Overinvestment theory

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Overinvestment theories are contributions to business cycle theory developed in the first half of the 20th century . A distinction is made between the monetary overinvestment theory of Knut Wicksell and Friedrich August von Hayek and the nonmonetary overinvestment theory of Gustav Cassel , Arthur Spiethoff and Joseph Schumpeter .

Knut Wicksell

Wicksell examined the way in which an economy in equilibrium reacts to monetary impulses. He differentiates between a natural interest on capital and the interest on money. The natural interest on capital is the interest at which savings and investments are balanced in a pure exchange economy. It corresponds to the marginal productivity of capital. The monetary interest is the interest for which loans can be taken out on the market.

According to Wicksell's monetary overinvestment theory, there is an increase in the company's internal rate of return, i.e. the “natural interest rate”, for example through technical progress , above the existing monetary interest rate. The demand for loans to finance new investments is increasing on the capital market. First of all, the additional liquidity feeds the upswing, in the course of which investment projects with lower (expected) returns are also financed. This increased demand for credit is being met by the banks, and the amount of deposit money is being expanded. The demand for physical capital increases while the supply remains constant. Together with the growing amount of deposit money, this leads to a rising price level without the real sizes changing. The inflationary process will only come to an end when the banks adjust the monetary interest rate to the natural interest rate again.

Ludwig von Mises

Ludwig von Mises focused on the effects of an expansionary monetary policy. So he investigated the case that the banks reduce the money interest below the level of the natural interest rate by creating deposit money. In his analysis he assumes the natural interest rate to be constant. He realized that a monetary impulse does not have an even effect on the structure of prices. The prices of raw materials and semi-finished products and wages rose earlier than the prices of more consumer-related goods.

Friedrich August von Hayek

Hayek examined the effect of monetary stimuli not only on the economy as a whole, but also how the structure of production is affected. To do this, he expanded the models of his predecessors to include the production structure model of a temporal capital theory. In this theory, the production process takes time, which is not taken into account in nontemporal theories. Hayek starts from a simple, linear model in which consumer goods are created in a step-like process. Capital arises from the production factors labor and land, which is converted into more consumer-friendly goods by adding more labor and land. In the last stage of production, the capital goods finally become consumer goods. In this model, the capital consists entirely of working capital.

A production detour can be worthwhile if it makes production more effective. This is countered by interest, which is why production that takes less time is more lucrative. Therefore, a low interest rate means that more capital-intensive production is favored. If the lower interest rate has real causes, such as an increased savings rate, it leads to greater production. However, if it is due to increased lending, the demand for capital goods rises without consumer demand falling. This leads to inflation in the medium term. If banks don't systematically expand lending, they'll have to raise interest rates again. The newly created non-consumer production stages are once again unprofitable. Investment projects that were still profitable at the previous monetary interest rate are canceled. Since there is a lack of intermediate products, production close to consumption can only be adjusted to demand with a delay. This leads to unemployment and a general economic crisis .

Proposed countermeasures

According to Wicksell, the central bank would have to raise the key interest rate in good time to prevent the overinvestment crisis. Hayek also recommends that the central bank raise the key interest rate in good time, but this would not completely avoid the financial crises .

In a later creative period, Hayek made the political influence on the central banks responsible for an overly expansionary monetary policy. He then took the view that the only way to achieve monetary stability was to denationalize money .

reception

The monetary overinvestment theory was the dominant notion around 1929. The American President Herbert Hoover , who largely followed this theory during the Great Depression of the 1930s, later complained bitterly about these recommendations in his memoirs.

Contemporary economists such as John Maynard Keynes and Milton Friedman have concluded that the policy recommendation of inactivity advocated by Friedrich August von Hayek exacerbated the Great Depression. Milton Friedman recalled that the University of Chicago never taught such “dangerous nonsense” and that he could understand why at Harvard, where such nonsense was taught, smart young economists and Keynesians turned away from their teachers' macroeconomics were. He wrote:

"I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You've just got to let it cure itself. You can't do anything about it. You will only make it worse. ... I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm. "

“I think the Austrian School's overinvestment theory has done serious damage to the world. If you go back to the 1930s, which was a crucial point in time, you see the representatives of the Austrian School - Hayek and Lionel Robbins - sitting in London saying that things have to be allowed to break down. You have to leave it to self-healing. You can't do anything about it. Everything you do will only make it worse. [...] I think that by encouraging inaction they have harmed both England and the United States. "

However, the representative of the Austrian School Lawrence H. White objects that Hayek's overinvestment theory does not call for a policy of deflation. Hayek's ambivalence on the question of deflationary policy (later admitted to be fatal) was not specifically related to overinvestment theory, but to his hope at the time that deflation would break wage rigidity.

literature

Web links

supporting documents

  1. ↑ Georg Ewerhart: Money and Production Structure . Duncker and Humblot, Berlin 1991. p. 8. ( Volkswirtschaftliche Schriften. Issue 416.)
  2. ^ Compare Ludwig von Mises: Monetary Value Stability and Economic Policy . Jena 1928. p. 45.
  3. ↑ Georg Ewerhart: Money and Production Structure . Duncker and Humblot, Berlin 1991. p. 9. ( Volkswirtschaftliche Schriften. Issue 416.)
  4. ↑ Gunther Schnabl / Andreas Hoffmann: Monetary policy, vagabond liquidity and bursting bubbles in new and emerging markets Download from Wirtschaftsdienst 2007/4
  5. ^ Friedrich August von Hayek: Monetary Theory and Business Theory , Vienna / Leipzig 1929
  6. ^ Friedrich August von Hayek: Denationalization of Money. Institute of Economics Affairs, London 1976 ( PDF ( Memento of April 23, 2008 in the Internet Archive ))
  7. ↑ Kevin Dowd: Experience of Free Banking. Routledge, London 1992, p. 4.
  8. ↑ Hans-Helmut Kotz: The return of the cycle - and the new debate about stabilization policy
  9. ↑ Lawrence White: Did Hayek and Robbins Deepen the Great Depression? . In: Journal of Money, Credit and Banking . No. 40, 2008, pp. 751-768. doi : 10.1111 / j.1538-4616.2008.00134.x .
  10. ^ J. Bradford DeLong, "Liquidation" Cycles: Old Fashioned Real Business Cycle Theory and the Great Depression , National Bureau of Economic Research, Working Paper No. 3546, p. 1
  11. ↑ Lawrence White: Did Hayek and Robbins Deepen the Great Depression? . In: Journal of Money, Credit and Banking . No. 40, 2008, pp. 751-768. doi : 10.1111 / j.1538-4616.2008.00134.x .
  12. ^ Lawrence White, The Clash of Economic Ideas: The Great Policy Debates and Experiments of the 20th Century (Cambridge University Press), 94; Lawrence White: Did Hayek and Robbins Deepen the Great Depression? . In: Journal of Money, Credit and Banking . No. 40, 2008, pp. 751-768. doi : 10.1111 / j.1538-4616.2008.00134.x .