The myth of overproduction

The first time I heard the myth of overproduction, in a sociology course last semester, I brushed it off as a fluke - the mad ravings of an unreconstructed Marxist professor. But when I heard the same thing repeated last week in a philosophy course, I realized that these were not just isolated incidents; there must be some method to this madness.

The argument goes as follows: capitalism does not suffer from a scarcity of resources in a world of unlimited desires. Rather, capitalism is burdened by overabundance -- so much so that capitalism sows the seeds of its own destruction by producing more goods than consumers want, resulting in recessions and depressions. The solution to these economic downturns, then, is not more production, but less.

Ok, that's a nice theory (well, not really, but let's pretend it is), but where is the evidence that it is true? When have "market forces" ever resulted in overproduction? In both of the courses I mentioned above, the professors used the same example to make their point: the Great Depression.

It's interesting to note that this is the only example either professor could muster, but let's put that aside for now. Does the Great Depression actually demonstrate what they are trying to prove? Did market forces result in widespread overproduction?

No, they did not.

Many myths have some element of truth, and this one is no different. Market forces certainly can result in overproduction - in the very short term. Investors, entrepreneurs, and managers are human after all, and we all make mistakes. Our expectations of the future are often wrong - in this case, it is certainly possible that farmers mistakenly assumed that consumers would demand more goods than they actually did.

Add to this the increased productivity flowing from the technological advances of the industrial revolution, and we have a reasonable explanation for why supply would exceed demand.

But such overproduction cannot last for long. Why not? Because of prices.

Prices serve two functions. In the short run, prices serve a rationing function by increasing or decreasing in order to clear markets of shortages or surpluses. In the long run, prices serve a guiding function, by signaling to producers and consumers to put more or less resources in the affected markets.

If farmers produce too much food in the short run, prices decrease in order to clear the market. In the long run, farmers either decrease production or go out of business.

So if market forces didn't cause the surplus, what did? Price controls.

Many economists now believe that the New Deal, apart from its gold policy, probably had little impact on economic activity. At the heart of the early New Deal were the National Recovery Administration (NRA) and the Agriculture Adjustment Act (AAA). Created in Roosevelt's first hundred days, they sought to promote recovery by propping up prices. The idea was to improve incomes and halt bankruptcies. The AAA tried to eliminate agricultural surpluses (pigs were slaughtered, crops destroyed) and paid farmers not to plant. The NRA allowed companies in the same industry to set wages, prices, and working hours in an effort to check "destructive competition." This approach rested on a remarkable contradiction: the way to get recovery, which requires more production, is to have less production. There never has been much evidence that it worked, and the Supreme Court found the NRA unconstitutional in 1935.

The Concise Encyclopedia of Economics: Great Depression

These professors have cause and effect precisely backwards. Price controls are not the necessary government response to overproduction. Overproduction is the necessary result of price controls.

When I mentioned to one of these professors that there was no need for the government to purchase wheat from farmers just to dump it into the ocean, because there would not have been a surplus in the absence of price controls, and that there were simply too many farmers in the market, the professor responded sarcastically, ?So instead you want to push the farmers into the ocean??

No, professor, I want to push *you* into the ocean.

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Overproduction can happen

Overproduction can happen due to misalignment of time preference between consumers and producers- the malinvestment concept which is vital to the ABCT.

Generalized overproduction can't happen, though, as desire/need for goods is always greater than the total ability of an economy to satisfy them- so if you are oversupplied for a service or good in one or two sectors of the economy, you can be assured that you are undersupplied in others (perhaps to the same extent as the oversupply). Its Say's law (people produce in order to consume something of equal or greater value, so all production 'creates' demand, or rather all production is accompanied by equivalent or greater demand).

I think we need to stop

I think we need to stop producing all of this moderation, sucha as buildings and cars, expecially cars, we don't need to keep making all of these cars, sooner or later there will be no need for them because it will be better to travle by bycle or evn i foot...Think how much better the pollution rate would go down if we stopped making cars, plus we're gonna run out of oil for gas soon anyways so we might as well start sooner and save some things....
Randi::end:( if we don' t stop)