In Austrian business cycle theory, malinvestments are badly allocated business

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

s due to artificially low cost of credit and an unsustainable increase in

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...

Central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...

s are often blamed for causing malinvestments, such as the

dot-com bubble The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet. Between 1995 and its peak in March 2000, the Nasdaq Comp ...

and the

United States housing bubble The 2000s United States housing bubble was a real-estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reac ...

. Austrian economists such as the Swedish central bank's

Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...

laureate

F. A. Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...

advocate the idea that malinvestment occurs due to the combination of

fractional reserve banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserv ...

and artificially low interest rates misleading relative

price signal A price signal is information conveyed to consumers and producers, via the prices offered or requested for, and the amount requested or offered of a product or service, which provides a signal to increase or decrease quantity supplied or quantit ...

s which eventually necessitate a corrective contractiona boom followed by a bust. Larry J. Sechrest
"Explaining Malinvestment and Overinvestment"
(pdf), October 2005, referenced 2010-07-01. In the Austrian Business Cycle Theory and all its different frameworks, the actual definition of malinvestment is the same: an investment with high potential that becomes worthless. However, it is important to note that a malinvestment only occurs if the investment becomes worthless due to increased interest rates. The classification of a malinvestment is only when there is an increased amount of credit which causes it to become worthless. Many economists believe that malinvestments occur at different times and to certain companies.

Åkerman Åkerman is a Swedish surname. Notable people with the surname include: * Gustaf Åkerman (1888–1959), Swedish economist *Gustav Åkerman (1901–1988), Swedish Army lieutenant general * Johan Åkerman (born 1972), Swedish ice hockey player * Lis ...

and Dahmén who came up with the Åkerman-Dahmén theory, which is different than the Austrian Business Cycle Theory, believe that a malinvestment will occur during the "boom" to companies who cannot keep up with the interest rate growth. The concept dates back to at least 1867. In 1940, Ludwig von Mises wrote, "The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the

overconsumption Overconsumption describes a situation where a consumer overuses their available goods and services to where they can't, or don't want to, replenish or reuse them. In microeconomics, this may be described as the point where the marginal cost of ...

of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last."

Ludwig von Mises Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberalism. He is ...

, ''Human Action: A Treatise on Economics'', 196

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References

{{Reflist Austrian School Business cycle theories Investment indicators

See also

References