I. The Relationship Between Consumption and Investment

(A) Focusing Solely on the "Three Engines" Can Easily Obscure the Connection Between Consumption and Investment

Economic growth is of paramount importance in any era. Typically, we measure economic growth using Gross Domestic Product (GDP) and its growth rate. It is widely acknowledged that GDP represents the sum of the value added produced by an economy over a period of time, reflecting a supply-side perspective. From the expenditure perspective, the "Three Engines" are based on the GDP expenditure approach, which aggregates the value added in an economy according to its final destination, with final demand driving production, reflecting a demand-side perspective. Additionally, there is the GDP income approach, which sums up the initial distribution of income received by all resident units in the economy, including compensation of employees, capital consumption allowance, operating surplus, net production taxes, etc., and is a statistical method from the perspective of factor compensation. Since the expenditure approach only focuses on the final destination, it avoids the complex interrelations between industries and the accounting relationships in income distribution, making it easier to measure. Coupled with the prevalence of Keynesian economics' total demand analysis framework, the final demand is decomposed into consumption, investment, and net exports, these "Three Engines," which is a commonly used analytical method in macroeconomics.

However, this "trichotomy" is a static analysis method. When debating the importance of consumption versus investment based on this approach, it is often easy to have a limited perspective. Looking at the time series chart of the contribution rates of the "Three Engines" to GDP growth (see Figure 1), the contribution rates of consumption and investment often fluctuate in opposite directions, leading to the misconception that there is an exclusive relationship between the two. In fact, this method of analysis views the total economic growth for each year as a piece of cake to be divided among the "Three Engines," but it does not allow us to infer the interplay between consumption and investment. In this section, we attempt to understand the relationship between consumption and investment along a timeline.

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1. Current Period. Following the sequence of production first, then distribution, and finally expenditure, after various factors of production such as labor, capital, and land are invested in production, the total output for the current period can be obtained. After income distribution, purchasing power is formed, and the total output is consumed through the three major demands of consumption, investment, and net exports. Focusing solely on a single period, it is easy to intuitively believe that the total output is a well-made cake that is then divided by the three major demands, leading to the view that consumption and investment compete to divide the cake, thus separating consumption and investment and considering them as a zero-sum relationship. The debate on whether to stimulate economic growth through "consumption" or "investment" is clearly limited to the results of the current period.

2. Next Period. If we further consider multiple periods, the status of investment will rise. To maintain the normal functioning of society and ensure the survival of oneself or future generations in the next period, people will plan for the next period's production and cannot rely solely on the current period's resources. Since current period investment can offset capital depreciation and increase the assets invested in production for the next period, only with production in the next period can there be income in the next period, and subsequently, consumption in the next period. Therefore, maintaining a certain scale of investment in the current period is crucial for sustaining production in the next period. In other words, when breaking through a single period and extending the perspective to multiple periods, the role of investment and the additional capital it drives as a "connector" for production activities in each period will be amplified. It is worth noting that for the convenience of discussion, economic models only consider per capita capital as a factor of production, but if we break through the mindset and realize that labor also needs to enter the next period's production, then consumption that sustains labor survival and enables it to enter the next period's production is also a form of investment, isn't it?

3. Infinite Period. If we look even further into the future and consider an infinite period, then the status of consumption will rise again. First, humans engage in productive labor for survival and reproduction, and the ultimate purpose of all economic activities is consumption, whether it is for oneself or for future generations. Second, as mentioned earlier, current period investment is a necessary condition for the capital required to maintain production in the next period. Similarly, current period consumption is also a condition for maintaining the sustainable supply of labor and entering production in the next period, which is a form of "investment." It is an investment in human capital that maintains the physical or intellectual capacity of workers, rather than a narrow sense of capital goods investment. Furthermore, future supply ultimately relies on consumption to realize its value. Whether it is the capital depreciation compensated by current period investment or the additional capital driven by it, or the labor production maintained by current period consumption, the future production formed by the investment relies on consumption to realize its value at the end point (if there is one). Imagine at the end of a science fiction world where human civilization, if left with only a pile of magnificent buildings and no one, the past investments accumulated for the prosperity of human civilization would lose their meaning. Therefore, if the term is extended to infinity, consumption will again become the ultimate meaning of all production activities, relating to national welfare and people's pursuit of a better life.

