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Definition of Investment that I have found:

  • Investment is the expenditure incurred on the procurement of such capital assets that would help in further production .

According to this, it means that investment is only made by producers.

Am I correct in saying that only producers invest? Or do consumers also invest?

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  • $\begingroup$ I think the only difference is that when you consume something, then you can't use it again: it's a one time usage. But most economics theories are very narrow and out of touch with reality, so you are probably right in the context of the theory. $\endgroup$ – gagarine Nov 17 '18 at 17:48
  • $\begingroup$ your reading it wrong. Production doesn't only need to be done by producers. It doesn't say that anywhere, your being to literal. $\endgroup$ – Thorst Nov 21 '18 at 7:18
  • $\begingroup$ @Thorst But how can consumer do production ? Any Example ? $\endgroup$ – Jonathann Nov 21 '18 at 8:32
  • $\begingroup$ It depends on the context. If your talking specifically about a model, then your consumers can for example invest savings in a company. $\endgroup$ – Thorst Nov 21 '18 at 9:30
  • $\begingroup$ @Thorst But isn't investing in a company not an investment in economics I studies that investment in business is investment in accounting sense $\endgroup$ – Jonathann Nov 21 '18 at 10:00
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It is true that we tend to think of Investment as something firms and businesses do, while consumers practice savings or "invest" in utility-enhancing assets (like a house to live in).

One could argue that when consumers buy shares of a corporation in the stock market they participate in productive investment, even though they do not control the decision-making process.

But exactly because they do not affect the decision-making process it is better to think of such "investments" also as saving, and retain the word investment for the purposeful and decided-upon transformation of resources into productive use.

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  • $\begingroup$ So is the answer yes or no ? $\endgroup$ – Jonathann Nov 18 '18 at 2:20
  • $\begingroup$ @Jonathann That should be an obvious conclusion from my answer. Exactly what iis that you don't understand? $\endgroup$ – Alecos Papadopoulos Nov 18 '18 at 2:49
  • $\begingroup$ No , I was not able to understand . you suddenly started talking about accounting investment i.e shares .bonds etc $\endgroup$ – Jonathann Nov 18 '18 at 4:01
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    $\begingroup$ @Jonathann Ok. So what is that you don't understand in the sentence "it is better to think of such "investments" also as saving, and retain the word investment for the purposeful and decided-upon transformation of resources into productive use"? $\endgroup$ – Alecos Papadopoulos Nov 18 '18 at 4:12
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Consumers participate in informal/household production (dishes, laundry, food etcetera). In this sense, when a consumer buys a fridge, stove, dishwasher or other comparable machine they are essentially investing.

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  • $\begingroup$ But household production is not an economics activity hence not a part of NY . $\endgroup$ – Jonathann Nov 21 '18 at 2:38
  • $\begingroup$ Why not? It increases utility right? What do you mean with NY? $\endgroup$ – Henk from Holland Nov 22 '18 at 7:56
  • $\begingroup$ NY is national income and household production is a non economic transaction and non market transaction . it is difficult to evaluate thrie market value . also they are not done for income $\endgroup$ – Jonathann Nov 22 '18 at 8:46
  • $\begingroup$ You are right to the extent that household production is not a monetary transaction, however, household investment is monetary whereas the return on investment does not have to be. I do not think household production is non-economic. You do not have to evaluate investment decisions through market value persé, you could use concepts like willingness to pay for that. Regarding the your statement that it is not done for income, you may be right but income is not the goal of consumers under economic theory. Consumers care about utility and household production obviously has utility-effects. $\endgroup$ – Henk from Holland Nov 23 '18 at 13:40
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Horrod domar said that "If the savings are increased then it leads to investment". By this we can say formally that consumer is also investing as he is actively saving money but in the sense of real economics(global level) we say that only producer/manufacturer is investing. Consumers invest in a wide variety of things but not in large amounts and more over their investment is not controlled by themselves directly.

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Within the framework of national accounts, you are correct in saying that only producers invest. This is true by definition. However, households are sometimes treated in national accounts as containing both consumers and producers (unincorporated enterprises), when it's not possible to separate the two.

As I explain in detail in an answer to a related question, when a person engages in productive activity (or when they acquire capital goods for use in production, i.e., invest) we try to the extent possible to separate that activity out, and say that that person is doing that in their capacity as part of a productive enterprise. When they consume, we count that as occurring in their capacity as a consumer.

It can be confusing, because there are two overlapping systems that appear in national accounts.

The first is the division between enterprises (producers) and households (consumers), in which households are treated as consumers and never as producers, as detailed in the other answer. This is considered to be the ideal, and the national accounts try to separate out households as consumers from households as producers to the extent possible, but it often can't be done for practical reasons. As a result, this division sits in the background, and accounts are generally presented in the second system, using accounting fictions when it's practical and important to reconcile between the two.

The second is the institutional view, which how accounts are generally presented. In this view, corporations (including quasi-corporations) are still never consumers. However, it's not always possible to split out the accounts of households between when they act "in their capacity as consumers" from when they act "in their capacity as producers." As a result, in this framework, productive activity that occurs in a household can be treated as a part of the household, as noted in the 2008 System of National Accounts. (p. 63):

Institutional units are allocated to sector according to the nature of the economic activity they undertake. The three basic economic activities recorded in the SNA are production of goods and services, consumption to satisfy human wants or needs and accumulation of various forms of capital. Corporations undertake either production or accumulation (or both) but do not undertake (final) consumption. Government undertakes production (but mainly of a different type from corporations), accumulation and final consumption on behalf of the population. All households undertake consumption on their own behalf and may also engage in production and accumulation.

On page 83, they explain further:

As noted in the introduction, households are unlike corporations in that they undertake final consumption. However, like corporations, they may also engage in production. Household unincorporated market enterprises are created for the purpose of producing goods or services for sale or barter on the market.

The relationship between the two views (consumer/producer) and institutional is then described:

An unincorporated enterprise can only be treated as a corporation if it is possible to separate all assets, including financial assets down to the level of cash, into those that belong to the household in its capacity as a consumer from those belonging to the household in its capacity as a producer.

The desire to split out this activity to the extent possible is explained explicitly on p. 461:

All households undertake final consumption and all to a greater or lesser extent undertake accumulation but a household does not necessarily undertake production. To the extent possible, the production activities within households are treated as quasi-corporations, included in one of the corporations sectors and separated from the rest of the household. However, as explained in paragraphs 4.155 to 4.157 a quasi-corporation can only be created when a full set of accounts, including balance sheet entries and information about withdrawals of income from the quasi-corporation, is available.

So, just so long as you're talking about consumers, it's true to say that they never produce, and thus never invest. If you're talking about households, in the consumer/producer framework it's not a household that is investing, it's an unincorporated enterprise that is contained within the household. In the institutional framework, productive activity is separated out when possible and just counted as part of the household when it's not possible. In this framework, households therefore always consume and sometimes invest, but they never invest in their capacity as consumers.

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