Monday, October 24, 2011

Matthew Yglesias Strange Critique Of ABCT

After being asked by a reader to refute the Austrian business cycle theory, Matthew Yglesias after linking to Paul Krugman's old attack on it, ( Which I refuted here), he attacks the concept of malinvestments.

First he seems to try to make a distinction between "making society worse off than it otherwise would have been" (which he at this point admits that malinvestments do) and "makes society worse off (which he denies there is). But there is in the context off analzsing the effects of malinvestments no distinction between these two conepts. Whether or not the economy because of other factors improves or not is irrelevant, the only relevant thing is whether the malinvestments makes it worse or not compared to how it otherwise would have been.

Then he argues that later after the malinvestments have been made, they are "sunk costs" and therefore not a problem. But because the capital invested could have been invested more usefully, they result in a lower living standard, or resulted in a lower living standard in the past if it had been consumed. And more importantly, because of the problem of sectoral immobility of workers, mass unemployment is created. Because of that, and the depressing effect on investments, output is permanently lowered because of these malinvestments.


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