In short, not all debt is the same for individuals and borrowing for anything that delivers productivity gains greater than the ‘all in cost’ of financing might be a smart thing to do, with sufficient self discipline.
Since current economic issues are a prevailing item of discussion I’ve decided to repost this with some edits.
Everyone’s heard of having too much debt or buying too much on credit cards is bad, but I believe this logic is true only for goods and services of productive value lower than the ‘all in cost’ of financing it.
For businesses it’s actually a positive if they spend profits, and even borrow money to spend, on productive capital assets, machinery, building improvements, productive software, etc… And it’s seen as a negative for them to hoard money instead of spending on these investments with investors usually demanding the excess capital to be returned.
For an individual to do the same, instead of saving, is seen in a negative light.
However, individuals are considered as productive entities as well and their productivity can be improved likewise with the appropriate goods and services.
1. fancy air conditioner (reduce long term energy costs, improved comfort, etc. -> improved productivity) vs old noisy air conditioner, or none at all
2. ergonomic chairs (reduce long term health costs, improved comfort, etc. -> improved productivity) vs normal chair
3. Luxury automobile (lower noise, vibration, and harshness during commute -> improved comfort -> improved productivity, more powerful engines -> less anxiety getting on the highway and overtaking -> reduce cognitive burden -> improved productivity)
and so on.
Even services such as a personal assistant, maids, etc. could improve productivity just like capital investments. There are limits here of course, the return on productivity on the jump from an average luxury car to a Rolls Royce Phantom might be very marginal…
I guess there’s a hidden assumption in common wisdom that for the average person they wouldn’t be able to make good use of these improvements.
Of course someone could also buy vacations, purses, trendy clothing, etc. on credit as well which wouldn’t improve productivity (at least not in a measureable way).
So it seems like a sort of a false economy / penny wise pound foolish type of thing where listening to popular wisdom can be counterproductive if the person in question is sufficiently wise with their finances.
Also because interest rates are still very low right now, borrowing money to invest in these productivity improvements seems like the rational choice to make in a wider range of categories than during periods of high interest rates. (this is assuming that the borrower has enough discipline to make only productive purchases)
This would also lead to a virtuous cycle of stimulating the economy through increased productive consumption -> increased business revenue -> economic expansion -> higher incomes and/or more jobs -> more productive consumption -> more stimulus
And the second order effect of everyone becoming more and more productive after each round of the cycle…. which leads to businesses investing in productivity improvements to compete with each other and better serve their customers… and so on. A positive feedback cycle forms!
The flip side being that if people invest in goods and services of deleterious value (i.e. less than the prevailing opportunity cost), it could incur a negative feedback cycle
Therefore, if the logic holds out, and assuming humans were perfectly rational in the economic sense, everyone should be doing this.
The tough part is assessing these gains at the minute scale of individual consumption as most products are no longer advertised with their functional benefits but with emotional and brand association type strategies. To resolve this conundrum I leave to those with more insight.
Edited from original post on November of 2018.