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Adam Smith makes the argument well in A Wealth of Nations. Essentially, the only reason to invest is that you expect to earn something above on top of the risk.

Adam Smith makes the argument well in A Wealth of Nations. Essentially, the only reason to invest is that you expect to earn something above on top of the risk. Then add that up over everybody in the system. They cannot all get something extra, unless there is growth. That growth is spread over everybody as return on investment. So, if there is no growth, then investment stops earning that extra, so there no point in investment, so nobody hires anybody or builds new machines. Importantly, it's growth in total value, not growth in number of things. Hence, it's okay that growth is infinite without gobbling up the universe - we can always be better. Stuff can always be sexier.

tome 10y ago
But surely people invest for "maintenance" purposes too, where nothing extra is expected. I invest in maintaining my house. I don't expect any "return" from that investment, besides the roof not collapsing.
- allendoerfer 10y ago
  Maintenance is obviously limited to the number of things maintained and cannot stop deflation, because costs will be approaching zero due to innovation and competition. Edit: And you do expect a return. You maintain your house, because it has a value and rent costs money, so you have more house in the future if you maintain it now. Imagine a world were rent and the value of your house is approaching zero, would you maintain it? You would have more house if you just kept your money and rented a house.
  - tome 10y ago
    OK, so that raises the next question: why do we need to stop deflation?
    - allendoerfer 10y ago
      Because you liquidate all your assets if there is deflation. No companies, no jobs, no food. Edit: Obviously I am speaking in very extreme terms and ignoring the fact that there is a government acting and that not everything will happen instantly. These are just long-term forces.
      - tome 10y ago
        Do I? Why? What can I do with all that cash that I got from liquidating my assets? I can't spend it on consumption all at once.
        allendoerfer 10y ago
        You don't have to, it will be worth more next month. It would be stupid to invest into your retirement fund if cash is increasing in value faster, so you take the cash. It makes total sense individually, but when everybody does it, the system will collapse.
        tome 10y ago
        Yes, I can see why a deflationary shock can cause behaviour that is individually rational but destroys the economy in the long term. I do not see why there cannot be a steady state with no growth. Presumably if this is widely accepted by economists there must be a standard textbook reference that you can give me?
        allendoerfer 10y ago
        I am not an economist and would be interested in such a reference, too. My guess is that as long as there is even tiny growth, central banks can react with negative interest rates/taxing cash. It will take quite a while until there is no growth at all on the whole world. I think even Western countries have room for growth by mandating green standards. When less and less growth is possible any more, I imagine we would have to start socializing industries, which reached that point, so they are taken out of the equation. People would then get a basic income and use it to pay for state provided services, which would not deflate, because the state does not have to care about market prices, it can just regulate competition. I think the problem here is more to find the right time for it, not the solution itself.
        Kalium 10y ago
        As I understand it, such a thing is hypothetically possible. However, as long as populations grow and people want change in their lives, it is not desirable.
psadri 10y ago
You may invest to meet your basic needs. People used to build a house so they could be sheltered from them elements, not just to flip it.
- allendoerfer 10y ago
  But houses are already there. Especially when populations are shrinking.
  - psadri 10y ago
    Same goes for food, etc. my point was that not everything has to be for financial gain -- we have basic needs that are higher in the priority stack and will always be there. About homes specifically - they have a life span too so they eventually have to be rebuilt or, as others have pointed out, maintained.
    - allendoerfer 10y ago
      But who would want to own a company producing food, when owning cash would be a better investment?
      - vivekd 10y ago
        There has got to be some ways in which this basic economic assumption is wrong. Like with cars, I can buy a car and when I sell the car it will be worth much less. But I will buy that car anyways because I need a car. Or for a business perspective, I buy a dairy cow as an investment, when I sell the cow it will be worth much less than what I bought it for, but I don't mind because the cow has provided a steady stream of milk based income over the years. So in these ways at least, it doesn't seem like economic prosperity is always dependent on growth. Maybe in some economic circumstances cash might be a better investment or worth more than my dairy cow, but such a circumstance can't last for long because supply and demand affect money too right - so if enough people get rid of their dairy cow for the cash, eventually that would decrease the supply of milk, increasing price which would put me and my milk business back on top again would it not?
petra 10y ago
The problem with this argument is that it mixes global effects and personal effects. A person could have an appealing investment - for example building a more attractive fruit shop, with better customer service - taking all the sales from the current fruit shop . But the GDP will remain the same.
- mcguire 10y ago
  You are describing a zero-sum game.

