In Rothbard's America's Great Depression, he mentions in an endnote:
"Some readers may ask: why doesn't credit contraction lead to malinvestment, by causing overinvestment in lower-order goods and underinvestment in higher-order goods, thus reversing the consequences of credit expansion? The answer stems from the Austrian analysis of the structure of production. There is no arbitrary choice of investing in lower or higher-order goods. Any increased investment must be made in the higher-order goods, must lengthen the structure of production. A decreased amount of investment in the economy simply reduces higher-order capital. Thus, credit contraction will cause not excess of investment in the lower orders, but simply a shorter structure than would otherwise have been established."
Why is it that increased investment must be made in the higher-order goods?
Thanks for your help!
Because an increase of investment funds via banks and stock markets mean you have more money to spend on "higher order goods," e.g. machinery, factories, etc. If you have less investment funds due to credit contraction, you'll just purchase less, causing no distortion.
Political Atheists Blog
The question might be more properly worded:
"Why does Rothbard believe that increased government investment must be made in the higher-order goods(capital producing goods)?"
A couple counter questions I would pose to him if he were here to defend himself would be:
"What are the negative consequences of government involvement in investment?"
The answer:
1) Government must take from someone to do this(whether it be direct taxes or through fiat money). The real issue boils down to: who would better invest that money, a bureaucrat or the individual who worked hard to earn it? If history is any measure, government has royally screwed up every industry it has involved itself in(on top of the people it plundered to do this). Pharmaceuticals, health care, space exploration, sciences, education, etc. (They haven't done much with computers yet, good thing.) Government should not be involved in investing or in plunder under any circumstances.
2) In the natural setting their is benefit to the one making decisions from good decisions and detriment to the investor from bad decisions. When the government takes someone else's money and invests it, they get bigger budgets from being inefficient and making bad decisions. So the incentive is to make bad decisions when the government is the investor.
3) The recipient of the investment has incentive in the natural setting to make a profit for investors. The recipient of the investment in a government investing project has the incentive to make excessive jobs and other inefficient decisions at the whims of the government.
drpiotrowski: Why is it that increased investment must be made in the higher-order goods?
If you could make the same thing in a cheaper/"less complicated" way (or an improved version for the same cost, etc.), you'd already be doing that and pocketing the excess profit; since you're not, the only way to improve production (aside from discovering a new and cheaper method, which happens occasionally, but you can't count on that, and credit expansion doesn't make any difference) is to "lengthen the structure of production" (i.e., make it in a "more complicated" way)