what public infrastructure spending entails. The purchase of capital goods (“future goods”) for the production of new capital goods (roads, power plants, et cetera). But, rather than “future” versus “present” goods — which can be confusing —, I still prefer my definition. “Present” goods are those for direct satisfaction (to be “consumed”); “future” goods are those for indirectly satisfaction, or for the production of goods that will ultimately become consumer goods. In the end, our definitions are more-or-less the same; I just think mine is more direct and less confusing.

      • Bala

        “The purchase of capital goods (“future goods”) for the production of new capital goods (roads, power plants, et cetera).”

        While I understand that present goods are being exchanged for what are normally treated as future goods, I do not see a transformative process at the end of which there is a corresponding exchange of less remotely future goods for present goods. I think you are mixing up “things” with goods.

      • Bala

        “But, rather than “future” versus “present” goods — which can be confusing —, I still prefer my definition.” – Your definition is misleading because that is where the error of mistaking the “thing” for the “good” stems from. While you think your definition is more direct, mine covers the critical point – the combination of exchanges without which it is easy to mix up consumption and investment (which is is what, I am afraid) you are doing.

        Just to take a simple example, a lathe is usually a capital good. Let’s say I buy a lathe and lock it up in a room in my basement. It just stands there and rusts away. Did I purchase a capital good? Did I invest? On the other hand, let us consider the case where I place the lathe in my factory in a manufacturing process churning out stuff that I sell. In that case, would I have purchased a capital good and would the lathe constitute an investment? Your definition would say “Yes. Yes.” and mine would say “No. Yes”. That is what I think is your error.

        • http://economicthought.net/blog JCatalan

          I don’t know how you’re distinguishing “thing” with “good.” I personally don’t see anything substantive in the differentiation. Whether you call it a “thing” or a “good,” the definition is the same; it’s the Mengerian definition of an “economic good.” These, as per Mises, can be categorized as: producers’ goods (capital goods and the original means of production), consumers’ goods, and media of exchange. I don’t see why anything more than this is needed; otherwise it just complicates things, and I think that the complications is what’s causing the disagreement here.

          I don’t know what relevance the “combination of exchanges” has. Neither am I sure of the relevance of your example, although I agree that my answer is “yes and yes.” With regards to your first question, you’re storing a good for future use, whether that future use is consumption or investment. That resources are idle doesn’t mean that they aren’t an investment; in fact, having a resource idle can be a kind of investment (say that you buy a good now to sell it at a future date for much more than you bought it for; these kinds of acts of arbitrage are still investments — not all cases have the same motivation, but the same general principle continues to apply). Just like holding money, or any asset, can be considered a financial investment.

          But, in the case of roads it’s not a case of idleness. The government hires a private firm to construct a road. That road is then “sold” to others in society, who can either consume it or use it as a capital good (to get to work, et cetera).

          If your distinction between “thing” and “good” is that the latter best fits the “typical” vision of what an economic good is, then it’s not a good reason to distinguish between the two. There are all types of economic goods.

          • Bala

            “I don’t know how you’re distinguishing “thing” with “good.” I personally don’t see anything substantive in the differentiation.”

            There is a lot of substance in that differentiation. It’s like saying “coffee (as in ground coffee beans) is a consumers’ good”. What if I run a cafe where I intend to use the purchased ground coffee beans to make coffee that I sell to my customers? What if, on the other hand, I have purchased the ground coffee beans to make coffee for myself at home? Similarly, there is a substantive difference if I buy the lathe for the purpose of (and this is the important point) storing it in my basement or to display to my guests at home, would you still insist on calling it a capital good? I would think you are in error in doing so because I never intended to apply it in producing other less remotely future goods.

            “I don’t know what relevance the “combination of exchanges” has. ”

            The relevance is that it is ONLY between the pair of exchanges that a “production process” exists. It is this pair of exchanges that brings in the concept of time for us to tale meaningfully of goods as “present goods” and “future goods”. That’s what I was highlighting with my lathe example.

            “That resources are idle doesn’t mean that they aren’t an investment;”

            You are completely missing my point. It is not about idleness of the “resource” (misleading word again). It is about my intent (as the acting man) at the time of offering present goods for the lathe. I never intended to apply it in production of less remotely future goods for further exchange. This, IMHO, is the key.

