John Maynard Keynes said that depressions and recessions are caused by underconsumption. People do not spend enough money, so the government should spend money for them.

Ludwig von Mises said that depressions and recessions are caused by overinvestment. Businesses expanded too much and now businesses need to shrink to the correct size, so the government should do nothing and let businesses go bankrupt.

Keynes and his followers disagree with von Mises and his followers. This is strange, because both theories are very similar.

Keynes said that people do not buy everything that businesses produce. Von Mises said that business produce more stuff than people buy. So both theories say that production is greater than consumption. Whether we call this underconsumption or overinvestment is unimportant.

The only difference is that von Mises said that overinvestment occurred during the boom before the depression or recession, and Keynes said that underconsumption occurred during the depression or recession.

The reason that followers of Keynes and followers of von Mises hate each other so much is that their proposed government policies are the exact opposite. But the underlying economic theory is the same.

The underlying economic theory is wrong. Keynes and von Mises were both wrong.

There are two things you can do with money. You can spend money. Or you can save money.

There are two things factories can do. Factories can make stuff for people to consume. Or factories can make more factories.

There is a balance between consumption and investment. More investment means less consumption, because people are saving money instead of spending money and factories are making more factories instead of stuff for people to consume. More consumption means less investment, because people are spending money instead of saving money and factories are making stuff for people to consume instead of more factories.

Von Mises said that recessions and depressions occur because of overinvestment during the preceding economic boom. But if investment increases during an economic boom, then consumption should decrease during an economic boom. It doesn't. Von Mises is wrong.

Keynes said recessions and depressions occur because of underconsumption. But consumption decreases during a recession or depression, then investment should increase. It doesn't. Keynes is wrong.

Consumption and investment both increase during an economic boom. Consumption and investment both decrease during a recession or depression. The balance between consumption and investment remains stable. Recessions and depressions are not caused by an imbalance between consumption and investment.

For an example of an imbalance between consumption and investment, study the Soviet Union. During the 1930s, Stalin demanded that production of tractors, trucks, steel, etc increase. So farm workers were forced to abandon their farms and to go build factories instead. Factory production increased, but farm production decreased, so there was a food shortage, and people starved to death. That is what overinvestment/underconsumption looks like. During the 1970s the soviet leaders demanded that consumption increase. So workers and factories switched from making more factories to making stuff for people to consume. The lives of the soviet people improved at first. But the factories wore out, and not enough new factories were built. Eventually the factories broke down and the economy collapsed, and the Soviet Union disintegrated. That is what overconsumption/underinvestment looks like.

Ludwig von Mises also said that overinvestment preceding the economic bust was caused by artificially low interest rates. This also is wrong. Market interest rates are a balance between the supply and demand for loans. If the government sets interest rates below the market rate, there will be a shortage of loans. More people and businesses will want to borrow money than are willing to lend money. There will be long waiting lists for loans, and the government may ration loans. The government could supply more loans by printing money, but that would cause inflation. If inflation is low and there are no waiting lists for loans, then interest rates are not artificially low.

Some supporters of Ludwig von Mises say the government does cause artificially low interest rates and inflation by printing money, but the low interest rates appear immediately while the inflation is delayed and does not appear until several years later. This is also wrong. The overinvestment which artificially low interest rates cause will also be delayed. So if artificially low interest rates have not caused inflation yet, then artificially low interest rates have not caused overinvestment yet either.

Mainstream Macro in an Austrian Nutshell; by Roger W. Garrison; The Freeman magazine; May 2009; pages 10 to 15; says that Ludwig von Mises thought depressions were caused by malinvestment, not by overinvestment; and the malinvestment was caused by artificially low interest rates. This is also wrong.

Suppose you had opportunities to invest in two different businesses. The first business would would earn a high return on your investment. The second business would earn a low return on your investment. If interest rates were moderate, you would invest in the high return business and not in the low return business. If interest rates were high, you would invest in neither. If interest rates were low, you would invest in both. There is no interest rate which would make you want to invest in the low return business but not the high return business. The high return business is a better investment at all interest rates. Interest rates affect how much you invest, but not what you invest in. Government manipulation of interest rates cannot cause malinvestment.

One possible exception is a government contractor with cost plus contracts. Since interest is a cost, the cost plus government contractor will earn higher profits if interest rates are higher. If interest rates are low, investors might choose to invest less in cost plus government contractors and more in normal businesses. If interest rates are high, investors might choose to invest more in cost plus government contractors and less in normal businesses. However, cost plus government contractors tend to be inefficient because cost plus contracts reward waste and inefficiency. Garrison said that artificially low interest rates cause malinvestment which causes the bust. But low interest rates would cause investors to invest less in inefficient cost plus government contractors. So Garrison is saying that the bust occurred because people did not waste enough money during the boom. That is absurd.

Another possible exception is home mortgages. Malinvestment could occur if investors invest too much in home mortgages and not enough in normal businesses. However, this could not be caused by low interest rates, because interest rates affect how much investors invest, but not what investors invest in. It could be caused by the government subsidizing home mortgages, or by government regulators requiring insurance companies and pension funds to invest in home mortgages instead of stocks.

However, if the bust was caused by malinvestment with overinvestment in home mortgages, then there must have been underinvestment in something else. Whatever industry has been underinvested in should have reduced capacity, so there should be a shortage of whatever the underinvested industries produce. Shortages cause prices to rise, so the underinvested industries should have high profits after the bust. The shortages and high profits should make it easy to identify the underinvested industries after the bust. But there are no obvious underinvested industries, so there was no underinvestment. The only way there could be overinvestment in home mortgages without underinvestment in something is if there was overall overinvestment, which could not occur unless there was reduced consumption during the boom, and Garrison already said there was no overall overinvestment.