Apr
16
“It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production.”
So according to Marx and Engels, capitalist economies suffer from an inherent trait of periodic depressions. They go on to explain further:
“Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property”
According to them, the root cause of a depression is too much prosperity. For better understanding of this subject, I would also like to cite the Marxian crises theory, which revolves around the concept of the falling tendency of the profits in capitalist economies. Marxist writers often use this in various ways to put forward their theory of Imperialism. However, I would restrain myself from explaining that here.
The basic premise of the overproduction doctrine is that a capitalist economy, as it gets more and more efficient with labor-saving machines introduced for the production of goods, moves towards a state of increased efficiency which leads to overproduction and that overproduction causes losses. Therefore the core reason behind the losses are overproduction and increased efficiency. Because of overproduction, there are no more profits in the economy, and hence the economy goes into a deep depression. So, it is the lack of profits which causes depression.
In order to debunk this Marxist proposition, we need to understand what causes profits to exist in the market. I will explain how profits never cease to exist in a non-stationary economy where consumers’ preferences and production conditions change so often. I will start of by quoting Austrian economist Ludwig Von Mises from his famous work ‘Human Action’:
“Profit is not related to or dependent on the amount of capital employed by the entrepreneur. Capital does not “beget” profit. Profit and loss are entirely determined by the success or failure of the entrepreneur to adjust production to the demand of the consumers. There is nothing “normal” in profits and there can never be an “equilibrium” with regard to them. Profit and loss are, on the contrary, always a phenomenon of a deviation from “normalcy,” of changes unforeseen by the majority, and of a “disequilibrium.”
What Mises says here is that the origin of profits (and losses) is due to the “disequilibrium” phenomenon. So how does this “disequilibrium” phenomenon actually express itself like in a real economy?
Suppose that a market is dumped with millions of tonnes of potatoes much more than the consumer’s desire to purchase. This causes the market gets cleared only when the prices decrease to a large extent. This might lead to immense losses to the farmers, but can these losses caused by the overproduction in one sector of the economy cause a recession? The answer is no.
Lets go further and ask, does this overproduction in any way lower the average rate of profit in the economy. Again no, it doesn’t. The partial overproduction in a particular sector of the economy leads to partial underproduction in some other sector of the economy. Like in our example, the overproduction of potatoes means that the equipments and labor that were used in growing potatoes could have been used better in some other sector of the economy.
This is what Mises calls a “disequilibrium” phenomenon. The market always moves in a direction to minimize this disequilibrium, but almost never reaches equilibrium because of various factors like the change in consumers’ preferences, natural causes etc.
Having explained the basic misconception, I would also like to deal with such speculations which contemplate the possibility of an overproduction in every sector of the economy. People argue overproduction everywhere could lead to losses everywhere completely wiping out profits from the economy. But there is no need to worry, the market has answers again. An overall overproduction everywhere in the economy still doesn’t set the “disequilibrium” that exists between the preferred quantities of various goods into equilibrium. Here one needs to understand that people’s needs are humongous and can never be satisfied. The market can only try to provide the proportionate quantities of various commodities according to the consumers’ preferences. Profits (and losses) are nothing but the signals that guide producers to adopt to the consumers’ preferences, and they never would cease to exist.
Being a Socialist up till a few months ago, I spent countless hours figuring a way out to enable a central planner to somehow manage to order the exact amount of production required to satisfy the maximum demand for the maximum people, and I did reach onto some complicated unrealistic solutions, but nothing beats the simplicity and realism of the Free Markets.
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1 views16 Responses to “On Overproduction”
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asdf Says:
April 17th, 2009 at 8:36 amGreat.
CRD Says:
May 2nd, 2009 at 1:49 pmi fail to understand this. Of course overproduction will cause losses, but why would anyone resort to overproduction.
with increased efficiency, time and other resources can be diverted to other avenues, maybe towards other products. alternatively, mebbe they cud even use less of those resources, thus reducing the cost of production.
why would anyone produce unless they were sure that their produce will be bought by someone?
prashanthguevara Says:
May 6th, 2009 at 4:17 pmCRD, that’s a good question. Overproduction usually happens during times of artifical booms caused by loose monetary policies. There is almost, as Rothbard calls it, a ‘cluster of entrepreneurial errors’ during these periods of overproduction. But it’s only at the end of the boom that entrepreneurs tend to realise their mistakes. The culprit is the Central bank which tampers with the market interest rates, which are important signals to entrepreneurs to make the correct business decisions. If you want to know more, you can start learning the Austrian Business Cycle Theory. I am told Murray Rothbard’s “America’s Great Depression” is the best book to know more. Hope this helps!
