Capital Investment

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    Must all capital investment come from savings in one form or another? I know Schumpeter felt bank deposit creation was a mechanism for development finance. Was he wrong?


    Yes, Schumpeter was wrong. Mises argued that any credit creation from the issue of fiduciary media generates mal-investments which must be liquidated later. People’s time preference determine both the pure rate of interest and the extent of saving-investing people prefer. People’s preferred saving-investing releases resources from lower-order to higher-order production. Credit creation from fiduciary media issue does not create more resources it merely diverts more of them from lower-order to higher-order production than people desire according to their time preferences.

    Take a look at chapter 20 in Ludwig von Mises’s Human Action:

    Here is Murray Rothbard on Schumpeter:

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