It is customary to describe the boom as overinvestment.  However, additional investment is only possible to the extent that there is an additional supply of capital goods available.  As, apart from forced saving, the boom itself does not result in a restriction but rather an increase in consumption, it does not procure more capital goods for new investment.  The essence of the credit-expansion boom is not overinvestment, but investment in the wrong lines, i.e.; malinvestment.  The entrepreneurs employ a supply of r + p1 + p2 as uf tget were in a position to employ a supply of r + p1 + p2 + p3 + p4.  They embark upon an expansion of investment on a scale for which the capital goods available do not suffice.  Their projects on unrealizable on account of the insufficient supply of capital goods.  They must fail sooner or later.  The unavoidable end of the credit expansion makes the faults committed visible.  There are plants which cannot be utilized because the plants needed for the production of the complementary factors of production are lacking; plants the products of which cannot be sold because the consumers are more intent upon purchasing other goods which, however, are not produced in sufficient quantities; plants the construction of which cannot be continued and finished because it has become obvious that they will not pay.

This is why I continually stress, not overinvestment, but investment made due to the distortion of the price structure.  Investment made because entrepreneurs were unaware of the true scarcity of capital-goods.   It is a confusion of causality.  Entrepreneurs didn’t invest too much, per sé; their is no abundance of goods.  Rather, there is a lack of goods, caused by malinvestment.

I clarify this in my Krugman contra Hayek Mises Daily,

Despite this notion of disequilibrium, Austrian theory does not argue in favor of blaming “overinvestment,” as the supply of capital goods does not necessarily increase. Instead, it examines price distortion where a price ceiling is effectively installed causing entrepreneurs to not recognize the actual scarcity of the capital goods in question — the adjustment of the price mechanism reveals this scarcity, and entrepreneurs must liquidate their “malinvestments.”

So, for those who continue to claim this overinvestment nonsense as an interpretation of what I write, it is only due to your lack of understanding of Austrian business cycle theory, or an inability to “connect the dots”, so to speak.

I realize I come off as hostile and conceited, but the debate is tiring when it goes in circles.  I don’t accuse non-Austrians of being able to argue in only circles.  My only objection is to move beyond what has already been discussed, or at least disprove that Austrian theory is one of “malinvestment”  not “overinvestment”.  But, don’t debate as if we haven’t addressed these concerns already.

Christopher,

For me football (a.k.a. “soccer”) provides the perfect example of individual, and unpredictable, human action. Although the sport includes set piece plays, and specific maneuvers, ultimately the success of a team will depend on individual human action. That is what makes football such an exciting sport to watch—it is unpredictable. Although coordination is also a key component, and therefore prediction and analysis can be considered a component, these quantitative characteristics can only accurately be applied on the individual level. It proves useless to apply these to some type of aggregate.

If Valeri Lobanovsky’s model is still in use in Ukraine—by, at least, the national team—it is no wonder that apart from the 2006 World Cup the Ukraine National Football Team has been unable to preform as well as either the Russian national team, or the even more successful national teams in Western Europe (although, it was FC Shakhtar Donetsk who won the Europa League last year).

The opening match for Ukraine’s 2006 World Cup group serves as the perfect illustration for my point. It was between Ukraine and Spain. Although Spain was hardly in the same shape it is today, the characteristic Spanish style of football still permeated the squad. Ukraine lost their match against Spain, 4–0 (Ukraine won their next two group stage matches, but these were against entirely substandard teams).

Ukraine’s mathematical approach to the game could not compete against Spain’s more individualistic approach. Although Spain’s style relies heavily on coordination and cooperation, these elements only exist because Spanish players have learned to coordinate and cooperate on the individual level. They do not follow some type of “master plan” or “scientific method”; instead, they rely on individual skill and individual understanding, based upon years of experience with playing with each other.

While some may try to cheat nature and apply some type of metric to football, the sport is really a shining example of human action outside of the world of strict economics.

Laura writes:

While I understand that economics is the sole study that turns on economists and some political theoreticians, it is completely ignorant of the spectrum of human behavior that causes totalitarian regimes. Economics does not make the world go round, nor does it influence every decision a human being makes. This is fundamentally what I do not understand about the Libertarian set of views–economics fills the role of a deity, which is fundamentally irrational to me.

Laura, I think there is a misconception of what economics is.  This misconception finds its origins in the confusion created in the field of economics, especially when teaching it to high school or undergraduate students, thanks to the coming of econometrics and mathematics.  To one degree or another, studying macroeconomics has become a science of studying “aggregates”.  So, when you analyze libertarian views from the perspective of mainstream economics, then you are bound to misunderstand the libertarian argument (well, I guess that whether this is true or not also depends on the particular libertarian argument, but I speak from an explicitly Austrian point of view).  The study of economics is not the study of aggregates, or statistics, et cetera.  It is the study of individual human actions.

Economics is a science which deals primarily with understanding the actions individuals will commit to as to further their own interests.  These interests can be monetary, psychological or for any other reason.  In this sense, the study of economics is not just the study of finance or monetary theory.  It just so happens to be that money, as a common unit of trade, has managed to unite and facilitate barter between millions of people.

If we accept that humans are rational, we accept the fact that humans will only commit to a decision if the benefits outweigh the costs.  I am not suggesting that this always proves to be true in the long-run.  In other words, an individual can make a rational decision on the spot, only to find out that he did not analyze the situation correctly or that he had taken in imperfect information.  Human rationality is the basic building block to economic theory.  If human rationality is nearly synonymous with human action, as all human action aims to maximize utility, then economics is the study of “what makes the world go round” and it does indeed “influence every decision a human being makes”.