Squaring the Culture




"...and I will make justice the plumb line, and righteousness the level;
then hail will sweep away the refuge of lies,
and the waters will overflow the secret place."
Isaiah 28:17

05/08/2010 (8:10 am)

Malinvestment

I came across the word “malinvestment” in a newsletter from a folksy economist named Richard Maybury. Maybury is reputed to be expert at making difficult economic concepts simple by way of clear illustration. In his recent newsletter regarding the bailout of Greece, he explains how a government’s adding to the money supply does not affect all areas of the economy equally by way of just such an illustration. Listen:

ConesWhen a government inflates its money supply, the new money does not descend on the economy in a uniform blanket. It goes into specific areas, usually those that are fashionable, or those at which the government directs the money through its own spending or regulations.

Businesses crowd into areas that are receiving these extra flows of money. They invest in stores, offices, factories, machines and other capital to tap into the flows. The more money flows into an area, the more capital is created there.

In effect, the money pours into the economy like thick molasses poured into a bathtub from hundreds of pitchers. This creates cones of money, and businesses crowd into these cones.

The cones are not natural. Businesses would not move into these areas if money were not poured there, they’d go elsewhere. So, the businesses in these cones are not investment, they are malinvestment. When the government stops inflating, the cones wither; businesses dependent on the flow of money starve.

The newsletter also explains the European Union as the rise of what Maybury calls “the Roman Disease,” or Fascism. His information here is mostly sound, although not entirely (he uses the fact that Hitler was more popular in Austria than in Germany as evidence of the widespread European acceptance of Fascism, when it probably had more to do with Hitler being Austrian himself. OTOH, Europe did accept Fascism easily.) Likewise, he accurately describes the ancient and local loyalties of various European districts, but inaccurately (in my humble opinion) predicts civil war in the EU because of them. Still, his understanding of both history and economics is sound, and the entire piece deserves to be read, if not entirely believed.

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