Not only does Mr. Phelps fail to address the “artificiality” of the boom faces, he blatantly mischaracterizes Austrian Business cylce theory as a theory of overinvestment. Everything I have read regarding Austrian theory explains how malinvestment occurs due to the distortion of the pricing/production process by excess creation of money and credit. Mises constantly cautions that this is not a theory of overinvestment, rather malinvestment.
Posted by Casey Khan (casey.khan@pinnaclewest.com)It is customary to describe the boom as overinvestment. However, additional investment is only possible to the extent that there is an additional supply of capital goods available. As, apart from forced saving, the boom itself does not result in a restriction but rather in an increase in consumption, it does not procure more capital goods for new investment. The essence of the credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment. [Human Action, p. 560]
