malinvestment

Malinvestment refers to the allocation of capital to projects, assets, or ventures that yields no productive benefit and often drains resources from more efficient uses. The term was popularized by economist John Kenneth Galbraith in his 1965 book *The Affluent Society* and further developed by the Austrian School of economics, notably by Joseph Schumpeter and his disciple Ludwig von Mises. In theory, funds flow where they are most valued; malinvestment arises when market signals, typically interest rates or prices, misrepresent underlying economic conditions.

A common cause of malinvestment is artificially low interest rates, often set by central banks. When borrowing costs fall below their natural equilibrium level, investors chase higher returns, erecting new projects that may prove unsustainable once rates rise or demand shifts. Another source is distorted price signals due to deregulation, subsidies, or tax incentives that encourage excess investment in certain industries at the expense of others.

Consequences include asset bubbles, misallocation of labor and capital, overcapacity, and eventual economic downturns when the excess demand collapses. The oil crisis of the 1970s and the dot‑com bubble are frequently cited as periods of extensive malinvestment. Critics argue that purely market‑based corrections can be painful, whereas proponents claim that allowing free adjustment is necessary to restore efficiency.

Policy measures to mitigate malinvestment focus on maintaining credible monetary policy, reducing sudden credit expansions, and ensuring transparent regulatory frameworks. By aligning interest rates with societal time preferences and allowing price signals to reflect true scarcity, economies can reduce the likelihood of unsustainable investment and preserve resources for productive use.