In statistical practice, both China and foreign countries calculate GDP on a quarterly basis, using quarters as the unit to measure the economy's consumption, investment, and output. The reality of the economic situation is that millions of micro-entities are making consumption and investment decisions every moment, not on a quarterly basis or with an annual endpoint. Therefore, in an infinite period, it is difficult to argue the merits of consumption or investment, which is also a flaw of the "trichotomy." Undoubtedly, labor and capital as factors of production enter the production function, and behind them, there is consumption and investment that maintains the existence of labor and capital factors. When output is formed, it also requires consumption and investment to determine the fate of the output. The above analysis only illustrates the relative importance of consumption and investment over continuous time; the two are similar to the DNA (deoxyribonucleic acid) double helix structure, advancing interactively, and should not be viewed in isolation.

(B) There is a Mutually Reinforcing Relationship Between Consumption and Investment

From a micro perspective, investment and consumption may have a competitive relationship in resource allocation. For example, at the household level, if residents allocate too much of their income to investment or savings, it will reduce daily consumption expenditure. There are already many documents explaining the influencing factors of residents' consumption rate or savings rate, including income and expected income growth rate, medical and pension systems, cultural traditions, credit constraints, etc. (Modigliani and Cao, 2004; Kujis, 2005). Furthermore, at the government level, if too much public fiscal expenditure is allocated to public investment, it may crowd out funds in the public finance that could have been used to support residents' consumption (such as social welfare, consumption subsidies, etc.).From a macro perspective, investment and consumption are interrelated.

Investment can stimulate consumption. When businesses increase investment, they generally create more job opportunities, raise workers' incomes, and thereby enhance their consumption capacity. Moreover, investment is often accompanied by technological innovation and improvements in production efficiency. Expanded supply can lower the prices of goods or increase the supply of new types of goods, stimulating consumer spending.

Consumption affects investment. When consumer demand increases, businesses often need to expand production scales to meet consumer demand, such as purchasing new machinery and equipment, expanding factories, or upgrading technology. At the same time, a robust consumer market usually means that businesses expect higher sales and profits. This positive financial expectation encourages businesses to engage in more investment activities because investment is usually based on expectations of future rates of return on capital. As consumer preferences change and demand upgrades, businesses need to continuously invest in research and development and technological innovation to produce new products and services that better meet people's needs. This innovative investment not only enhances the competitiveness of businesses but also promotes technological progress in the entire industry. Therefore, based on consumer demand, under market economy conditions, it is easier to identify investment directions with reasonable returns, improve the efficiency of economic operation, and promote the growth of the total economy. There is only ineffective investment, not ineffective consumption (except for waste). Government spending affects consumer spending. On the one hand, the multiplier theory of fiscal expenditure suggests that government spending will be transformed into residents' income, multiplied by the marginal propensity to consume and then become residents' consumption, which in turn becomes the income and consumption of other residents, thus generating a demand-driven effect several times that of fiscal expenditure. On the other hand, some studies believe that expanded fiscal expenditure may have a crowding-out effect on consumer spending (Blanchard and Perotti, 2002; Linnemann and Schabert, 2004), because residents expect that expanded fiscal expenditure will increase the tax burden, thereby reducing residents' expected income and ultimately crowding out household consumption.

Although the "three engines" theory originates from Keynes's total demand analysis framework, Keynes did not separate the relationship between consumption and investment in his 1936 book "The General Theory of Employment, Interest, and Money." Keynes pointed out that residents' income and marginal propensity to consume determine consumer demand, and unemployment will occur when investment is insufficient to make up for the gap between full-capacity production and consumption. Business investment is influenced by expected rates of return on capital. When entrepreneurs expect the rate of return on capital to be lower than the interest rate, insufficient investment will occur. However, consumption and investment are not separated; consumer demand is actually an important factor affecting the rate of return on capital. Therefore, entrepreneurs' expectations of the evolution of consumption must be exogenous, or at least not mechanically linked to the evolution of effective output, otherwise, there will be Harrod dynamic instability (Dejuán, 2005, 2017).

