The Crisis of Overproduction

One of Marx's most fundamental propositions is that capitalism is based on a number of contradictions that limit its potential for unfettered growth, and ultimately destabilize the entire system.

1.  One of the primary ways by which capitalists profit is by keeping wages low. However, lowering wages also reduces demand for the goods that are produced. Thus, the tendency to try to minimize wages and to maximize demand are contradictory.

2.  Investment in new productive technology, while increasng the efficiency of the production process and initially raising profits, actually lowers the rate of profit. This is because profit is the realization of surplus value, and surplus value derives from the ability to obtain human labor in excess of what one is paying for the labor through wages. Thus, surplus value and profit are directly dependent on human labor. Introducing new technology into the production process reduces the proportion of human labor embedded in the price and cost of each object produced. This means that it is more difficult to accumulate surplus labor at the same rate. The reduction in the rate of profit can be forestalled through the creation of monopolies (for example, through copyrights), which allows one to keep prices high despite lowered production costs. However, monopolies can only be sustained for so long.

These contradictions that are particular to capitalism derive from principles pertinant to the accumulation of wealth in general (capitalist or non-capitalist). Recall the primary principle that continued investment in profitable enterprises decreases their profitability. Essentially (though this is a slight over-simplication) when one expands an enterprise (by re-investing accumulated surplus capital), then one risks undermining advantages on both the input and output end of the production process:

-Increasing the supply of goods that one is providing drives down prices
-Increasing the demand for inputs drives up the cost of the inputs

Thus, material expansion endangers profitability from both ends. When one accumulates more capital than one can profitably re-invest (i.e. when such a re-investment would enlarge the enterprise beyond the point of profitability) the result is a crisis of overaccumulation. One has two options. Either one can find other outlets for investment (other enterprises, financial speculation, public works and philanthropy - the latter also working as a means to cultivate political power), or one can actually continue to invest the accumulated capital and expand the enterprise. If the latter course is chosen, then a crisis of overaccumulation will become a crisis of overproduction. In a crisis of overproduction, the investment of excess capital in material expansion beyond the point of profitability results in a surfeit of goods produced in relation to demand.

Such is the situation the world now finds itself in. The post-WW2 era was a period of rapid economic acceleration and expansion. The widespread incorporation of mechanized production and assembly line production techniques, in addition to the rise of the transnational corporation, afforded rapid economic growth and productivity increases to the world's industrial powers, most notably the U.S., Western Europe, and Japan. By the end of the 1960s, however, this economic expansion was already becoming a crisis of overproduction.

One response to the overproduction crisis has been the use of Keynesian deficit-spending tactics. This has been most prominent in the United States, even in the 1980s when Reagan ratched up military spending. However, many countries in the world are now saddled with massive amounts of debt, so it is certainly not a strategy confined to the U.S.

Another approach has been to divert investment away from production and toward financial speculation. This began toward the end of the 1970s and particularly with the advent of Reagan-Thatcherism. Results of this strategy have included: Third World economic collapse and debt crises, bubbles, bubbles, and burst bubbles. The events of the past few years have, I think, made it very clear that financial speculation is not a path to sustainable prosperity.

History suggests that a crisis of overproduction of the scale now plaguing the world economy cannot necessarily be "overcome." Instead, a certain level of systemic collapse and reorganization is necessary. And this takes a long, long time. We might have to deal with global economic depression for the rest of our lifetime. Enjoy the ride!