Government and Central Bank Malinvestment

The term “malinvestment” is a phrase mostly used in the realm of Austrian school economics.  It was used by Ludwig von Mises.  It basically describes a misallocation of resources.

I would say that almost all central bank inflation and government spending is malinvestment.  Some people make the mistake of assuming that this is all completely wasteful spending, or that the Austrians are making this claim.

But malinvestment doesn’t necessarily mean total waste.  I would argue that some spending is completely wasteful, or even anti-productive to the economy.  In the latter case, war is a good example.  You would be better off, not only in terms of lives saved, but also in economic terms, of taking money spent on a war and instead using it to pay people to dig ditches and fill them in.

Some free market opponents will mischaracterize the term malinvestment and say that the government builds roads, infrastructure, etc.  But to say it is malinvestment is not to say that it is completely wasteful.  Sure, in most cases, you are better off with the road that the government built rather than having used the money to dig ditches for no good reason.

The government could also take our tax money (or use money created via inflation/ debt) to buy every single person in America a new television.  For a few people, this wouldn’t be a misallocation of resources.  If they hadn’t been taxed extra, they were still planning to buy a television anyway.

But for everyone else who would have done something else with the money, this is malinvestment.  It isn’t to say that they won’t use the new television.  They might even derive some enjoyment out of their new television.  But the point is that if they hadn’t been forced to pay for it, they would have done something else with their money.  Buying a new television was not the number one priority on their list.

When there is malinvestment, it makes us poorer than we otherwise would have been.  In the case of the government buying televisions for everyone, this money could have been put to better use.  Aside from the extra administrative fees of setting up such a program, we can’t ignore what each individual would have spent his or her money on instead.

While a new television would be nice for many, it just isn’t their top priority, and nobody should try to claim they know better than everyone else.  One family may have had medical bills to pay.  Another family may have wanted a weekend getaway vacation.  Another family may have wanted to add to their savings for a rainy day.  Another family may have needed new tires for their car.

This is the problem with central planning that is forced on everyone.  It not only redistributes wealth and inhibits production, but it misallocates resources.  It makes us poorer than we otherwise would have been.

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