The Distinction Between
"Invest" and "Acquire"

Dan Sullivan

[Reprinted from an online discussion at LandCafe, 13 January, 2010]

In my seminar, "Orwellian Economics," I discuss euphemisms that function to confuse economic policy. One of those euphemisms is the use of "invest" for "acquire." In as much as there has been some discussion about whether buying government bonds was truly "investing," I would like to suggest it is not. However, I go further and argue that most stock purchases, apart from initial product offerings (IPOs) are not investments either, but are merely acquisitions. The distinction becomes important when we examine government policies that claim to "encourage investment," because they often encourage the bidding up of prices while discouraging genuine investment.

Originally, "invest" meant to "clothe in," or to "provide clothing to" the recipient of the investment. In business, it came to mean providing assistance to a business, usually in exchange for a stake in that business. However, the investing side of the exchange was the providing of assistance, and getting a stake in the business was the acquisition side.

However, there can be investment without acquisition, and acquisition without investment. For example, parents setting aside money for their children's education say they are "investing in" their children's future. That means they are putting something in, and it customarily does *not* mean they are acquiring a stake in the productivity those children will enjoy as adults.

Conversely, the person who buys stock in a company from a prior stockholder is not investing in that company in the true sense of the word, but is merely acquiring the stake in that company that someone else had owned. Only the first holder of that stock had actually given money (or something else of value) to the company itself in exchange for the stock. Everyone else who traded that stock was not actually investing in the company, but was merely acquiring stakes in it from previous stakeholders.

Thus, when someone said, "I just invested in General Motors" (back when someone might actually brag about such a thing), I would be tempted to ask, "How? Did you buy them an new fender stamper?" For if you did not provide something of value to the company, i.e., did not "clothe" them in anything, then you did not actually "invest."

This is not to say that stock trading is a bad thing. After all, the original, true investor could well have been motivated by the idea that he could sell his stake in the company at a profit, rather than by the opportunity to get a lifetime revenue stream from stock dividends. And it is understandable that, when someone at a cocktail party is asked what he does for a living, he would rather say, "I'm an investor" than "I'm an acquisitor."

The problem comes when this euphemism is used in public policy discussions, and various measures are passed "to encourage investment." Usually these measures are merely plums for those rich enough to own assets, and their effect is not to encourage investment, but to encourage acquisition, which is to say, to bid up the stock market and create (or exacerbate) bubbles.

In a sense, the first purchaser of government bonds is more of an investor than subsequent purchasers of company stock, even where the company is legitimate and has no noteworthy privileges. After all, the government does get that purchaser's money, while the company is not getting anything. Yet that government could have just as well issued the money as issue bonds to sell to get the money, or could have acquired the money through taxation rather than through borrowing. In that sense, the "investment" is really a transaction based on malfeasance by the government.

Henry George does a good job of capturing that malfeasance in Chapter 16 of Social Problems:

"If it were possible for the present to borrow of the future, for those now living to draw upon wealth to be created by those who are yet to come, there could be no more dangerous power, none more certain to be abused; and none that would involve in its exercise a more flagrant contempt for the natural and unalienable rights of man. But we have no such power, and there is no possible invention by which we can obtain it. When we talk about calling upon future generations to bear their part in the costs and burdens of the present, about imposing upon them a share in expenditures we take the liberty of assuming they will consider to have been made for their benefit as well as for ours, we are carrying metaphor into absurdity. Public debts are not a device for borrowing from the future, for compelling those yet to be to bear a share in expenses which a present generation may choose to incur. That is, of course, a physical impossibility. They are merely a device for obtaining control of wealth in the present by promising that a certain distribution of wealth in the future shall be made -- a device by which the owners of existing wealth are induced to give it up under promise, not merely that other people shall be taxed to pay them, but that other people's children shall be taxed for the benefit of their children or the children of their assigns...

...if, when we called on men to die for their country, we had not shrunk from taking, if necessary, nine hundred and ninety-nine thousand dollars from every millionaire, we need not have created any debt. But instead of that, what taxation we did impose was so levied as to fall on the poor more heavily than on the rich, and incidentally to establish monopolies by which the rich could profit at the expense of the poor.

And then, when more wealth still was needed, instead of taking it from those who had it, we told the rich that if they would voluntarily let the nation use some of their wealth we would make it profitable to them by guaranteeing the use of the taxing power to pay them back, principal and interest. And we did make it profitable with a vengeance. Not only did we, by the institution of the national banking system, give them back nine-tenths of much of the money thus borrowed while continuing to pay interest on the whole amount, but even where it was required neither by the letter of the bond nor the equity of the circumstances we made debt incurred in depreciated greenbacks payable on its face in gold. The consequence of this method of carrying on the war was to make the rich richer instead of poorer. The era of monstrous fortunes in the United States dates from the war."

(Incidentally, this is one of many passages that should make people skeptical of claims that George was a tool of the bankers.)