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Saturday, November 24, 2012

How Intended Investment Can Fall Short of Investment, Personal Version

I caught and salted 100 cod fish last week. Here is how I allocated them:

20 I planned to eat.
60 I planned to sell on the market to finance other consumption.*
20 I planned to set aside as a store enabling me to work on capital goods in the future, e.g., a better fishing net.


Here is what actually happened:
20 I ate.
50 I sold on the market, because, at the price I planned to sell, 50 was all that was demanded.
30 I set aside.

My intended investment was 20 cod fish. But I wound up, due to unexpected market conditions, actually saving 30 fish.

S = I, always.

But sometimes I can include the unintentional piling up of inventories. That might be a problem, depending on whether you think the economy is more dominated by negative or positive feedback effects.

* Mainly the high-blood-pressure pills I must take due to eating so much salt cod.

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