- Oct 2018
Because the capital structure of the economy becomes internally inconsistent, eventually some entrepreneurs must abandon their projects because there are insufficient capital goods to carry them all to completion.
This argument have confused me my entire life in all explanations of the Austrian Business Cycle Theory. It is the core of the most famous of all, that Mises story about the master builder who doesn't have enough material to finish the house he's building.
It is misleading and ultimately wrong because economic goods (in the Menger definition) are always insufficient. In simple terms, given the market price, every good can be obtained.
What happens after the economy realizes it was in a malinvestment boom, prices of capital goods adjust in a way that they can become too expensive for some projects to be completed profitably.