IDEAS home Printed from https://ideas.repec.org/a/kap/revaec/v30y2017i2d10.1007_s11138-016-0343-2.html
   My bibliography  Save this article

Malinvestment

Author

Listed:
  • Randall G. Holcombe

    (Florida State University)

Abstract

In the Austrian business cycle theory, monetary expansion lowers the interest rate and sends misleading relative price signals to investors, who then make investments that turn out to be unprofitable. One criticism of the theory is that if malinvestment is predictable, investors should understand their businesses well enough to see and avoid the temptation to be lured into unprofitable investments. A broader understanding of the Austrian school's framework explains why malinvestment takes place. The economy is a complex order, and while the theory explains that malinvestment will rise during the expansionary phase, it cannot identify which investment projects will eventually become unprofitable, nor can investors themselves tell ahead of time. Furthermore, applying the fallacy of composition, it may be that one investor could profitably invest based on those price signals, but all investors cannot. Monetary expansion lowers the informational content of prices, making it more likely that unprofitable investments will take place. Even if investors become more cautious, the percentage of investment projects that eventually will prove unprofitable will rise.

Suggested Citation

  • Randall G. Holcombe, 2017. "Malinvestment," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(2), pages 153-167, June.
    • Handle: RePEc:kap:revaec:v:30:y:2017:i:2:d:10.1007_s11138-016-0343-2
    DOI: 10.1007/s11138-016-0343-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11138-016-0343-2
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11138-016-0343-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Carilli, Anthony M & Dempster, Gregory M, 2001. "Expectations in Austrian Business Cycle Theory: An Application of the Prisoner's Dilemma," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 14(4), pages 319-330, December.
    2. David Howden, 2010. "Knowledge shifts and the business cycle: When boom turns to bust," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(2), pages 165-182, June.
    3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    4. Robert Lester & Jonathan Wolff, 2013. "The empirical relevance of the Mises-Hayek theory of the trade cycle," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 26(4), pages 433-461, December.
    5. Hayek, F. A., 2012. "Hayek on Hayek," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226321202 edited by Kresge, Stephen & Wenar, Leif, December.
    6. McCulloch, J. Huston, 1981. "Misintermediation and macroeconomic fluctuations," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 103-115.
    7. Bryan Caplan, 1999. "The Austrian Search for Realistic Foundations," Southern Economic Journal, John Wiley & Sons, vol. 65(4), pages 823-838, April.
    8. Roger W. Garrison, 1986. "Hayekian Trade Cycle Theory: A Reappraisal," Cato Journal, Cato Journal, Cato Institute, vol. 6(2), pages 437-459, Fall.
    9. repec:wly:soecon:v:81:4:y:2015:p:1062-1073 is not listed on IDEAS
    10. Gerald O’Driscoll & Douglas Rasmussen, 2012. "Did Hayek have a monetary theory of business cycles?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 255-262, September.
    11. Leland Yeager, 1999. "Should Austrians Scorn General-Equilibrium Theory?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 11(1), pages 19-30, January.
    12. Yeager, Leland B, 1999. "Should Austrians Scorn General-Equilibrium Theory?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 11(1-2), pages 19-30.
    13. Roger W. Garrison, 2004. "Overconsumption and Forced Saving in the Mises-Hayek Theory of the Business Cycle," History of Political Economy, Duke University Press, vol. 36(2), pages 323-349, Summer.
    14. Paul Mueller, 2014. "An Austrian view of expectations and business cycles," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(2), pages 199-214, June.
    15. Wagner, Richard E, 1999. "Austrian Cycle Theory: Saving the Wheat While Discarding the Chaff," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 12(1), pages 65-80.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Simon Bilo, 2021. "Hayek’s Theory of Business Cycles: A Theory That Will Remain Obscure?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 36(Fall 2021), pages 27-47.
    2. Joshua R. Hendrickson, 2017. "Interest rates and investment coordination failures," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(4), pages 493-515, December.
    3. William Luther & Mark Cohen, 2014. "An Empirical Analysis of the Austrian Business Cycle Theory," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 42(2), pages 153-169, June.
    4. Théret, Bruno, 2011. "Du keynésianisme au libertarianisme.La place de la monnaie dans les transformations du savoir économique autorisé," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 10.
    5. Göcen, Serdar, 2015. "F. A. Hayek'in Bilgisizlik Teorisi Çerçevesinde Piyasa, Denge ve Planlama [Market, Equilibrium, and Planning within the Framework of F.A. Hayek's Theory of Ignorance]," MPRA Paper 66811, University Library of Munich, Germany.
    6. repec:dau:papers:123456789/11496 is not listed on IDEAS
    7. Raymond C. Niles, 2017. "The unresolved problem of gratuitous credit in Austrian banking theory," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(1), pages 83-105, March.
    8. Nicolas Cachanosky, 2015. "Expectation in Austrian business cycle theory: Market share matters," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 28(2), pages 151-165, June.
    9. Robert F. Mulligan, 2005. "The Austrian Business Cycle: a Vector Error-correction Model with Commercial and Industrial Loans," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 21(Fall 2005), pages 59-91.
    10. Tomá? Frömmel, 2017. "The Austrian business cycle theory, rational expectations and historical time," Proceedings of Economics and Finance Conferences 4507343, International Institute of Social and Economic Sciences.
    11. Paul Mueller, 2014. "An Austrian view of expectations and business cycles," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(2), pages 199-214, June.
    12. Robert Mulligan, 2006. "Accounting for the business cycle: Nominal rigidities, factor heterogeneity, and Austrian capital theory," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 19(4), pages 311-336, December.
    13. Nicolás Cachanosky & Alexander W. Salter, 2017. "The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(2), pages 169-192, June.
    14. William J. Luther, 2021. "Two paths forward for Austrian macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 289-297, June.
    15. Nicolas Cachanosky, 2014. "The Mises-Hayek business cycle theory, fiat currencies and open economies," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(3), pages 281-299, September.
    16. William J. Luther & J. P. McElyea, 2018. "Austrian Macroeconomics in Search of Its Uniqueness," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 33(Summer 20), pages 1-20.
    17. Deirdre Nansen McCloskey, 2019. "Lachmann practiced humanomics, beyond the dogma of behaviorism," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 32(1), pages 47-61, March.
    18. Robert F. Mulligan, 2015. "Roger W. Garrison and the Integration of Austrian and Mainstream Macroeconomics," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Winter 20), pages 59-79.
    19. Stephan Schulmeister, 2018. "From Prosperity into the Crisis and Back. On the Role of Economic Theories in the Long Cycle," WIFO Working Papers 571, WIFO.
    20. Bagus, Philipp & Howden, David, 2011. "Unanswered Quibbles with Fractional Reserve Free Banking," MPRA Paper 79594, University Library of Munich, Germany.
    21. Martin Komrska & Marek Hudík, 2016. "Hayek’s monetary theory and policy: A note on alleged inconsistency," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 29(1), pages 85-92, March.

    More about this item

    Keywords

    Business cycles; Investment; Monetary policy; Fractional reserve banking; Austrian school of economics;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:revaec:v:30:y:2017:i:2:d:10.1007_s11138-016-0343-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.