Cameron Says:
May 7th, 2009 at 11:50 pmOne more thing to make us all Love Obama and his Marxist ways. Great! :(
ddg Says:
May 16th, 2009 at 11:11 amIt would be difficult to find a more ignorant account of the theory of crises, and believe me there is no shortage of ignorant accounts.
As for von Mises nonsense:
“Profit is not related to or dependent on the amount of capital employed by the entrepreneur.”
Oh Really? That will explain then why every corporation expresses its annual profit as a percentage of its total capital, i.e., earnings per share. And it would be some capitalist indeed who didn’t know that making an outlay on a machine (i.e., increasing the amount of capital) that was capable of twice the output with the same amount of labour would lead to an increase of profits. If it didn’t, he wouldn’t.
But then no doubt as an ‘economist’ you have never been within a hundred miles of the actual process of production.
tilak Says:
May 17th, 2009 at 11:21 amI fully agree with ddg, how can profit not related to the capital employed. We always need to find out the future value of our investment. The portion that is related with demand will be associated with risk mitigation.
ddg Says:
May 20th, 2009 at 1:13 pmCRD
”why would anyone resort to overproduction”
To understand this it’s necessary to put the textbook down and visit a manufacturer. No one intentionally resorts to overproduction. But practically all production has varied time cycles. One product may take e.g. three months to come to market, another a year and so on. There is nothing to prevent production initiated when things are going well being ready for market just at the point that the boom has run its course. Thus, the homebuilders in the US were confident that the units they were building right up to the crash would find a market. And this is even before the much longer cycles involved in the machine building industry are considered. New entrants to any sphere of production, and by definition there are always such while the market is expanding, must begin by setting up the production facility. What happens if the crash arrives even before the first run begins? The machine builders have in effect overproduced since the capitalist who bought the setup from them on 120 days or whatever will not now be able to pay up.
The problem with modern economics teaching is that everything is viewed from the point of view of its monetary representation and thus the facts of production are never in mind. The gentlemen in the ivory towers would never dream of dirtying their hands in the mundane world of actual production.
prashanthguevara Says:
May 20th, 2009 at 2:21 pmCRD, I am humbled by your responses, especially when they are so low quality ones.
An economist does not have to visit each and every factory and screw through entrepreneurial brains to understand the production process. All that he has to do is to have a basic understanding of human action through a priori reasoning, and when the conclusion is derived from the right premises the conclusion can be taken as right with infinite certainty.
While you were interested enough to read the first line of Mises’ quote, you probably didn’t want to read the next line which reads “Capital does not “beget” profit”
Mises does not say that when you invest a higher capital in a rapidly developing sector you won’t do any better than a guy who invested lesser capital than you did in the same sector. What Mises really says is, just because you invested a higher Capital does not mean you are assured of profits. An entrepreneur has to choose the right business (where consumers’ demand has not been satisfied yet) to invest in, to deserve profits. A guy who chose the right sector and invested a smaller capital than you could do better than you who invested a higher capital in a sector where consumers’ demand has been satisfied by the market already. That is, anticipation of consumer demand is what gives you profits (primarily), not the amount of capital you invest.
renegade_division Says:
May 20th, 2009 at 2:41 pm@ddg
Did you read the full quote of the Mises? Does not sound like you did. Nor did Tilak.
prashanthguevara Says:
May 20th, 2009 at 2:50 pmJust a clarification. my previous post was for ‘ddg’, not for CRD (as it was mentioned)
ddg Says:
May 20th, 2009 at 9:30 pmOK then, I’ll read it: “Capital does not “beget” profit.” What does it mean? Webster, ‘beget’ - to bring into being, produce. Now if you’re talking about a quantity of money, then even a fool and the Bible know that you can sit it there for as long as you like and it will produce nothing. So presumably Mises must be referring to actual capital. But you can likewise set up a factory and no matter how long you wait it will produce nothing without being set in motion with labour-power. Every productive capitalist knows that he must transform his capital into means of production and labour-power in order to create even a product, let alone profit. Except of course our shopkeepers (who think profit is what they can devote to their consumption fund) and the money capitalists who leave the tiresome task of figuring out this ‘magic’ to others.
Your whole subsequent paragraph is nothing but a non sequitur. Other than that it merely repeats the ‘a priori’ commonplace that profits vary with business conditions. It does reveal however your petty shareholder point of view with its focus on the consumer, beloved of modern ‘economic science’. This point of view of course, with its lack of any need “to understand the production process” and its confidence that it need only “have a basic understanding of human action through a priori reasoning,” to guarantee its ”infinite certainty” knows nothing of the relationship between the production of means of production and the production of consumer goods. As a consequence it is bound to be impressed with the doctrine that on the one hand denies crises and on the other asserts them with such gems of ‘a priori’ method as, “There is nothing “normal” in profits and there can never be an “equilibrium” with regard to them. Profit and loss are, on the contrary, always a phenomenon of a deviation from “normalcy,” of changes unforeseen by the majority, and of a “disequilibrium.”
