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@ fiatjaf
2024-01-14 13:55:28
# Just malinvestiment
Traditionally the Austrian Theory of Business Cycles has been explained and reworked in many ways, but the most widely accepted version (or the closest to the Mises or Hayek views) view is that banks (or the central bank) cause the general interest rate to decline by creation of new money and that prompts entrepreneurs to invest in projects of longer duration. This can be confusing because sometimes entrepreneurs embark in very short-time projects during one of these bubbles and still contribute to the overall cycle.
The solution is to think about the "longer term" problem is to think of the entire economy going long-term, not individual entrepreneurs. So if one entrepreneur makes an investiment in a thing that looks simple he may actually, knowingly or not, be inserting himself in a bigger machine that is actually involved in producing longer-term things. Incidentally this thinking also solves the biggest criticism of the Austrian Business Cycle Theory: that of the rational expectations people who say: "oh but can't the entrepreneurs know that the interest rate is artificially low and decide to not make long-term investiments?" ("and if they don't know they should lose money and be replaced like in a normal economy flow blablabla?"). Well, the answer is that they are not really relying on the interest rate, they are only looking for profit opportunities, and this is the key to another confusion that has always followed my thinkings about this topic.
If a guy opens a bar in an area of a town where many new buildings are being built during a "housing bubble" he may not know, but he is inserting himself right into the eye of that business cycle. He expects all these building projects to continue, and all the people involved in that to be getting paid more and be able to spend more at his bar and so on. That is a bet that may or may not end up paying.
Now what does that bar investiment has to do with the interest rate? Nothing. It is just a guy who saw a business opportunity in a place where hungry people with money had no bar to buy things in, so he opened a bar. Additionally the guy has made some calculations about all the ending, starting and future building projects in the area, and then the people that would live or work in that area afterwards (after all the buildings were being built with the expectation of being used) and so on, there is no interest rate calculations involved. And yet that may be a malinvestiment because some building projects will end up being canceled and the expected usage of the finished ones will turn out to be smaller than predicted.
This bubble may have been caused by a decline in interest rates that prompted some people to start buying houses that they wouldn't otherwise, but this is just a small detail. The bubble can only be kept going by a constant influx of new money into the economy, but the focus on the interest rate is wrong. If new money is printed and used by the government to buy ships then there will be a boom and a bubble in the ship market, and that involves all the parts of production process of ships and also bars that will be opened near areas of the town where ships are built and new people are being hired with higher salaries to do things that will eventually contribute to the production of ships that will then be sold to the government.
It's not interest rates or the length of the production process that matters, it's just printed money and malinvestiment.