jmherbenerEfficient allocation of resources means that they are being used to produce goods that satisfy people’s highest-valued ends in the least-cost manner. It is not efficient to merely produce more stuff.
During the boom, monetary inflation and credit expansion results in a pattern of demands for goods and resources that results in the build up of the capital structure that proves to be unsustainable. Once the pattern of demands for goods and resources change in the crisis the efficient thing to do is to re-allocate the mis-allocated resources and mal-invested capital structure into those lines of production that best satisfy people’s preferences. For example, once the housing boom is over and demand for housing and the resources to produce housing throughout the capital structure have collapsed, the efficient thing to do is for some construction workers to find jobs elsewhere, some factories producing roofing shingles to be re-configured to produce other materials, and so on. Having build too many houses in Vegas during the boom, it is not efficient to use the resources to produce too many houses in Reno. If Keynesians are really against unemployment and excess capacity, they should favor eliminating all government impediments to the re-allocation of labor and capital goods.