“[During the artificial boom] credit expansion has gone to where government directed it”

Edward Leamer and Russ Roberts have explained how the boom/bust cycle has been shaped by government policy, and directed into such sectors as housing and finance.  In Hayek’s economics housing is a long-term production good, an open target for malinvestment — and the idea that the boom / bust malinvestment cycle can take many different forms is fully consistent with Hayek’s account of the production / relative price distortions of the credit cycle / artificial boom, as Hayek explains in an interview from 1978:

JACK HIGH: The Austrian theory of the cycle depends very heavily on business expectations being wrong. Now, what basis do you feel an economist has for asserting that expectations regarding the future will generally be wrong?

F. A. HAYEK: Well, I think the general fact that booms have always appeared with a great increase of investment, a large part of which proved to be erroneous, mistaken. That, of course, fits in with the idea that a supply of capital was made apparent which wasn’t actually existing. The whole combination of a stimulus to invest on a large scale followed by a period of acute scarcity of capital fits into this idea that there has been a misdirection due to monetary influences, and that general schema, I still believe, is correct.

But this is capable of a great many modifications, particularly in connection with where the additional money goes. You see, that’s another point where I thought too much in what was true under prewar conditions, when all credit expansion, or nearly all, went into private investment, into a combination of industrial capital. Since then, so much of the credit expansion has gone to where government directed it that the misdirection may no longer be over-investment in industrial capital, but may take any number of forms. You must really study it separately for each particular phase and situation.

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