When I was a kid, I was pretty good in most sports with the notable exception of baseball. In baseball I was really awful. I could throw good but absolutely could not hit for my life. I struck out nearly every time. Consequently I was picked last when teams were chosen in the traditional schoolyard way. I don’t recall this being particularly awful as I took it for granted that I wasn’t good so being picked last seemed like a natural consequence. I did hate batting and I recall it stressing me out when it came to be my turn.
The other day my recollections of my terrible skill coalesced into a wonderful metaphor for malinvestment. When I was struggling with Austrian economic theory, I found myself on a forum arguing about what malinvestment was. At the time, I imagined all investments contributed to the economy so the notion of the ills of cheap credit eluded me. As it turns out, picking schoolyard teams is a perfect metaphor.
Start with a random group of kids whose ability falls on a curve. The more kids you pick for the team, the skill level lowers in each addition kid. If a teacher mandates that the entire class is going to play, even people like me will find themselves on a team even though they wouldn’t get picked if the teams were smaller. What is the result? I strike out at a crucial time and lose the game.
In the free market, the credit supply is like the number of players on each team. With less credit (high interest rates,) only the most profitable investments can be undertaken. With more credit (low interest rates,) less profitable investments are possible. But this is like including the lousy players on the team by increasing the team size.
In this metaphor, the teacher is the central banks. In the absence of the teachers, those like me who were awful in baseball, would have pursued some other goal to the mutual benefit of both me and the baseball team I didn’t play on. Those playing baseball would have loved to determine for themselves whether each additional player was a benefit or a hazard, but of course it’s just a game. The teacher has decided unilaterally that everyone will benefit by being on the team, even though many don’t want to play at all.
Lowering the interest rate and stimulating the economy is like a teacher telling the team captains they must increase the size of their team and pick the lousy players. Meanwhile, on another part of the schoolyard, the soccer team is deprived of players, or a new made-up game never gets created at all.
The only way to fix a baseball team with rotten players on it is to get them off the team, not add more marginal players. The only way to “fix” the economy is to let wages and prices adjust themselves, not maintain recession conditions with cheap credit that encourages the marginal investments that created the problem.