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3. The Malinvestment of Capital
The malinvestment of capital goods can have come about in several ways.
- The construction of the plant was economically justified at the time it was established. It is not so any longer because since then new methods of production have become known or because today other locations are more favorable.
- Though originally a sound investment, the plant has become uneconomic because of changes that have occurred in the data of the market, such as, for example, a decrease in demand.
- The plant was uneconomic from the very first. It was able to be constructed only by virtue of interventionist measures that have now been abandoned.
- The plant was uneconomic from the very first. Its construction was an incorrect speculation.
- The incorrect speculation (case 4) that led to the malinvestment has been brought about by the falsification of monetary calculation consequent upon changes in the value of money. The conditions of this case are described by the monetary theory of the trade cycle (the circulation-credit theory of cyclical fluctuations).
If the malinvestment is recognized and it nevertheless proves profitable to continue in business because the gross revenue exceeds the current costs of operation, the book value of the plant is generally lowered to the point where it corresponds to the now realizable return. If the necessary writing off is considerable in relation to the total capital invested, it will not take place in the case of a corporation without a reduction in the original capital. When this happens the loss of capital occasioned by the malinvestment becomes visible and can be reported by statistics. Its detection is still easier if the firm collapses completely. The statistics of failures, bankruptcies, and balance sheets can also provide much information on this point. However, a not inconsiderable number of investments that have failed elude statistical treatment. Corporations that have sufficient hidden reserves available can sometimes leave even the stockholders, who are, after all, the most interested parties, completely in the dark about the fact that an investment has failed. Governments and local administrative bodies decide to inform the public of their mistakes only when losses have become disproportionately great. Enterprises that are not under the necessity of giving a public accounting of their activities seek to conceal losses for the sake of their credit. This may explain why there is a tendency to underestimate the extent of losses that have been brought about by the malinvestment of fixed capital.
One must call special attention to this fact in view of the prevailing disposition to overrate the importance of "forced saving" in the formation of capital. It has led many to see in inflation in general, and in particular in credit expansion brought about by the policy of the banks of granting loans below the rate that would otherwise have been established on the market, the power responsible for the increasing capital accumulation that is the cause of economic progress. In this connection we may disregard the fact that inflation, though it can, of course, induce "forced saving," need not necessarily do so, since it depends on the particular data of the individual case whether dislocations of wealth and income that lead to increased savings and capital accumulation really do occur.7 In any case, however, credit expansion must initiate the process that passes through the upswing and the boom and finally ends in the crisis and the depression. The essence of this process consists in rendering the appraisement of capital misleading. Therefore, even if more capital is accumulated to begin with than would have been the case in the absence of the banks' policy of credit expansion, capital is lost on the other hand by incorrect appraisement, which leads it to be used in the Wrong place and in the wrong way.
Whether or not the increase in capital is equalled or even exceeded by these losses is a quaestio facti. The advocates of credit expansion declare that there is always an increase in capital in such cases, but this certainly cannot be so unhesitatingly asserted. It may be true that many of these plants were erected only prematurely and are not by nature malinvestments, and that if there had been no trade cycle they would certainly have been constructed later, but not otherwise. It may even be true that in the last sixty to eighty years, especially during the upswing of the trade cycle, plants were built that surely would have been constructed later—railroads and power plants in particular—and that therefore the errors that bad been committed were made good by the passage of time. However, owing to the rapid progress of technology in the capitalist system, we cannot reject the supposition that the later construction of a plant would have influenced its technical character, since the technological innovations that appeared in the meanwhile would have had to be taken into account. The loss that results from the premature construction of a plant is then certainly greater than the above optimistic opinion assumes. Very many of the plants whose establishment was due to the falsification of the bases of economic calculation, which constitutes the essence of the boom artificially inaugurated by the banks' policy of credit expansion, would never have been built at all.
The sum total of available capital consists of three parts: circulating capital, newly formed capital, and that part of fixed capital which is set aside for reinvestment. A shift in the ratio of circulating capital to fixed capital would, if not warranted by market conditions, itself represent a misdirection of capital. Consequently, the circulating capital in general must not only be maintained, but also increased by the allocation of a part of the newly formed capital. Thus only an amount that is quite modest in comparison with total capital is left over for new fixed investment. One must take this into consideration if one wishes to estimate the quantitative importance of the malinvestment of capital. It is not to be measured by comparison with the total amount of capital, but by comparison with the amount of capital available for new fixed investments.
Without doubt, in the years that have elapsed since the outbreak of the World War, very considerable amounts of fixed capital have been malinvested. The stoppage of international trade during the war and the high-tariff policy that has since prevailed have promoted the construction of factories in places that certainly do not offer the most favorable conditions for production. Inflation has operated to produce the same result. Now these new factories are in competition with those constructed earlier and mostly in more favorable locations—a competition that they can sustain only under the protection of tariffs and other interventionist measures. These extensive malinvestments took place precisely in a period in which war, revolution, inflation, and various interferences of the political authorities in economic life were consuming capital in very great volume.
One may not neglect all these factors if one wishes to investigate the causes of the disturbances in the economic life of the present day.
The fact that capital has been malinvested is visibly evident in the great number of factories that either have been shut down completely or operate at less than their total capacity.
- 7. Cf. my Geldwertstabilisierung und Konjuncturpolitik, p. 45 et seq.