In his article on investment, economics scholar Kevin A. Hassett provides a good example of how the principle of investment should be understood. The example is as follows: in early agrarian societies, decisions would have to be made concerning how much produce (wheat in this case) to consume as food, and how much to use as seeds for the following season’s planting.
The example beautifully illustrates the understanding of investment as modelled by the social science of economics. To put it in a straightforward manner, investment is the foregoing of current consumption with a view to future consumption. On this view, investment is deferred consumption (that is, present consumption is deferred to the future). Investment is vital to creating levels of consumption that are stable through time, and, further, to increasing productivity.
In a more contemporary example, the concept of investment alters slightly from the model of consumption deferral to a model in which consumption deferral leads to an increase in future consumption: a factory owner might invest in new machinery as the improved technology could dramatically increase the factory’s output. In order to purchase the machine, the owner must check if he has the monetary means to do so; if he does, he must further make sure that the increased output from the machine will increase his profits enough to justify not investing that money elsewhere. This is to say that the owner must calculate whether the new machine is the best way (i.e. will generate the highest returns) to use his capital. He can be seen to forego spending that money on current consumption (a new car, home theatre system etc.) in order to ensure that he can consume in the future; moreover, because his factory output will increase, his profits will increase and he should enjoy a higher level of consumption in the future. His decision to buy a new machine for his factory will thus come down to the belief that the proposed course of action will generate the highest amount of future wealth (consumption resources) based on the factory owner’s current resources. In micro-economic theory the projection of advantage gained by following a certain course of action is referred to as expected utility.
The implementing of the principle of investment has been central to the development of human-created technologies as the predicate on which technological evolution occurs is that of directing resources into projects that are expected to yield results that make the manipulation of the material environment easier.
An increase in stores of wealth is also dependent on the principle of investment. Wealth cannot increase unless a certain portion of current wealth is used to generate future wealth. This is to say that, theoretically at least, higher investment in effective areas will directly result in higher amounts of future consumption.
This article has introduced the notion of investment in extremely broad brushstrokes, and has done so from the stand point of economic studies. In practical implementation, however, the world of financing sees investment as the allocation of monetary funds to commercial enterprises (which, strictly speaking, is actually speculation) and the instruments used by financing institutions are infinitely complex and highly varied. Even in this, however, the principle of increased future consumption (and therefore wealth) is founded upon the sacrifice of current expenditures.