(III) The relationship between consumption and investment is constantly changing: an empirical test

This section uses data from the China Statistical Yearbook to construct an unbalanced panel data set spanning 2005 to 2022, with cross-sections for 31 provinces in China, to test the dynamic relationship between consumption and investment. Among them, we selected the growth rate of per capita consumer expenditure as a proxy variable for consumption (consumption), and the growth rate of total fixed asset investment as a proxy variable for investment (investment). According to the method of Dumitrescu and Hurlin (2012), we conducted a panel Granger causality test between the two variables. Within the sample period, the null hypothesis was not rejected (P-value greater than 0.1), that is, consumption is not the Granger cause of investment, and overall, consumption did not play a role in promoting investment. However, on the contrary, investment is the Granger cause of consumption, that is, investment has promoted consumption to a certain extent.

However, the empirical relationship between consumption and investment has reversed in the past decade. When using panel data from 2013 to 2022, the situation is the opposite. The results show that from 2013 to 2022, the null hypothesis that consumption is not the Granger cause of investment was rejected, that is, consumption promoted investment, but investment no longer promoted consumption. The causal relationship between consumption and investment can be transformed over time, which is also in line with the characteristics of our country's national conditions and development stage. Since the reform and opening up, in the early stage, our country shifted from a planned economy to a market economy, with a shortage of commodity supply, and economic growth was mainly driven by investment; as the economy grew rapidly, the situation of insufficient commodity supply changed, the marginal return on investment decreased, and consumption gradually determined the direction of investment.

II. What is the virtuous cycle of consumption and investment

(I) The theoretical relationship between consumption and investment: an explanation from economic growth models

The debate on the relationship between consumption and investment and their contribution to economic growth is heated, and the previous text also demonstrated the dynamic interactive relationship between the two. In fact, classic economic growth theory has long discussed this.For a considerable period, China's economic growth model has been heavily investment-driven rather than consumption-oriented. This model focuses on increasing capital investment and production capacity, that is, by promoting economic growth and employment through large-scale infrastructure construction, industrialization, and urbanization. While this model has driven rapid economic growth, it also has obvious drawbacks.

In the early stages of reform and opening up, there was a significant supply shortage in our country, and the returns from investment were enormous. As the pace of industrialization accelerated, the rate of return on investment decreased, and the situation of supply not meeting demand rarely occurred. Instead, issues such as overcapacity, misallocation of resources, and unbalanced development emerged. At the same time, large-scale investment and rapid industrialization led to severe environmental problems, including excessive consumption of resources and environmental pollution.

According to World Bank data, the total capital formation as a percentage of GDP in the United States has been relatively stable, fluctuating between 20% and 26%. In contrast, China's share fluctuated and increased from 31% in the early 1970s to 46.7% in 2011, then slightly decreased and stabilized around 43%. The United States has a relatively high share of consumption expenditure, which has generally remained relatively stable, indicating that the U.S. economic model places more emphasis on consumption. Between 1972 and 2021, the share of final consumption expenditure in GDP in the United States ranged from 75.75% to 85.13%. China's share of consumption expenditure declined after 2000, falling from 63.6% to 48.9% in 2010, then slightly increased.

It is worth noting that during economic recessions (such as the early 1980s and the 2008 financial crisis), the share of final consumption expenditure in GDP in the United States increased, mainly because investment and exports decreased, and the proportion of consumption in the economy relatively increased. However, during these periods, China's share of total capital formation showed an upward trend, reflecting the differences in policy focus between the two countries.

The proportion of total savings as a percentage of GDP moves in the opposite direction to the share of final consumption expenditure. According to World Bank data, before 2000, the share of domestic total savings as a percentage of GDP in both the United States and China showed a relatively stable trend. After 2000, the share of savings in the United States first slightly decreased, then rebounded after the financial crisis; while China's share of savings increased from 36.4% to a peak of about 50.1% in 2010, then gradually decreased to 44.0% in 2019.

During the COVID-19 pandemic, the savings rates in both China and the United States increased. The increase in the U.S. savings rate was mainly due to the large amount of fiscal subsidies that increased residents' disposable income, and after the subsidy policy stopped, this excess savings quickly turned into consumption. However, the situation in China was different, as most residents chose to save precautionarily due to increased economic uncertainty.

