Malinvestment is a concept developed by the Austrian School of economic thought, that refers to investment

Investment

Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

s of firms being badly allocated due to what they assert to be an artificially low cost of credit and an unsustainable increase in money supply

Money supply

In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

, often blamed on a central bank

Central bank

A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

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This concept is central to the Austrian Business Cycle Theory, which has been criticized by such as Nobel laureate economists such as Paul Krugman

Paul Krugman

Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 and Milton Friedman

Milton Friedman

Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

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The concept dates back at least 1867. In 1940, Ludwig von Mises wrote, "The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last."

Austrian Business Cycle Theory and Malinvestment

Though mainstream studies, such as those by Nobel laureate Milton Friedman, have delivered conclusions against the theory, Austrian economists such as Nobel laureate F. A. Hayek largely advocate the idea that malinvestment occurs due to the combination of fractional reserve banking and artificially low interest rates misleading relative price signals which eventually necessitate a corrective contraction—a boom followed by a bust.

Government intervention

Government interference can also distort market information signals. For example, some studies of crowding-out in the area of private philanthropy explain it with reference to private charities’ reduced effort to raise funds from individuals after they receive a government grant. Austrian economists, such as Murray Rothbard

Murray Rothbard

Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...

, have derided government spending and public 'investments' as simply interfering with the complex resource-allocating properties of the price mechanism.