            “But, in the case of roads it’s not a case of idleness.”

            And neither am I saying it is idleness. I am saying that the road was not made with the intention of exchanging its services in the future for present goods. You are failing to account for all the roads that are built and left open for the public to use (at no cost). There exist millions of miles of such roads in every country that has roads. I see them all around me in my home country (India). I am sure they exist in yours as well.

            “That road is then “sold” to others in society,”

            But this would only be true if there are tolls for road usage. What about the roads that do not carry tolls or any usage charge? What about all the schools for which a fee is not charged or the intention is not to charge a market determined fee that would make the school self-sustaining? What about all the hospitals where no fee is charged? Do all these constitute “investment” as well?

            And then there is the important point of recovering these “investments” not being a critical issue to the extent that prices for their usage are politically and not economically determined. The “price” there is an attempt at mimicking market processes but one that fails to do so effectively. Would these constitute investments as well? I ask this because in the long-run, the intent was never to exchange them for present goods but to deliver certain benefits.

          • http://economicthought.net/blog JCatalan

            I absolutely agree that whether a good is a capital good, consumer good, or a medium of exchange is a subjective decision. I’m not contesting that; in fact, my definition embraces it! But, this doesn’t clarify what you’re intending to say. And, rather than definitions, I think we’re at the point where we need applications. For example, you talk about “combination of exchanges,” but then you don’t really apply the subject to that. If you did, you might see that building a road for the public involves a “combination of exchanges.” Allowing someone to use your good is a “combination of exchanges.”

            I never intended to apply it in production of less remotely future goods for further exchange.

            That you’re holding onto something for future consumption is an act of investment. Consumption is a present-oriented activity; you can’t hold something and assume it’s an act of consumption throughout its period of existence. And, idleness is absolutely relevant to this discussion, because it helps define the acting person’s intention.

            Finally, I’m not sure what the “lack of cost” has to do with anything (and, by the way, some people do pay: it’s called taxation). Even if the product of an investment is offered for free, it doesn’t make the act of investing any less of an investment. It certainly doesn’t imply that the action is, instead, an act of consumption.

          • Bala

            “Allowing someone to use your good is a “combination of exchanges.””

            An exchange is always something for something. There is no 2nd exchange if the use of the good is for free and intended to be free simply because nothing is offered in exchange. I am absolutely unable to see the 2nd exchange when a road is built and people are allowed to use it for free.

            “That you’re holding onto something for future consumption is an act of investment.”

            Praxeologically, yes. Catallactically, no. Would you apply the same logic if I bought a quintal of wheat knowing that I would use only 500 gms of it every day?

            “Consumption is a present-oriented activity; you can’t hold something and assume it’s an act of consumption throughout its period of existence.”

            Once again, you are mixing praxeological analysis into catallactic analysis.

            “I’m not sure what the “lack of cost” has to do with anything”

            It means that there is no future exchange. Without that, calling the good a “future good” is meaningless.

            “Even if the product of an investment is offered for free, it doesn’t make the act of investing any less of an investment.”

            I disagree. Without a corresponding future exchange of less remotely future goods, there is no meaning in talking of “present” and “future” goods. “Free” removes the future exchange and leaves you in no position to talk of “present” and “future” good. There are only present goods in such a case. Hence, there is no meaning in talking of investment.

          • http://economicthought.net/blog JCatalan

            An exchange doesn’t necessarily require one person to offer something physical, at that immediate point in time, in return. I can give a friend something for free, because I want to, and that’s still an exchange. In the act of consumption, you’re not exchanging anything because the act of consumption is entirely personal; you are consuming your own property.

            Would you apply the same logic if I bought a quintal of wheat knowing that I would use only 500 gms of it every day?

            Absolutely.

            Once again, you are mixing praxeological analysis into catallactic analysis.

            What’s the benefit of introducing unsubstantiated terminology, other than to further confuse the debate and not actually engage what’s being said?

            It means that there is no future exchange. Without that, calling the good a “future good” is meaningless.

            There is a future exchange. The government still needs to pay back debtors, or levy taxes, and pay wages. Just because a specific investment doesn’t offer monetary returns that help to pay these costs doesn’t mean it’s not an investment. Much like a failed investment (one that returns no profits, or even negative profits) is still an investment.