(III) Optimal Consumption Share: A Country-Level Test

From the analysis in the previous text, it can be seen that there is an optimal combination between consumption and investment. So, is there an optimal consumption ratio that can maximize economic growth with the same growth rates of consumption and investment? This section uses a non-balanced panel data set with a time span of 2000-2021 and a cross-section of 94 countries to construct a panel threshold effect model (Threshold Regression) to test this issue. The total factor productivity data comes from the Penn World Table, a set of national economic accounting data developed and maintained by scholars from the University of California, Davis, and the Groningen Growth and Development Center of Groningen University, while other data comes from the World Bank. Table 2 provides descriptive statistical characteristics of the explained variable GDP real growth rate, the core explanatory variable capital formation growth rate, the threshold variable final consumption share of GDP, and other control variables.

We use the capital formation growth rate (capitalrate) as the core explanatory variable, the GDP real growth rate as the explained variable, and the share of consumption in GDP (consumption) as the threshold variable. The following threshold effect model is constructed:Upon examination, it has been discovered that the threshold effect of the consumption share is significant, with the presence of one threshold, namely when the consumption share exceeds 78.7%, the promotional effect of capital formation growth on the actual GDP growth rate is notably enhanced. It can be seen that China's consumption share is far from reaching the optimal level.

When investment is equal to the level of maintenance investment, all investments will be used to maintain existing capital to prevent it from shrinking, and there will be no additional investments, which is the steady-state level of investment. As the capital stock expands, the required level of maintenance investment will rise proportionally, meaning that a larger proportion of the part deducted after consumption each period will be used to maintain existing capital, and a smaller proportion will be used for additional investments, until all investments are for maintaining existing capital. In other words, the capital stock formed by each period's investment will become a burden on the next period's investment, manifesting as the rigidity of debt burden. The corporate sector borrows capital from the household sector for production, and a part of the borrowed capital is used to maintain existing capital, such as equipment maintenance and replacement. This part of the investment is rigid and a task that must be completed, otherwise, there will be a problem of equipment aging. As the capital stock expands, the investment required to maintain existing capital will also expand, so each period the manufacturers need to borrow capital and bear the cost of interest to maintain existing capital. In reality, whether it is the maintenance of highways after construction or the maintenance of production workshop equipment, continuous investment is required, and these investments are inevitable and will not be included in the new period of production.

III. How to Promote a Virtuous Cycle of Consumption and Investment

The 2023 Central Economic Work Conference report proposed two methods to promote a virtuous cycle of consumption and investment: one is to stimulate potential consumption, and the other is to expand effective investment. So, what is potential consumption and effective investment? Simply put, effective investment is investment that can ultimately be sold and make a profit, which is determined by both the demand and supply sides; potential consumption is consumption that can promote continuous output and expansion of production, mainly depending on the mutual influence of the demand and supply sides. Specifically, it is necessary to analyze the respective determinants of consumption and investment.

(1) Understanding Consumption: Determinants of Consumption

Consumption has always held an important position in macroeconomic theory. Classical economists agree on the significance of consumption, but overall, they emphasize the importance of thrift and approve of saving as a virtue. Adam Smith has long said, "Consumption is the sole destination and purpose of production," but he also clearly opposes "consumption paramount," believing that extravagant and luxurious consumption is not conducive to the accumulation of valuable goods and the increase of social capital. Ricardo emphasizes the role of investment in economic growth, and savings (investment) compared to consumption can promote capital accumulation, production expansion, and long-term productivity improvement. Marx sees consumption and production as a unity of opposites, with consumption determined by production and reacting to production, and consumption is an important condition for the continuation of social reproduction. Classical economics emphasizes that individuals should moderate consumption, save more, form capital, and promote economic growth and long-term prosperity. This view of consumption is related to the stage of economic development. In the early stages of economic development, for example, in the Malthusian era, he believed that land is the most important factor of production in agricultural society, and the population is a burden on economic growth because too many people pursuing food and clothing will consume most of the agricultural products, so it is difficult to provide surplus products for investment, forming new productive forces, thus dragging down per capita output growth. Later, Keynes并列消费和投资 as the two major components of total demand, but what determines consumption demand and investment demand are two sets of independent variables. Consumption demand is determined by income and marginal propensity to consume, while investment demand is determined by the rate of return on capital and interest rates. In the short term, due to the slow change in people's marginal propensity to consume, there is little room for consumption demand to rise, so if you want to expand total demand, as a slow variable, consumption demand is often powerless, and more needs to be the investment demand as a fast variable.

