[ QUOTE ]
I was reading about causes of the Depression, and one causes listed was this
[ QUOTE ]
"Malinvestment" is a term coined by the Austrian school of economics to sum up their explanation of the causes of business cycles. According to this theory, all business cycles are caused by government intervention in the market. Specifically, the central bank (the Fed in the case of the U.S.) artificially lowers the interest rate, flooding the economy with money. This money is then invested in capital goods that would not be justified at a market level of interest rates. The low interest rate cannot be sustained forever without an increase in inflation, so the Fed inevitably has to raise interest rates. When this happens, the investments that were "justified" under a lower interest rate must be liquidated. Any prevention of this liquidation by further government intervention will simply prolong the re-adjustment and thus exacerbate the recovery. This view is held by very few economists.
[/ QUOTE ]
I'll admit that I don't know as much about economics as I'd like to. 'Malinvestment' seems like a solid concept, and I was hoping to get some insight (pro and con) by those with more knowledge than me, specifically about why few economists give it any weight. You can answer either in the context of the Great Depression (since that's what I'm trying to learn about) or separate from it. Thanks in advance for the responses.
[/ QUOTE ]
It is a solid concept. It is absolutely unavoidable. For a complete analysis not limited to the Great Depression see Rothbard's
Economic Depressions: Their Cause and Cure. Regarding the Austrian theory of the business cycle and specifically the Great Depression, it is worthy of note that only a handful of economists predicted the coming depression during the boom years of the 20s:
[ QUOTE ]
Ludwig von Mises had predicted the depression during the heyday of the great boom of the 1920s—a time, just like today, when economists and politicians, armed with a "new economics" of perpetual inflation, and with new "tools" provided by the Federal Reserve System, proclaimed a perpetual "New Era" of permanent prosperity guaranteed by our wise economic doctors in Washington.
[/ QUOTE ]
For a vastly more detailed analysis of specifically the Great Depression, see Rothbard's
America's Great Depression, the full text of which is available online.