As the Austrian economists Ludwig von Mises and Friedrich Hayek have amply shown, creating money out of thin air, flooding the economy with cheap credit, and keeping interest rates artificially low – as Western banking systems have been doing more or less continuously for decades, and particularly so in the years following the dot-com bust and the 9/11 attacks – does not lead to economic growth. On the contrary, it leads to malinvestments – and to inflation. In short: loose monetary policy creates bubbles.
It would go too far here to delve deeply into the capital theory of the “Austrian” school of Mises and Hayek. Suffice it to say that cheap or fiat money that is injected into the economy by banks (on the back of the central banks’ monetary policy) either leads to overinvestment in (more often than not) the capital goods sector, driving up prices of machinery and commodities, or (as is more frequent nowadays) is channeled into speculative activities, in particular investments in stocks, bonds, mortgages and commodities, leading to price bubbles in these sectors.
Source link: http://archive.mises.org/12290/sound-in-turkey/
Sound in Turkey
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Almost as perfect as it can get for a short 2 paragraph summary of ABCT, except for the fatal error of describing the Austrian theory as a theory of overinvestment instead of malinvestment.
“Capital Theory” in a newspaper
…..can’t breath…….
the fatal error of describing the Austrian theory as a theory of overinvestment instead of malinvestment
I think we should cut him some slack.
Yes, guys–I’m for “cutting him some slack,” too. But I’d simply like to point out that the difference between mis- and mal- investment is not only elusive to economists as well as to laymen but (if any simple misunderstanding can be so described) is actually tragic. What is missing is an appreciation that: 1.) though both may be encouraged by monetary policy, the latter (“mal-”) is always so founded; and, further, 2.) that malinvestment represents loss not only to the disappointed investor or entrepreneur but to society at large. Misinvestment causes no “social” loss, while the “mal-” variety does; even a Marxist ought to be able to appreciate the fundamental difference and to, therefore, decry its source in monetary policy.
The writer of this article Karel Beckman is a Dutch libertarian journalist who wrote a book in the 90s called “There is no green house effect”.
To be fair, the author didn’t talk about overinvestment in general. He said “overinvestment in … the capital goods sector”. Isn’t that correct? After all, more money was invested in the capital goods sector than would otherwise have been.
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