You're arguing that a glut is due to producing what is not desired, instead of what is desired. So when there is a glut in one area, there must be corresponding shortages in other areas. This is easy to debunk.

Look at the labor market. The US unemployment rate went from ~4.5% in 2007 to 10% in 2010: a big labor glut. The "malinvestment" theory predicts unfulfilled demand comparable in size to the unemployment. Large sectors of the economy should have had millions of unfilled job listings, spiraling wages, etc. But this did not happen.

The right explanation is simply that total labor supply exceeded demand.

I don't agree with the statement that a glut in one area must equal a surplus elsewhere. You've added at interpretation to my statement.

If a person produces hot pink sweaters and finds nobody wants them, that doesn't mean there is a shortage of blue sweaters, or even sweaters in general. Additionally, it might mean that people might want hot pink sweaters, but not at the price being asked.

Taking this back to labor markets, surplus labor (unemployment) is indeed oversupply, that much we are agreed. But you must break this down further - it is an oversupply of specific types of labor at specific rates. You could clear that labor oversupply by switching the supply by changing the type of labor being offered, and also by changing the price. For example I'd happily pay someone to do work for me at lower rates than currently offered, but that market doesn't usually clear. Changing the price doesn't happen often for regulatory reasons or stickiness, but changing the nature of labor supply often does. It's just that the timescales involved involve a lot of problems.

The solution to that is to identify reason why mal investment occurs and to avoid anything that contributes to it. I don't think it can be totally avoided due to human nature - hubris, mistakes and misfortune - but you can certainly avoid some of the obvious ones, like rigging credit markets and trying to centrally plan economies.

You wrote "The person who produces unwanted goods and services must...switch production to what is desired," which presupposes that there is something else desired, i.e. there is no general glut.

For example, we Americans demand less oil today than we did 10 years ago. This contributes to the oil glut, which has turned many drill sites into malinvestments and caused layoffs in the petroleum industry. How can you say that that consumer demand is irrelevant here? Isn't it obvious that if there was a nationwide ad campaign to buy gas guzzlers and take them on road trips, it would increase oil prices and improve the state of the petroleum industry?

And if it can happen in the petroleum sector, why not at the scale of the entire economy?

Unpacking that slightly. First, an oil glut is not a general glut, so it's possible that the demand for oil has shifted elsewhere. I don't agree that an ad campaign for national gas guzzler travel would increase oil prices, because it's very unlikely that such a campaign would work, and even if it did, it would be a poor choice of resource spend.

Going back to a general glut - and I hate the term - of course it is possible to have an economy-wide contraction where production overwhelms demand temporarily. This is possible from external shocks (eg war, disaster) or persistent interference (eg Venezuela). Such a scenario is generally best resolved by solving the cause of the shock and doing everything to let the market clear. Most of the time this will be temporary and conditions will resolve, if not at the speed at which makes everything happy. I think the key thing here is that while there will be demand for other production at some point, it's necessarily a case of timing and there is likely to be a lag before new preferences are developed. The key here for future prosperity is not to borrow and spend on what is already not wanted, or to borrow and spend on pointless spending just for the sake of making money move.

The alternative is if an economy dropped to a new, lower level of production by choice, such as if everyone decided to lower their production and consumption and consciously not increase it again. You'd then get reversing economic growth, but then that would be the intention as results from people choosing less.

> Such a scenario is generally best resolved by solving the cause of the shock and doing everything to let the market clear. Most of the time this will be temporary and conditions will resolve, if not at the speed at which makes everything happy.

Maybe waiting would work, but that's no reason not to intervene if we think that intervention can bring us faster growth (even if this will only be temporarily faster growth until we "catch up" to currently unused production capacity). If consumption stimulus will help recovery (and I think it will, on Keynesian grounds) we should do it.