Economic theories specifically discussing consumption emerged in the 1950s. At that time, the life-cycle hypothesis and the permanent income hypothesis respectively became the mainstream theories of consumption-savings research, both essentially explaining the same truth: rational individuals will decide each period's consumption based on the maximization of life-cycle utility, and under this setting, what determines current consumption is not current income but the total income for life, and savings are the difference between current income and current consumption, used to support future or offspring consumption. The life-cycle hypothesis and the permanent income hypothesis coincide in their views, believing that consumption is not simply determined by current income, but by the total wealth, total resources, or permanent income owned in life.

Looking at consumption theories, whether it is classical economic theory or Keynesian economics, as well as later permanent income hypotheses, all emphasize the decisive role of income or output level on consumption without exception. Although the assumptions or derivation methods of various consumption theories are different, there are several consensus points: First, consumption is affected by income, and even in agricultural society, how much people consume is also affected by the output of crops. Second, people have the ability to smooth consumption, not limited to current consumption, and are unwilling to go hungry one meal and full the next, but try to smooth consumption over a foreseeable period of time. Third, consumption willingness varies from person to person and from time to time, affected by subjective preferences, borrowing constraints, delayed gratification, etc., and more importantly, consumption willingness is affected by income and expected income, and is also a function of income. In other words, income will affect consumption through the income itself and its impact on consumption willingness, thus reinforcing the first point.

(2) Understanding Investment: Determinants of Investment

Compared to the rich consumption theories, there are much fewer economic theories specifically discussing investment. Adam Smith spent a lot of space discussing investment in "The Wealth of Nations," believing that expanding investment is the foundation of economic growth, because whether it is to expand the market or to enable skilled labor to maximize its specialization, investment needs to play a role. As capital accumulates, income increases, and the economy becomes more affluent, the rate of return on investment will decrease, but as long as the rate of return on capital that includes a risk premium exceeds the interest rate necessary to induce people to save, investment will continue. Malthus pointed out that the three most favorable factors for production are capital accumulation, land fertility, and labor-saving inventions and creations. Overall, classical economics considers investment to be a creative adventurous activity, emphasizing its role in promoting economic growth. With the depreciation of existing fixed assets, if there is no investment, it is impossible to maintain the level of capital stock required for reproduction, and the economic production capacity will shrink. Through investment, it is possible to maintain the level of capital stock without decline or increase, create new job opportunities, and thus promote consumption increase and economic growth.Keynes was the first to systematically discuss the determinants of investment, arguing that investment is jointly determined by the rate of return on capital and the interest rate. The rate of return on capital is determined by the stock of capital and the expected rate of return on capital, which is inversely related to the stock of capital and directly related to the expected rate of return on capital. The expected rate of return on capital is calculated by investors based on future cash flows and the replacement value of assets, and is related to the level of optimism in the general business psychology or epoch-making new inventions. Overall, the higher the rate of return on capital, the higher the investment. The interest rate is influenced by the money supply and liquidity preference. Generally, the lower the interest rate, the higher the investment. However, due to the existence of liquidity preference, central banks may not be able to effectively drive interest rate changes by adjusting the money supply, so the failure of monetary policy to regulate interest rates will make it powerless to stimulate investment demand. Although, as mentioned earlier, classical economics views saving as a good thing, more saving and more investment are beneficial to capital accumulation and economic growth, but Keynes believes that too little consumption and too much saving can lead to a decline in total expenditure when there is not enough investment demand to match, triggering a great depression, thus requiring government demand to fill the gap.