tome 10y ago

But surely people invest for "maintenance" purposes too, where nothing extra is expected. I invest in maintaining my house. I don't expect any "return" from that investment, besides the roof not collapsing.

allendoerfer 10y ago
Maintenance is obviously limited to the number of things maintained and cannot stop deflation, because costs will be approaching zero due to innovation and competition. Edit: And you do expect a return. You maintain your house, because it has a value and rent costs money, so you have more house in the future if you maintain it now. Imagine a world were rent and the value of your house is approaching zero, would you maintain it? You would have more house if you just kept your money and rented a house.
- tome 10y ago
  OK, so that raises the next question: why do we need to stop deflation?
  - allendoerfer 10y ago
    Because you liquidate all your assets if there is deflation. No companies, no jobs, no food. Edit: Obviously I am speaking in very extreme terms and ignoring the fact that there is a government acting and that not everything will happen instantly. These are just long-term forces.
    - tome 10y ago
      Do I? Why? What can I do with all that cash that I got from liquidating my assets? I can't spend it on consumption all at once.
      - allendoerfer 10y ago
        You don't have to, it will be worth more next month. It would be stupid to invest into your retirement fund if cash is increasing in value faster, so you take the cash. It makes total sense individually, but when everybody does it, the system will collapse.
        tome 10y ago
        Yes, I can see why a deflationary shock can cause behaviour that is individually rational but destroys the economy in the long term. I do not see why there cannot be a steady state with no growth. Presumably if this is widely accepted by economists there must be a standard textbook reference that you can give me?
        allendoerfer 10y ago
        I am not an economist and would be interested in such a reference, too. My guess is that as long as there is even tiny growth, central banks can react with negative interest rates/taxing cash. It will take quite a while until there is no growth at all on the whole world. I think even Western countries have room for growth by mandating green standards. When less and less growth is possible any more, I imagine we would have to start socializing industries, which reached that point, so they are taken out of the equation. People would then get a basic income and use it to pay for state provided services, which would not deflate, because the state does not have to care about market prices, it can just regulate competition. I think the problem here is more to find the right time for it, not the solution itself.
        Kalium 10y ago
        As I understand it, such a thing is hypothetically possible. However, as long as populations grow and people want change in their lives, it is not desirable.

psadri 10y ago

You may invest to meet your basic needs. People used to build a house so they could be sheltered from them elements, not just to flip it.

allendoerfer 10y ago
But houses are already there. Especially when populations are shrinking.
- psadri 10y ago
  Same goes for food, etc. my point was that not everything has to be for financial gain -- we have basic needs that are higher in the priority stack and will always be there. About homes specifically - they have a life span too so they eventually have to be rebuilt or, as others have pointed out, maintained.
  - allendoerfer 10y ago
    But who would want to own a company producing food, when owning cash would be a better investment?
    - vivekd 10y ago
      There has got to be some ways in which this basic economic assumption is wrong. Like with cars, I can buy a car and when I sell the car it will be worth much less. But I will buy that car anyways because I need a car. Or for a business perspective, I buy a dairy cow as an investment, when I sell the cow it will be worth much less than what I bought it for, but I don't mind because the cow has provided a steady stream of milk based income over the years. So in these ways at least, it doesn't seem like economic prosperity is always dependent on growth. Maybe in some economic circumstances cash might be a better investment or worth more than my dairy cow, but such a circumstance can't last for long because supply and demand affect money too right - so if enough people get rid of their dairy cow for the cash, eventually that would decrease the supply of milk, increasing price which would put me and my milk business back on top again would it not?

petra 10y ago

The problem with this argument is that it mixes global effects and personal effects. A person could have an appealing investment - for example building a more attractive fruit shop, with better customer service - taking all the sales from the current fruit shop . But the GDP will remain the same.

mcguire 10y ago
You are describing a zero-sum game.