(Unofficial) Recession: When Will it End?

What we are experiencing is not just the unwinding of malinvestment.   Entrepreneurs are looking for their next opportunity.

Steve Horwitz, economics professor at St Lawrence University, describes what we are experiencing so well…

“What Austrians claim happens during the boom is that inflation drives down interest rates, creating malinvestment as entrepreneurs begin production processes with too many stages between inputs and outputs (which seems to be justified by the artificially low interest rate).  Labor gets allocated to those industries as well.

Notice that it’s not that they have over-invested in capital. Rather they have the wrong mix of capital.  If one doesn’t understand the heterogeneity of capital, that distinction is easy to overlook.

It also explains why the road to economic recovery is not a matter of just more spending and more investment in general.  Capital and labor need to restructure themselves to meet the new reality of the post-crash marketplace.  Just throwing more capital at firms won’t help; neither will trillion-dollar government spending on consumption or job training.  Only the discovery process of the market can reveal which specific capital goods and what sorts of labor are required for entrepreneurial plans to succeed in the current economy.

We don’t need “more” capital and labor. We need the “right” capital and labor. Figuring out what’s right is what markets do better than the alternatives.”



About Christopher Hessenflow

Christopher Hessenflow is a financial planner in the Chicago area. He works with all sorts of people who are much more interesting than he is. He enjoys his career which lends him time to think and, sometimes, be creative. Chip was born bald.
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