Friday, August 19, 2011

Against the notion of malinvestment

This is based on a comment I made here.

I do not like the Austrian concept of "malinvestment" because what is or is not a good investment depends very significantly on larger economic conditions. What is a great idea in New York may be a really dumb one in Port-au-Prince. If you are going to make any sense of the notion of "malinvestment" it is that unwarranted monetary expansion misleads folk about the future path of economic activity. As conditions change, investments based on such unwarranted expectations are "exposed" and need to be liquidated to free resources to go to more valuable uses.

But suppose one slides into (in compete contradiction of Austrian value subjectivism) the notion that being a "malinvestment" is an intrinsic quality of an investment. Then the level of economic activity become irrelevant to the level of "malinvestment". So, you can happily advocate any amount of restrictive "adjustment" because the level of "bad investments" wasting resources is set.

Conversely, if you understand that what is or is not a good investment depends on economic conditions, then driving down income expectations does not "release" resources, it increases (potentially considerably) what becomes a non-returning investment. Such restrictive adjustment is a "cure" which is, in fact, more of the disease. Thus does poor analytical terminology leads to bad policy thinking.

Austrian or quasi-Austrian thinking is much stronger in American conservatism than British (or Oz) varieties, which may help explain differences in policy debates.

ADDENDA It appears that Swedish economist Gustav Cassell was way ahead of me (by about 80 years).

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