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Ineconomics,overproduction,oversupply,excess of supply, orglut refers toexcess of supply over demand of products being offered to themarket. This leads to lowerprices and/or unsold goods along with the possibility ofunemployment.
The demand side equivalent isunderconsumption; some considersupply 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.[1]
Inlean thinking, overproduction of goods orgoods in process is seen as one of the seven wastes (Japanese term:muda) which do not add value to a product, and is considered "the most serious" of the seven.[2]
Overproduction is often attributed to previousoverinvestment – creation of excessproductive capacity, which must then either lie idle (or under capacity), which isunprofitable, or produce an excess supply.
Overproduction is the accumulation of unsaleable inventories in the hands ofbusinesses. Overproduction is a relative measure, referring to the excess of production overconsumption. The tendency for an overproduction of commodities to lead toeconomic collapse is specific to thecapitalist economy. In previous economic formations, an abundance of production created general prosperity. However, in the capitalist economy, commodities are produced for monetaryprofit. This so-calledprofit 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 inemployment. 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 thelaw 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:
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.[3]
Karl Marx outlined the inherent tendency ofcapitalism towards overproduction in his seminal workDas Kapital.
According to Marx, incapitalism, improvements in technology and rising levels of productivity increase the amount ofmaterial wealth (oruse values) in society while simultaneously diminishing theeconomic value of this wealth, therebylowering the rate of profit—a tendency that leads to the paradox, characteristic of crises in capitalism, of "reserve army of labour" and of “poverty in the midst of plenty”, or more precisely, crises of overproduction in the midst of underconsumption.
John Maynard Keynes formulated a theory of overproduction, which led him to propose government intervention to ensureeffective demand. Effective demand are levels of consumption that 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 andnot solve overproduction.
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". 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.
Overproduction raises issues about the disposal of excess product stocks, which may have a significantenvironmental impact as well as raising additionalwaste disposal costs. Moreraw materials than necessary will have been used in production and, in some production processes, more undesirablepollution may have arisen due to the excess level of productive activity.[2]
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