So what then is this “normalcy” from which “profit and loss are… always a phenomenon of deviation.”? Well clearly it can only be a condition of neither profit nor loss, i.e., of breaking even. Cold comfort indeed for our real world capitalists the “majority” of whom are quite content to be “in disequalibrium” so long as it is on the profit side for most of the time. Or are you seriously suggesting along with Mises that “the majority” of capitalists are satisfied to simply break even?
prashanthguevara Says:
May 21st, 2009 at 3:10 pmSeriously, what’s your point? Your contention on the ability of Capital to produce profits has been busted, since earning profits is about correct anticipation of consumer demands, and not the size of capital.
First up, entrepeneurs in the real world don’t produce until the ‘break-even’ point. They produce only if there are profits which is above the going rate of interest. So, there is nothing like the break even point in the real world which the mainstream economics text you read suggests.
Second, there is always disequilibrium in an economy because consumer preferences constantly change, and a few entrepreneurial errors are always unavoidable. So there is relative underproduction or overproduction. Hence there will ALWAYS be profits and losses to be made in an economy.
I suggest you read this part of my article: “People argue overproduction everywhere could lead to losses everywhere completely wiping out profits from the economy. But there is no need to worry, the market has answers again. An overall overproduction everywhere in the economy still doesn’t set the “disequilibrium” that exists between the preferred quantities of various goods into equilibrium. Here one needs to understand that people’s needs are humongous and can never be satisfied. The market can only try to provide the proportionate quantities of various commodities according to the consumers’ preferences. Profits (and losses) are nothing but the signals that guide producers to adopt to the consumers’ preferences, and they never would cease to exist.”
Reason for Liberty » Blog Archive » What are profits? Says:
August 9th, 2009 at 12:35 pm[…] should understand the role of entrepreneurship in the market economy better! Footnotes:On Overproduction […]
arvind Says:
September 22nd, 2009 at 2:12 amFreeMarket is so obvious. How can’t more people agree with it.
renegade_division Says:
September 22nd, 2009 at 7:00 amBecause Free Market is invisible. The Government is visible. Everybody can see the govt and know who is in charge. Nobody can really see who is incharge of the free market. Then there is govt education system which puts people in this mindset that the only way to do things is through the govt. Imagine if being under Monarchy is a better solution for us. Who would really believe a bit of it? After all we all are made to realize the beauty of Democracy since were were in Middle school. Even if Monarchy was the best system, it would be hard to convince anyone but the most open minded person about the beauty of a monarchy.
My American friend got really pissed when I tried to defend the so-called ‘Robber Barons’ of 19th century. Robber barons is a derogatory name given to the richest industrialist of 19th Century America, (J P Morgon, Rockafeller, Andrew Carnegie etc etc). He hates them because he claims Robber Barons were exploiting the workers, but not taking care of them(what he does is sees them through contemporary American eyes, he didn’t say it, but he literally imagined them being evil for not providing health benefits to workers. IN 19th CENTURY!). My point was simple, I wish in India in 19th century we had our own robber barons. 19th century Indians weren’t better than 19th century Americans.
pathfinder Says:
September 28th, 2009 at 2:50 pmFirstly , lets talk about overproduction … I really don’t see how this can ever be bad . Yes , if the production cycle has started , and the demand suddenly goes down ( as in the case with housing ) it will lead to some loss . But generally , if say there are too many apples produced , and to clear them , the price has to be reduced , totally the loss will be cut because now more apples are sold . 50 apples at 10 rs is same as 100 apples at 5 rs . Even if the cost is much less , still the loss is minimized .
Now apples may be a perishable good , but for things like housing , there is no hurry to sell . Demand goes up and down in cycles , (unless there is something wrong with the neighbourhood , which is a problem with the builders planning) , so the builder just has to wait for the right time .. until the demand goes up again , and he can sell at a reasonable price , and minimize his loss .
“Profit is not related to or dependent on the amount of capital employed by the entrepreneur.”
I think we have not fully understood Mises statement . It means that just by putting in more capital , we cannot get (or ensure profits ) . Profit comes from the foresight and good judgement of the entrepreneur . But once he makes the judgement , he can multiply his profits by putting in more capital .
Take a gambler who bets on a sports team to win . By his judgement and his foresight he decided his team is a sure bet to win , so he puts in money for them . He will profit for sure , but more money he puts in , more he can multiply his winnings .
Same for an entrepreneur , more he trusts his judgement , and mre he risks , more he can profit . So the total profit made is proportional to the investment , but is not caused just by the investment