Consumption is the purpose of all economic activity Consumption Production LandCapital Labor Saving and investment Confidence in the future Respect for property rights

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: dis- saving

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