Later, there were some scattered investment theories, such as the Q-theory of investment. The Q-theory of investment describes the impact of the rate of return on capital on corporate investment decisions, indicating how the addition of one unit of capital will affect the present value of profits. If the Q value is high, companies want to increase the stock of capital, and if the Q value is low, they want to reduce the stock of capital.

Looking at the economic theories related to investment, although not as rich as consumption theories, there are some consensus points: First, maintaining a certain level of investment is necessary for the normal operation of the economy. A part of each period's investment is used to compensate for capital depreciation, to maintain the stock of capital without shrinking, and the remaining part is new capital. As the stock of capital expands, the amount of capital needed to maintain each period is increasing, which means that the stock of capital accumulated from past investments needs to be maintained by current investments, and the remaining part after maintenance is the addition of new capital on the existing stock of capital. Second, the rate of return on capital has a huge traction effect on investment. Regarding whether savings will be fully transformed into investment, (neo)classical and (neo)Keynesian economics have different views, but there is no dispute that in addition to being affected by savings, which is a "quantity" factor, investment is also driven by another set of forces, which is represented by the rate of return on assets.

(III) Driving Investment with Consumption

The analysis of the determinants of investment and consumption shows that consumption is an important factor for stable economic growth. Investment is often volatile, especially when economic uncertainty increases. However, consumption is usually relatively stable. Driving investment through consumption, leveraging the leading and promoting role of consumption on investment and technological progress, helps to reduce economic fluctuations and maintain the stability of economic growth.

1. The role of government expenditure and investment

China's investment-led growth model is mainly reflected in government investment. This section uses data from the China Statistical Yearbook from 2000 to 2021 to construct a panel data set with 303 cities as sections to test the impact of consumption on investment. In the panel regression model, resident consumption is used as a proxy variable for consumption, fixed investment is used as a proxy variable for investment, and local government expenditure is used as a proxy variable for fiscal expenditure. To partially reduce endogeneity, we treat consumption with a one-step lag. It shows that there is a long-term non-linear relationship between consumption and investment, and government expenditure plays a moderating role in this impact.

An increase in government expenditure may cause a substitution effect between investment and consumption. When government investment increases, it inevitably attracts more resources and funds to be used for government projects, relatively reducing the resources used for private investment and resident consumption, which may reduce the stimulating effect of resident consumption on investment.

Government investment can promote economic growth to a considerable extent, but it may also lead to irrational allocation of resources, which can lead to overcapacity. Overcapacity refers to the situation where the production capacity in the economy exceeds the actual demand level. When overcapacity occurs, the supply of corporate goods and services exceeds the demand of residents, which may lead to a decrease in the actual inflation level. At this time, residents may feel that delaying consumption can obtain lower prices, so they may choose to postpone consumption.

Enterprises will also reduce investment in order to reduce inventory. The decline in investment affects the employment and income of residents, weakens the consumption capacity and expenditure of residents, leading to a further decline in product demand, exacerbating the problem of overcapacity, and suppressing the level of inflation.2. The Relationship Between Total Factor Productivity and Investment and Consumption

Economic growth models invariably emphasize the role of total factor productivity (TFP) or labor productivity, with neoclassical economics being no exception. From the Solow model mentioned above, although increasing the exogenous savings rate can enhance the steady-state economic scale and the standard of living measured by per capita output, the standard of living fundamentally depends on technological progress, TFP, or labor productivity, which is the shape of the production function. Only by clarifying how much output can be generated from a unit of input in the production function can we discuss the impact of the level of savings rate. However, it is regrettable that economic growth models usually treat technological progress as an exogenous variable, similar to technological progress that falls from the sky like manna, driving the production function to expand outward. But in reality, technological progress does not emerge out of thin air; it is nurtured in the process of investment and consumption. Specifically, when it comes to the role of investment and consumption in promoting technological progress, it involves the supply and demand structure, industry structure, regional structure, and other aspects of economic operations. For example, whether it is the manufacturers' independent innovation that drives technological progress or the upgrading of consumer demand. Also, when the proportion of service consumption in total consumption increases and the proportion of intangible asset investment in total investment increases, the role of consumption and investment in technological progress is also changing. Consumption is not only about clothing, food, housing, and transportation but also includes education, entertainment, medical care, and housing. Investment may no longer be a series of large machinery and equipment but a series of codes. Consumption and investment are both important for the growth of TFP, but existing economic growth models have failed to depict this interactive effect.

