It seems to me that the burger Bob bought (and the check the restaurant wrote to its supplier for the ground beef, and the check the supplier wrote the farmer for the cow) is a direct payment into the food production system, while 'making capital available' may or may not land anywhere near the real economy. What's the sophisticated view here?
There's an enormous amount of complexity here. For one thing, it's not like there is an infinite amount of beef available at a fixed price. Bob's eating that burger probably on the margin increases the supply of beef, but it also on the margin increases the cost. Now everyone else has to pay 0.0000001c more for their hamburgers.
Or what if Bob bought a filet mignon instead of a hamburger. Maybe farmers will now be (on the margin), breeding cows that produce less hamburger but more steak. This could increase the price of food that poor people eat. If Bob buys a Tesla, maybe Bob helps expand the supply of Teslas, but now buying a Corolla is slightly more expensive, because there are slightly fewer economies of scales in sedans. (This is actually happening, BTW, as Americans buy larger cars.) I also spoke of Bob taking a vacation. He spent a thousand dollars on plane tickets, which has serious deleterious environmental effects, and for the most part represents a purchase of oil, not labor services. Oil workers wages may have gone up a bit, but most of the money just went into the pocket of whoever owns the oil.
These are just some examples of possible things that could happen. Without empirical testing, we could not know what the exact impacts of any given decision are, and realistically, we do not have the resources to track the impacts of each decision through the economy.
You make a lot of good points. I think we should also consider the fact that if you invest your money rather than spend it, the firm may not invest directly into capital projects for increased productivity. So much money is returned to shareholders via buybacks and dividends these days. So in those cases, your wealth isn't transferred to labor, instead it's transferred to other shareholders who already have wealth and a flywheel effect occurs. This creates more and more distance between labor and capital.
I could be completely off here but am interested in opinions on this.
You're not wrong that that effect can exist. And I'm not saying that investing is a totally altruistic, virtuous action. However, the criticisms of the stock market as not being "real investing" are largely off-base. Liquidity encourages investment -- illiquid investments are universally less preferred than liquid investments, all other things being equal. Even if non-IPO investors/subsequent issuance investors are not directly providing capital to a company, nobody would participate in IPOs or other stock issuances unless they were confident of a market for that stock in the future. Therefore participation in the secondary market for stocks is necessary for a primary market to exist in any meaningful way. (In a similar way, if the public market did not exist, there would be much less private investment, much fewer startups, etc.)
You raise fair points about the spending of money on physical assets/consumption. Can you elaborate similarly on the potential problems with how saved/invested money is allocated?
Well, at a very high level, banks can use saved money to lend to businesses or individuals at a given multiplier. If a bank has insufficient deposits, it can't lend any more money. This is called fractional-reserve banking. https://en.wikipedia.org/wiki/Fractional-reserve_banking So when you make a deposit, you are effectively causing a fraction of that deposit to be available for lending. This is what you're getting paid for when you get interest.
On the other hand, when you invest in a stock, you're providing liquidity to whoever held it last. That doesn't directly provide money to a company. But it has an important function: people only buy stocks when they are confident they can later sell it. If there were no buyers for stocks in the secondary market, nobody would participate in IPOs.
As far as which is better for the economy, this is beyond my knowledge. However, any normal person with any financial savvy knows that market returns are much better than deposit returns, so most of the time when such people say "save" they mean "invest in the market."
> If a bank has insufficient deposits, it can't lend any more money.
That's not actually true, banks effectively create money when making a loan, and the only constraints on this are the interest rate set by the central bank, which affects both demand for credit and the cost of providing it, and liquidity requirements set by legislation.
The "liquidity requirements" you refer to are the fraction in "fractional-reserve." If I deposit $1, and then the bank's capital requirements are 75%, and they lend out $0.75, the total amount of money is now $1.75. This is what people are referring to when they say banks create money.
Banks "create" money by making loans, but those loans aren't made from other deposits. A bank with a 10% requirement that has $100,000 in reserves can loan $1,000,000 to somebody even though they don't have that much deposited there.
> any normal person with any financial savvy knows that market returns are much better than deposit returns
And, if I understand the arguments, that's confirmed by Piketty's r (return on capital) > g (economic growth rate). My concern is that more money is getting tied up in chasing financial assets than in the real economy (houses, hamburgers, cows, etc.) If you have financial assets, that's good. If you don't, that's bad. Most people don't have financial assets. Sooner or later something's going to correct that trend. It'd be better to find a non-violent solution.
"Money" isn't resources. It's just numbers in databases. The whole point of financial assets is so that real resources don't get tied up, so I think your outlook is totally backwards. If people don't understand this and get violent, it will just be another civilization destroying seizure, signifying nothing.
You do not understand correctly. r vs. g has little to do with the return of debt vs. the return of certain classes of securities (since neither is pegged to economic growth). Rather, the return on deposits and the return on stocks are both part of a composite (r) that is meant to be greater than g.
Having $X in a bank account is not the same as taking $X in capital machinery and shoving it somewhere to rust "out of the economy". In fact, it's kind of the opposite, which is why the financial system exists and saving is a good thing.
