Malinvestments and Wages

When capital is employed productively more products are produced at lower cost. This enable producers to undercut the prices of their less efficient competitors, which in turn benefit consumers. The more capital we have employed productively in the economy, the more there is to consume at a lower price.

From this, we may infer that malinvestments come with a benefit, namely lower prices. However, on closer inspection, we see a big distinction between low prices due to efficient allocation of resources and low prices due to malinvestments. Where resources are allocated efficiently, only products of value are produced. In the case of malinvestments, we end up with products of little or no value. In both cases, prices go down, but it is only in the first case that prices go down for products of value.

Our purchasing power is not affected positively by malinvestments. Rather, the opposite is the case. When bad ideas get funded, it is necessarily at the expense of better ideas. Taking crypto-currencies as an example, we have engineers employed to produce numbers that can be traded speculatively in exchanges. This diverts labor, equipment and energy away from productive employment in favor of purely speculative activities with no productive output.

A lot of effort is spent with nothing of value to show for it. However, the well paid engineers are consumers. They drive up prices for products of value, making them less affordable for the productively employed. Had the crypto-engineers spent their energy on something of value, everyone would have benefited. But when they spend time, energy and scarce resources on worthless activities, they function solely as a drain on the economy.

When the crypto-bubble finally collapses, worthless crypto-tokens will be on sale together with computer equipment and other capital. But this does not benefit the productively employed in the same way that they would have benefited had the malinvestment not happened in the first place. The unwinding of a speculative bubble comes solely as a relief to the productively employed, allowing their purchasing power to raise back to where it should have been all along.

As mentioned in my post on Gresham's Law, bad money drives good ideas out of the economy. The fact that as many as 40% of all workers see their jobs as meaningless, indicate that we are currently awash in bad money. We are in the midst of a speculative bubble in which bad investments are made at the expense of the productively employed. Labor is greatly undervalued, and capital is correspondingly overvalued. Only an implosion of the current system, with a purge of central banking and political meddling, can rectify this problem.

By Brad Miller Millertime83 - Own work, CC BY-SA 3.0, Link