> To me, this doesn't "separate" investment and consumption at all.
Well, what you originally wrote doesn't jive with normal accounting:
>> I would argue that these expenditures in household improvement
>> *are* consumption, not capital investment, since they have been made
>> prior to a collapse in housing values, thus do not now add to the
>> owners' equity.
"Equity" isn't an accounting term, it's an unrealized gain/loss -- or if you like, an exchange of like assets -- and thus, as Doug says:
>> Equity doesn't matter in the accounts at all.
Say you have $100 and you buy 10 shares of stock; did you consume it? No. How much is it worth? We don't know until you sell. What happened to that new kitchen you installed in 1987? We won't know until you sell the house, at which point your purchase price *includes* the kitchen and likely decreases any gain (or increases your loss) you may have.
> It makes any distinction between expense and capital investment
> meaningless.
I think you're exactly wrong: it is the entirety of the distinction between expense and capital investment. Here's another example: you have $30k and you pay down your mortgage; what happened to it? Your net worth stays the same (though your investment mix is now more weighted to the housing sector ...).
/jordan