Productive versus Non-Productive Assets

In today’s world, there are far too many people who do not seem to understand the fundamental difference between productive assets and non-productive assets.

In general, non-productive assets are those that do not require any additional labor input in order to maximize their value. So things like stocks, bonds, gold, fine art, etc., these are considered non-productive because you just buy them and hold on to them; hoping that their value will rise over time.

On the other hand, productive assets require the implementation of labor in order to increase their value. For example, let us assume that you buy a saw and just set it on your shelf and never use it. In this case we would say that you have invested in a non-productive asset because you are not using it to produce anything of value.

Obviously that saw will retain some value over time, but treating it as a non-productive asset is definitely not its best use because it is much more likely that the saw’s value will decline as opposed to increase.

Instead, you will create more value by actually employing labor to the saw in the creation of some good or service. Obviously this involves additional cost (either the opportunity cost of your own labor or the cost of hiring someone else’s labor), and there is the obvious risk that there may not be sufficient demand in the economy to recover the cost of your investment plus the cost of the labor involved in using the saw.

So in a demand starved economy (one in which there is too much saving and thus too much capital chasing too little demand), a disproportionate amount of our saving (capital) will naturally be directed towards non-productive assets because they do not require the additional costs or demand requirements that productive assets do.

Thus we will inevitably see “bubbles” in the prices of non-productive assets and a lack of economic growth due to an under-investment in productive assets.

#EconomistsAreMorons