• Entrepreneurial Equity
  • Portfolio Investments
    • Current Investments
    • Historic Investments
  • Scribblings
    • Jane Taylor Book Launch
  • Fake News
  • Theology, Religion & Philosophy Corner
    • Does God Exist? The Rational Approach
    • What is the Evidence for Christianity?
    • What did Jesus Actually Teach? Only in His own Words
  • Linkedin
  • Twitter
  • Contact
  • Media Gallery
  • About Me
  • Home
  • Entrepreneurial Equity
  • Portfolio Investments
    • Current Investments
    • Historic Investments
  • Scribblings
    • Jane Taylor Book Launch
  • Fake News
  • Theology, Religion & Philosophy Corner
    • Does God Exist? The Rational Approach
    • What is the Evidence for Christianity?
    • What did Jesus Actually Teach? Only in His own Words

Mal-Investments Small And Large

Mal-Investments Small And Large

02 Feb 2012
0 Comment
Toby Baxendale
GDP, Malinvestment

In yesterday’s article I emphasised that it is profit that is beneficial, not revenue.

I’ve just read an excellent article (H/T Sean Corrigan) by Jerry L. Jordan, past president of the Federal Reserve Bank of Cleveland. He makes the same point, with particular reference to government “investment” and national accounting.

He opens with an analogy to warm the hearts of American readers:

It is tempting to think that the Soviets perfected negative-value-added investment — the stuff produced is worth less than the value of the resources to produce it. However, most families have experienced this first hand.

It usually surfaces with an entrepreneurial adolescent deciding it would be a good idea to sell lemonade at the curbside to passers-by

Parents, wanting to encourage the idea that working and making money is a good idea, drive around to buy the lemon, sugar, designer bottled water, cups, spoons, napkins, a sign or two, and probably a paper table cloth.

Aside from time and gas, the outing adds up to something north of $10. At the opening of business the next day, the kids find business is slow to non-existent at $1 per cup. So, they start to learn about market demand and find that business becomes so brisk at only 10 cents per cup that they are sold out by noon, having served 70 cups of lemonade and hauled in $7.

The excited lunch-time conversation is about expanding the business. A stand across the street to catch traffic going the opposite direction; maybe one around the corner for the cross-street traffic. The kids see growing revenue; the “investors” see mounting losses.

There is a strand of economics, we’ll call it the K-brand, that sees all this as worthwhile. They add together the $10 spent by the parents to back the venture and the $7 spent by the customers and conclude that an additional $17 of spending is clearly a good thing. Surely, the neighbourhood economy has been stimulated.

To the family it is a loss, chalked up as a form of consumption. If this were a business enterprise it would be a write-off. In classical economics it is a “mal-investment.”

But of course the government “invests” on a much larger scale:

To K-brand economics, such “investing” is better done by the government because there never has to be a write-down for bad ideas. So, Japan spent a couple of decades “investing” in airports few people fly to, highways few people drive on and bullet trains that not enough people ride on. All the expenditures were recorded as investment and were additions to national output, never recognizing that the value of what was produced is less than the value of the resources needed to produce it — negative-value-added. Surely it is clear that Japan was made poorer by lots of bad “investments.”

The U.S. recorded a great amount of “residential investment spending” in the central valleys of California that added to national output, only to have the houses bulldozed because there were no buyers. Subsequently, the home-builders incurred losses, reducing business income, thus shrinking national output.

Nevertheless, the national accounts will never be revised to reflect that the “investment spending” of a few years earlier was all “mal-investment” and should have been recorded as a form of business consumption. Such “investment” actually made us poorer.

The irony of this example is the expenditures incurred to bulldoze the vacant houses is recorded as “stimulus” to the economy. Thanks for that to K-brand economics. They now want California to “invest” in a Japanese-style bullet train that is negative-value-added economics.

I recommend the whole article.

About the Author
“Toby Baxendale is an entrepreneur who built up, amongst other things, the UK's largest fresh fish supplier to the Food Service sector, see www.directseafoods.co.uk, and recently sold it. Toby is dedicated to furthering the teaching of the Austrian school of economics. He established and funded the 1st Distinguished Hayek Visiting Teaching Fellowship Program at the LSE in Honour of the Nobel Laureate F A Hayek. Toby is Chairman of The Cobden Centre. Richard Cobden's timeless principles of the abolition of legal privilege of the few at the expense of the many are worthy in this day and age to promote.

Social Share

  • google-share

Leave a Reply Cancel reply

*
*

More Scribblings

Japan, an Opportunity Awaits Us

11 Jun 2020

Austrian Economics Podcast

22 Oct 2019

Economics for the Many

18 Oct 2018

What is Right Wing?

06 Nov 2017

The Protectionist Zombie Is Back

19 Jul 2017

Brexit Podcast

16 Jun 2017

Liberty Me

20 Dec 2013

My Time for Speakers for Schools

07 Dec 2013

The Selfish Gene, its Extended Phenotypic Effects and Human Cooperation

19 Aug 2013

In Defense of the Euro (An Austrian Perspective)

15 Aug 2013

IM70.3 Mallorca - The Chairman's report

13 May 2013

AEP and “The Chicago Plan Revisited

18 Jan 2013

Ron Paul’s Monetary Policy Anthology

08 Jan 2013

Exorcising the Ghost of Ironman Zurich

14 Nov 2012

Communist Approval For Western Central Banking

28 Sep 2012

The Motive Powers Of Destructionism

19 Sep 2012

The Hope Of Osborne And The Error Of Osborne

14 Sep 2012

The Ultimate Subsidy For The Rich

03 Sep 2012

Gross And Net Product

30 Aug 2012

Did The Savings Glut Or Massive Monetary Epansion Cause The Boom And The Bust?

13 Aug 2012

Forward To Liberalism

29 Jul 2012

Hugh Hendry v. Joseph Stiglitz

18 Jul 2012

Fraud - Documentary

13 Jul 2012

A Great Teacher

13 Jul 2012

Fraud

13 Jul 2012

Our Central Bankers Are intellectually Bankrupt

09 May 2012

Tag Cloud

Austrian School Bank of England Banking Benjamin M. Anderson Economics F A Hayek Federal Reserve Fractional Reserve Banking Fraud gold Hayek Hayek Lecture 2010 Henry Hazlitt Honest Money Huerta de Soto inflation Insight Jean Baptiste Say Keynes Keynesianism MIses Monetarism Quantitative Easing Richard Cobden Sean Corrigan
Creative Commons License
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
Proudly built by Lemongrass Media - Web Design Hertfordshire