In Austrian business cycle theory, malinvestments are badly allocated business

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

s resulting from artificially low interest rates for borrowing and an unsustainable increase in

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

Central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

s are often blamed for causing malinvestments, such as the

dot-com bubble The dot-com bubble (or dot-com boom) was a stock market bubble that ballooned during the late-1990s and peaked on Friday, March 10, 2000. This period of market growth coincided with the widespread adoption of the World Wide Web and the Interne ...

and the

United States housing bubble The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a Real-estate bubble, real estate bubb ...

. Austrian economists such as F. A. Hayek advocate the idea that malinvestment occurs due to the combination of

fractional reserve banking Fractional-reserve banking is the system of banking in all countries worldwide, under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to ...

and artificially low interest rates sending out 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 loses value. A malinvestment only occurs if the loss in value is due to increased interest rates. The classification of a malinvestment only applies 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 and Dahmén, who came up with the Åkerman-Dahmén theory, which is different from 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 Ludwig Heinrich Edler von Mises (; ; September 29, 1881 – October 10, 1973) was an Austrian-American political economist and philosopher of the Austrian school. Mises wrote and lectured extensively on the social contributions of classical l ...

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 consumers overuse their available goods and services to where they can't, or don't want to, replenish or reuse them. In microeconomics, this is the point where the marginal cost of a consumer is greater ...

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

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

/ref>

References

{{Reflist Austrian School Business cycle theories Investment indicators

See also

References