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To: yard_man who wrote (106901)	6/6/2001 1:22:31 PM
From: Ilaine	Read Replies (3) \| Respond to of 436258

I think you are setting up a false dichotomy. Buying "securities" isn't buying pieces of paper, it's buying a share of a going concern, a business. How is that driven by anything but the marketplace? Each of us makes an economic choice based on the information we choose to heed. Everyone knows, or ought to know, that shakeouts are inevitable. Everyone hopes they picked the right company.

To: yard_man who wrote (106901)	6/6/2001 2:05:08 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 436258

tippet - you misunderstand the term malinvestment as used by the Austrians. Malinvestment doesn't mean investment in securities, but deployment of economic resources to an end not good in the long term, i.e. other than that which would happen if the marketplace guided. Bankruptcies or businesses that fail: these aren't indicators of malinvestment. Entrepreneurial risk is another matter entirely (well almost, but not quite -- easy money does distort the assesment of such risks) -- it is certainly necessary for the market to allocate limited resource efficiently. The malinvestments that Austrians refer to mean resources that are deployed for a specific use -- not being driven by the market -- but by distortions of market demand brought on by easy money or rapid increases in the stock of money ... For instance -- more money might be directed to high tech infrastructure because of an initial period of rapidly growing profits. If the market for goods function efficiently -- competition heats up and prices fall, profits fall and less money is directed to producing said good. But when money is easy, and the accounting for benefits received by deploying technology are not discounted properly investment in productive capacity looks like a better proposition than it really is and capacity increases beyond levels that are good in the long term. Certainly this is what has happened in relation to the productive capacity of chips, routers, telcomm equipment. But since economic resources are finite malinvestment also means that there must also be a corresponding underinvestment in other types of productive capacity. The 'mal' has to do with differences between what economic resources would be allocated to what uses if driven solely by the marketplace and not untoward growth in money or credit ... My interpretation is, in part, different, but not certain. I agree that malinvestment is not directed at the secondary equity market, but disagree in that I believe that it IS aimed at entrepreneurial business decisions. A malinvestment is a matter of degree, but certainly would be a return on investment below the risk-free rate of return, judged in hindsight. It has to be this way since all kinds of investments would be highly successful, if it were not for an unpredictable number of competitors who act at the same time on the basis of the same signals and conditions. ...deployment of economic resources to an end not good in the long term, i.e. other than that which would happen if the marketplace guided.... Austrian theory is implemented through the judgements and action of entrepreneurs in serving the most urgent needs and desires of consumers. There is nothing that can define 'good in the long term' and there is no mystic magic to the market except for the successes and failures of those entrepreneurs. Easy money and artificial credit expansion DO bias investment decisions towards the acceptance of the risks of investment in higher order and longer term production goods. This is what is referred to as 'the cluster of errors' that drive the Austrian business cycle by time-synchronizing boom and bust. Austrians often seem to claim that the business cycle is completely due to this artificial investment boost, but my feeling is that much smaller cycles are going to occur anyway simply because multiple entrepreneurs will independently tend to act on the same signal at the same time. ...But since economic resources are finite malinvestment also means that there must also be a corresponding underinvestment in other types of productive capacity.... I believe that Austrian theory does not distinguish between one field of investment and another, but leaves that up the actual entrepreneurs to succeed or fail. The distinction is between investment in the long production cycle of production goods and investment in immediate consumption goods. The unhampered interest rate is the signal of the time preference of consumers between present and future consumption. If interest rates are low, there is little preference for current consumption and savings are available to support long term investment in production goods for future consumption. If interest rates are high, future consumption is heavily discounted and current consumption is heavily preferred to both future consumption and savings. Regards, Don