Overproduction
Encyclopedia
In economics
, overproduction, oversupply or excess of supply refers to excess of supply over demand of products being offered to the market
. This leads to lower prices and/or unsold goods.
The demand side equivalent is underconsumption
; some consider supply and demand
two sides to the same coin – excess supply is only relative to a given demand, and insufficient demand is only relative to a given supply – and thus consider overproduction and underconsumption equivalent.
Overproduction is often attributed as due to previous overinvestment – creation of excess productive capacity, which must then either lie idle (or under capacity), which is unprofitable, or produce an excess supply.
. The tendency for an overproduction of commodities to lead to economic collapse is specific to the capitalist economy. In previous economic formations, an abundance of production created general prosperity. However in the capitalist economy, commodities are produced for profit
. This so-called profit motive, the core of the capitalist economy, creates a dynamic whereby an abundance of commodities has negative consequences. In essence, an abundance of commodities disrupts the conditions for the creation of profit.
The overproduction of commodities forces businesses to reduce production in order to clear inventories. Any reduction in production implies a reduction in employment
. A reduction in employment, in turn, reduces consumption. As overproduction is the excess of production above consumption, this reduction in consumption worsens the problem. This creates a "feed-back loop" or "vicious cycle", whereby excess inventories force businesses to reduce production, thereby reducing employment, which in turn reduces the demand for the excess inventories. The general reduction in the level of prices (deflation) caused by the law of supply and demand also forces businesses to reduce production as profits decline. Reduced profits render certain fields of production unprofitable.
Henry George
argued that there could not be any such thing as overproduction in a general sense, but only in a relative sense:
outlined the inherent tendency of capitalism
towards overproduction in his seminal work, Das Kapital
.
According to Marx, in capitalism
, improvements in technology and rising levels of productivity increase the amount of material wealth
(or use value
s) in society while simultaneously diminishing the economic value
of this wealth, thereby lowering the rate of profit—a tendency that leads to the paradox, characteristic of crises in capitalism, of “poverty in the midst of plenty,” or more precisely, crises of overproduction in the midst of underconsumption.
formulated a theory of overproduction, which led him to propose government intervention to ensure effective demand
. Effective demand
are levels of consumption which corresponds to the level of production. If effective demand
is achieved then there is no overproduction because all inventories are sold. Importantly, Keynes acknowledged that such measures could only delay and not solve overproduction.
states that "The more goods (for which there is demand) that are produced, the more those goods (supply) can constitute a demand for other goods". Keynes summarized this "law" as asserting that "supply creates its own demand
", though this interpretation has been criticized. The consumer's desire to trade causes the potential consumer to become a producer to create goods that can be exchanged for the goods of others, goods are directly or indirectly exchanged for other goods. Because goods can only be paid for by other goods, no demand can exist without prior production. Following Say's law, overproduction (in the economy as a whole, specific goods can still be overproduced) is only possible in a limited sense.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, overproduction, oversupply or excess of supply refers to excess of supply over demand of products being offered to the market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
. This leads to lower prices and/or unsold goods.
The demand side equivalent is underconsumption
Underconsumption
In underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. The theory has been replaced since the 1930s by Keynesian economics and the theory of aggregate demand, both of which were influenced by...
; some consider supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
two sides to the same coin – excess supply is only relative to a given demand, and insufficient demand is only relative to a given supply – and thus consider overproduction and underconsumption equivalent.
Overproduction is often attributed as due to previous overinvestment – creation of excess productive capacity, which must then either lie idle (or under capacity), which is unprofitable, or produce an excess supply.
Explanation
Overproduction is the accumulation of unsalable inventories in the hands of businesses. Overproduction is a relative measure, referring to the excess of production over consumptionConsumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
. The tendency for an overproduction of commodities to lead to economic collapse is specific to the capitalist economy. In previous economic formations, an abundance of production created general prosperity. However in the capitalist economy, commodities are produced for profit
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
. This so-called profit motive, the core of the capitalist economy, creates a dynamic whereby an abundance of commodities has negative consequences. In essence, an abundance of commodities disrupts the conditions for the creation of profit.
