James McClure and David Chandler Thomas (MT) discuss business research and development in connection with the business cycle. Certain industries feature considerable investments into R&D of novel technologies and products which becomes for the firms in such industries the earliest stage of production.

A peculiarity of this stage is that “entrepreneurs, engaged in new-product R&D and seeking ‘first mover’ advantage, have incentives to shroud their operations and discoveries in secrecy.” There are clear and fundamental benefits to this practice, i.e., the firms’ ability to enjoy short-term profits upon launch of products destined to be successful, but also “system-wide costs of entrepreneurial secrecy and the absence of competition-constraining price and production signals”: what the authors call superfluous discovery, duplicative discovery, and duplicative development.

The benefit of the ability of the first movers to obtain profits for a longer or shorter period of time before they are imitated exceeds the slight inefficiency of secrecy consisting in R&D featuring unrealized non-rivalrous consumption. Patents may be controversial, but surely, no one is advocating forcibly open-sourcing all trade secrets!

MT’s argument depends on an assumption that the new money made out of thin air will be invested into a single R&D-intensive industry. The “Schumpeterian swarm” will then have two causes: hot new technology and credit expansion.

Now the ABCT is a general theory. Even if the boom generates numerous new entrepreneurs in many different industries, they still compete with each other in the general sense, as for the consumers’ money. The eventual mass losses — it will be the bust that will reveal who exactly will be the losers — occur regardless through a combination of consequences of credit expansion / lower interest rates and inflation.

Note that the increase in both investment and consumption in money terms is an “absolute” effect. There is both over-investment and overconsumption. The fact that the overinvestment is induced by the Central Bank policy and is contrary to the interests of the consumers — who will not stand for it for long and will bring about the bust — qualifies to call it “relative” mal-investment or un-utilitarian misallocation of resources.

MT’s point is that there is an extra component to the bust as regards R&D, which is that there are higher chances that different firms’ efforts will clash with each other by resulting in a greater number of superfluous/duplicate R&D. With this effect it is even clearer how investments triggered by credit expansions never bear fruit, i.e., profit.

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