Everyday Economics

“Most returns can’t effectively be measured in a dollar amount, but that doesn’t mean they don’t exist”

One of my favorite things about economics is how often it’s absolutely wrong. You’ll walk into an introductory economics course and be shown a beautiful, intricate system that makes so much intuitive sense. This introduction will be followed by an explanation of why, in the real world, nothing actually works like this, and the entire model is more or less incorrect. But hey, at least it’s pretty.

One area that economics enjoys simplifying is the grouping of spending into two distinct categories: consumption and investment. There are more technical definitions, but I find the most intuitive way to think about it is that consumption creates value now, and investment creates value later. Obviously, everybody wants value, and if you remember the ‘Two-Place Problem’ article, the challenge is in choosing at what point we want that value created for ourselves – at what point along the spectrum of life do we choose to spend the dollar.

In this simplified world, consumption is something that provides value in the moment. An example might be purchasing and eating a sandwich. I’ll enjoy the sandwich as I eat it, but afterwards it’s gone – it can no longer generate value, so we classify it as consumption.

Investment, on the other hand, requires waiting – choosing to realize the value at a later point. In traditional economics, we think about it as savings, stocks, treasury bonds, or all manner of assets that will store our value and help it grow. Conversely to consumption, investment doesn’t generate value at the moment – owning a treasury bond doesn’t immediately change anything in my life. An investment will only create value for me when I choose to cash it in, so to speak.

Essentially, consumption and investment are all about delayed gratification. In a non-monetary model, imagine yourself with a can of Coke. You love Coke and are dying for a drink, but the can hasn’t been refrigerated, and you prefer your coke cold. You have two options:

a) Consume it in the moment, which would make you happy

b) Put the coke in the fridge for half an hour (the investment), so that when you take it out (realizing the investment), the cold coke will benefit you more than its warm counterfactual.

When framed this way, it becomes clear that consumption and investment are simply two ends of a spectrum containing the range of choices regarding how long we’re willing to delay (and ideally grow) what we find valuable.

Simple enough.

But- This is where we throw in the wrench- That really, the entire spectrum is context-dependent.

Let’s go back to our sandwich. Imagine you’re waiting for an interview for your dream job. You accidentally overslept and skipped breakfast. You’re outside the building, hungry, cranky, and not in a particularly inspired mood. Thankfully, there’s a sandwich shop right next to the building.

But you’re interviewing for a financial advisor position, and on principle, you refuse to waste resources on petty consumption. So you walk into your interview hungry, cranky, and proceed to fail spectacularly.

Or, you choose to get the sandwich. It settles your stomach and your mood, and you walk into the interview feeling on top of the world. You proceed to land the job.

In this instance, the sandwich was the crux – the difference between getting an offer or not. The value provided by the sandwich doesn’t end with feeling full – it continues to pay a rate of return for as long as you stay in your dream job, and possibly even after. You invested a sandwich and reaped a six-figure income. Now that’s a killer rate of return!

The point here isn’t that you should always buy a sandwich, but it’s about understanding that there are almost always larger games at play. We have to manage ourselves, our relationships, our work, our futures – most returns can’t effectively be measured in a dollar amount, but that doesn’t mean they don’t exist.

The fact is that almost every decision we make will have ripples. And that’s all a return is – a ripple. As such, no decision or dollar spent can be contained in the definition of consumption. Everything is some form of investment, because consumption exists only as a snapshot, and we exist beyond that snapshot. Consumption is a short-run phenomenon, and we live lives in the long-run.

One way or another, decisions will ripple out to other aspects of our lives, desired or not. So when considering a spending decision – be it traditional investment, consumption, or anything in-between – the most rational thing you can do is focus on the ripples and see what they tell you.

This broader view of investment challenges us to think more holistically about our financial decisions. It’s not just about saving for retirement or splurging on a night out. It’s about understanding how each choice we make, no matter how small, can potentially impact our future. So the next time you’re faced with a spending decision, take a moment to consider: what kind of ripples are you creating, and where might they lead you?