The overproduction of commodities forces businesses to reduce production in order to clear inventories. Any reduction in production implies a reduction in employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
. A reduction in employment, in turn, reduces consumption. As overproduction is the excess of production above consumption, this reduction in consumption worsens the problem. This creates a "feed-back loop" or "vicious cycle", whereby excess inventories force businesses to reduce production, thereby reducing employment, which in turn reduces the demand for the excess inventories. The general reduction in the level of prices (deflation) caused by the law of supply and demand also forces businesses to reduce production as profits decline. Reduced profits render certain fields of production unprofitable.
Henry George
Henry George
Henry George was an American writer, politician and political economist, who was the most influential proponent of the land value tax, also known as the "single tax" on land...
argued that there could not be any such thing as overproduction in a general sense, but only in a relative sense:
Is there, then, such a thing as overproduction? Manifestly, there cannot be, in any general sense, until more wealth is produced than is wanted. In any unqualified sense, over- production is preposterous, when everywhere the struggle to get wealth is so intense; when so many must worry and strain to get a living, and there is actual want among large classes. The manner in which the strain of the war was borne shows how great are the forces of production which, in normal times, go to waste; proves that what we suffer from now is not overproduction, but underproduction.
Relative overproduction there, of course, may be. The desires for different forms of wealth vary in intensity and in sequence, and are related one with another. I may want both a pair of shoes and a dozen pocket-handkerchiefs, but my desire for the shoes is first and strongest; and upon the terms on which I can get the shoes may in large measure depend my ability to get the handkerchiefs. So, in the aggregate demand for the different forms of wealth, there is a similar relation. And as, under the division of labor characteristic of the modern industrial system, nearly all production is carried on with the view, not of consumption by the immediate producers, but of exchange for other productions, certain commodities may be produced so far in excess of their proper proportion to the production of other commodities, that the whole quantity produced cannot be exchanged for enough of those other commodities to give the usual returns to the capital and labor engaged in bringing them to market. This disproportionate production of some things, which is overproduction in relation to the production of other things, is the only kind of overproduction that can take place on any considerable scale, and the overproduction of which we hear so much is evidently of this character.
Inevitability
Karl MarxKarl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
outlined the inherent tendency of capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
towards overproduction in his seminal work, Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
.
According to Marx, in capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
, improvements in technology and rising levels of productivity increase the amount of material wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
(or use value
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
s) in society while simultaneously diminishing the economic value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
of this wealth, thereby lowering the rate of profit—a tendency that leads to the paradox, characteristic of crises in capitalism, of “poverty in the midst of plenty,” or more precisely, crises of overproduction in the midst of underconsumption.
Solutions
John Maynard KeynesJohn Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
formulated a theory of overproduction, which led him to propose government intervention to ensure effective demand
Effective demand
In economics, effective demand in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not constrained in any other market...
. Effective demand
Effective demand
In economics, effective demand in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not constrained in any other market...
are levels of consumption which corresponds to the level of production. If effective demand
Effective demand
In economics, effective demand in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not constrained in any other market...
is achieved then there is no overproduction because all inventories are sold. Importantly, Keynes acknowledged that such measures could only delay and not solve overproduction.
Say's Law
Say's LawSay's law
Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...
states that "The more goods (for which there is demand) that are produced, the more those goods (supply) can constitute a demand for other goods". Keynes summarized this "law" as asserting that "supply creates its own demand
Supply creates its own demand
"Supply creates its own demand" is the formulation of Say's law by John Maynard Keynes, and is considered by him one of the defining characteristics of classical economics...
", though this interpretation has been criticized. The consumer's desire to trade causes the potential consumer to become a producer to create goods that can be exchanged for the goods of others, goods are directly or indirectly exchanged for other goods. Because goods can only be paid for by other goods, no demand can exist without prior production. Following Say's law, overproduction (in the economy as a whole, specific goods can still be overproduced) is only possible in a limited sense.
See also
- Demand shortfall – microeconomic form, focused on demand side
- UnderconsumptionUnderconsumptionIn underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. The theory has been replaced since the 1930s by Keynesian economics and the theory of aggregate demand, both of which were influenced by...
– macroeconomic demand side