This section uses unbalanced panel data from 93 countries over the time span of 2008-2021, constructing a fixed effects model to test this issue. As with the previous text, TFP data comes from the Penn World Tables, and other data comes from the World Bank. The dependent variable is TFP, and control variables include the growth rate of the labor force population, etc. We focus on the impact of the growth rate of final consumption expenditure and the growth rate of capital formation on TFP, as well as the impact of their interaction.

It can be seen that final consumption expenditure significantly improves TFP. The interaction between the growth rate of final consumption expenditure and the growth rate of capital formation is significantly positive after 2008. That is to say, the increase in consumption expenditure can promote the positive effect of investment on TFP.

3. Marginal Return on Capital, Investment, and Consumption

It is almost undisputed that the rate of return on capital affects investment, but the connection between the rate of return on capital and consumption is rarely mentioned. Consumption growth means that the products produced by manufacturers can be recognized by consumers, there is no unsold inventory, and the transformation from product form to corporate revenue is realized. Therefore, consumption growth driving an increase in the rate of return on capital is conducive to maintaining the production enthusiasm of the manufacturing sector. Of course, as another outlet for the products produced by manufacturers, investment can also absorb current output and be used for the next period's production. However, if this is the case, the manufacturing sector will need to continuously borrow from the household sector, causing debt accumulation, and ultimately, it still needs to absorb surplus products through consumption. The biggest risk of investment is that the products cannot be sold, which is what Marx referred to as the "leap in the dark." Therefore, the main factor determining investment is consumption; only if consumption expands in the next period can it increase current investment. Investment is certainly important for maintaining the next period's production, but consumption also has a direct or indirect impact on the next period's production: on the one hand, consumption is used to maintain the survival of the labor force for the next period's production, and on the other hand, consumption growth is conducive to improving the rate of return on capital, stimulating the enthusiasm for current investment and the next period's production. Even if we set aside the role of consumption in maintaining the survival of the labor force, in a narrow sense, only investment can provide capital accumulation, enter the production function, and provide the impetus for economic growth. The role of consumption in affecting the rate of return on capital and stimulating investment should not be overlooked.

We use data from the China Statistical Yearbook from 2000 to 2020 to calculate the capital-output elasticity, that is, the percentage change in output when capital input increases by 1 percentage point, and use this as a proxy variable for the rate of return on capital. We construct cross-sectional data for 31 provinces to test the impact of consumption on capital-output elasticity.

The test results show that during the sample period, the growth rate of fixed asset investment has no significant effect on capital-output elasticity, but resident consumption expenditure significantly promotes capital-output elasticity. This proves the importance of an effective cycle of investment and consumption and also explains that investment can only promote economic growth on the basis of achieving consumption. The rate of return on capital and the impact of consumption on the rate of return on capital are crucial throughout the entire life cycle of a business. Only by demanding traction, especially through consumption to achieve product sales, can there be a rate of return on capital and lead to investment demand.

IV. Conclusion

This paper reviews the relationship between investment and consumption in economic theory models and examines the empirical relationship between consumption and investment from different perspectives through data from the China Statistical Yearbook and country data from the World Bank. The results show that the relationship between consumption and investment changes over time, and there is a positive equilibrium relationship between consumption and investment, which is neglected in traditional economic literature. The proportion of consumption in our country is still far below the optimal level, and the economic growth model should gradually shift from government-guided investment to a model that promotes investment through consumption.Investment is deferred consumption, and consumption is another form of investment. When individuals or businesses make investments, they allocate current resources for production or development rather than immediate consumption, which means they postpone the enjoyment of returns and profits to the future. Thus, investment can be seen as deferring present consumption to the future. Consumption is not only about meeting current needs but can also be viewed as an investment in the future. Through consumption, individuals or households can improve their quality of life, satisfy their needs, and provide a foundation for future development. At the same time, consumption has a leading and promoting effect on investment and technological progress, becoming a potential force for investment. The virtuous interaction between consumption and investment is not only a good remedy for short-term economic growth but also the key to long-term sustainable development.