Overproduction
 | This article needs additional citations for verification. (April 2010) |
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.
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 consumption. 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.
Inevitability
Karl Marx outlined the inherent tendency of capitalism towards overproduction in his seminal work, Das Kapital.
Solutions
John Maynard Keynes 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.
Say's Law
Say's Law 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.
See also
- Demand shortfall – microeconomic form, focused on demand side
- Underconsumption – macroeconomic demand side
External links
 | This economics-related article is a stub. You can help Wikipedia by expanding it. |