Consumption is the purpose of all
economic activity
Respect for property rights
Confidence in the future
Saving and investment
Land
Capital
Production
Consumption
Labor
Saving, investing, capital markets

We trade off present consumption against future
consumption
–
We sometimes forgo some present
consumption for the sake of increased future
consumption. This is saving.
–
We sometimes draw down savings or borrow
money to increased current consumption at the
expense of reduced future consumption: dissaving
Saving, investing, capital markets



Savers demand compensation for deferred
gratification. Savings are invested in productive
activities that provide compensation in the form
of interest, dividends, or capital gains.
Dis-savers are willing to compensate lenders.
They are willing to pay interest or other
compensation.
Savers supply “loanable funds” and dis-savers
(borrowers) demand them.
Saving, investing, capital markets


Like buyers and sellers of any goods and
services, savers and borrowers have to find
each other. Capital markets have arisen to fulfill
this function.
Early years
–
New York Stock Exchange began under a
buttonwood tree on Wall St.
–
American Stock Exchange was called the “Curb
Exchange”
Adam Smith’s “invisible hand”
Every individual necessarily labours to render the annual
revenue of the society as great as he can. He generally
neither intends to promote the public interest, nor
knows how much he is promoting it ... He intends only
his own gain, and he is in this, as in many other cases,
led by an invisible hand to promote an end which was
no part of his intention. Nor is it always the worse for
society that it was no part of his intention. By pursuing
his own interest he frequently promotes that of the
society more effectually than when he really intends to
promote it. I have never known much good done by
those who affected to trade for the public good.
Capital markets and the invisible
hand



Savers promote their own interest – higher
future consumption
Borrowers promote their own interest – high
present consumption or investment
Investments, when successful, provide
increased prosperity
–
More and better products
–
Increased employment opportunities