          • Bala

            I still see you making mistakes on many counts including fundamental ones. A gift is an exchange only in a praxeological sense and not in an economic sense. When you make a gift, you are “consuming” the gift to derive direct end satisfaction. The means is no longer available with you for any further end satisfaction.

            This bit shocks me

            “What’s the benefit of introducing unsubstantiated terminology, other than to further confuse the debate and not actually engage what’s being said?”

            I really didn’t think I needed to substantiate that while speaking to you. All I meant was that in both cases, the good (the quintal of wheat or the lathe) is outside the nexus of interpersonal exchange and hence from the point of view of economic analysis, the good is a consumers’ good and buying the good is an act of consumption, not investment. I really thought that to an Austrian, this should be obvious. I am sorry if I wasn’t clear enough.

            “There is a future exchange.”

            That is an exchange of money for the government not using violence against the individual being taxed. The particular offering of the services of the free-to-use road/hospital/school is not accompanied by a price. It was never intended to be accompanied by a price. I don’t see how you can call it exchange if it is not accompanied by a price. The price may be a money price or a barter price but the existence of a price is an absolute prerequisite simply because any exchange has to happen in a certain quantity of each good and once you speak of quantities, there is always a ratio, which, in exchange, is what we call price. What I can therefore see is an act of consumption followed by an act of violent exchange to obtain the resources to pay for the consumption.

            “The government still needs to pay back debtors, or levy taxes, and pay wages.”

            That may be so but it is not exchanging the service of the road/hospital/school for present goods (money). Taxes are a form of violent exchange. As I see it, there are 2 things happening (and I am repeating myself) – When it builds the road, government is engaging in consumption. When it taxes people to pay for it, it is imposing violent exchange on the people (not necessarily the people who use the road). You are erroneously taking the latter violent exchange as part of the transaction involving users consuming the service of the road

            “Just because a specific investment doesn’t offer monetary returns that help to pay these costs doesn’t mean it’s not an investment.”

            I am not engaging in ex-post but ex-ante analysis (while you are making the mistake of engaging in the reverse). I am saying that ex-ante, the offering of present goods to obtain the services of future goods was not to produce a less remotely future good to obtain present goods in exchange. In government provision of infrastructure, ex-ante, only the offering of present goods to obtain the services of future goods exists. The latter doesn’t. Hence, to consider it as an investment ex-ante would be absolutely erroneous.

  • Bala

    Just pointing out more errors in your original argument.

    “The inputs used to build roads, bridges, lighting, et cetera, are all capital goods.”

    A road or a bridge does not automatically become a capital good. One needs to take the proper praxeological, catallactic view of the choice to produce the road or the bridge ex-ante. If and only if the present goods were advanced to obtain the services of future goods to build the road or bridge with the intention of either applying it in further production of less remotely future goods which are then exchanged for present goods can we consider the output as a capital good. Capital goods are way-stations on the road to end-satisfaction. If a good is not ex-ante intended to be such a way-station, it can’t be treated as a capital good.

    “But, we wouldn’t call the construction of a WalMart consumption;”

    You are missing the world of difference between the construction of a WalMart store by WalMart and the construction of a road by government. When WalMart builds a store, they ex-ante intend to apply it as a factor of production in their core business – retailing. Every billing is an exchange of the services of the future good “the store” for the present goods (money) offered by the customer. When government builds a road, there ex-ante is no intent to engage in a future exchange of the services of the road for present goods with the users of that road.

    “likewise, we wouldn’t call the production of bottled orange juice consumption, either.”

    You are making the same mistake as with the WalMart example.

    “But, that final product isn’t always used to directly satisfy an end.”

    Of course. If I buy bottled orange juice to serve Screwdrivers to the customers at my bar, it is indeed a capital good, but then it is ex-ante intended to be used for that. At the time I buy it, it is a capital good because I intend to exchange its services and the goods these services help produce for present goods.

    “Just because the government can target investment”

    This is question-begging.

    In case you feel I am just being obstinate, please do not hesitate to say so, but I, OTOH, hope that I am being persuasive enough (though verbose – that’s a problem I just can’t seem to address :) )