Underconsumption and Overproduction?—?Stuart
inflation can’t be avoided because underconsumption is an inevitable phenomenon.
For instance, the overproduction of cotton caused by the invention of the cotton gin created periodic economic panics in the U.S. in the 19th century. This cotton overproduction was the consequence of consumption demand outrunning production demand. To make matters worse, the increased supply of cotton caused the price of cotton to decline sharply to less than half its former price. Obviously, the cost of production was much higher than the selling price. Therefore, cotton merchants, especially those with large inventories, suffered losses and some even went bankrupt. According to the underconsumptionists, this was the main reason that the economy went into a crisis.
Underconsumptionists hold that although the free market can generate a high standard of living, it can’t prevent economic crises from occurring. Depressions are the unavoidable price that society pays for a high standard of living.
In the underconsumptionist view, a free market will always be faced with the problem of periodic overproduction. The reason is that in a capitalist free market, capitalists will use their capital to produce a maximum number of consumer goods. Production of consumer goods is done to earn profits, which come from the difference between the selling price and the production cost. But since the supply of consumer goods is very elastic, production costs have little effect on the selling price. Therefore, an increase in supply leads to a sharp decline in the selling price of consumer goods.
Because of the overproduction of consumer goods, the selling price is likely to fall well below the production cost. Even if capitalists could earn profits by producing consumer goods, the fall in the selling price of consumer goods would make them reluctant to invest in producing them. Such a situation is called underconsumption. Underconsumptionists, therefore, hold that periodic economic crises are inevitable in a free market economy because of the underconsumption of consumer goods.
Overproduction or underproduction in a free market economy has to do with the production of consumer goods for profit-making. By contrast, underconsumption is an overproduction of producer goods for profit-making.
A free-market economy is supposedly free of government interference; so, if the government is not intervening, then what is causing periodic overproduction of producer goods?
The reason why a free market produces periodic overproduction of producer goods is that the overproduction of consumer goods sets into motion an increase in the demand for producer goods. For instance, to keep up with the increased production of cotton cloth, an individual would need to purchase more sewing machines to make more cotton cloth. In addition, he would also want to replace his old sewing machine with a newer and more powerful one. The increased demand for producer goods was a consequence of the increased supply of consumer goods. Since the supply of producer goods is always inelastic, producer goods will be sold at high prices. This in turn will encourage producers to invest in producing more producer goods at the expense of consumer goods.
With the overproduction of one thing, we get the underproduction of something else. With the underproduction of one thing, we get the overproduction of something else. Note the circularity of this reasoning. The dynamic flux and flow of this situation sits at the base of the free market equilibrium.
Free market equilibrium
The free market comes into balance by having the bad beget the good. In this way, the market is like nature, where the bad is eventually out-evolved by the good. Some people in a free market may initially make errors in judgment, but over time, those errors are eventually out-evolved by the good decisions of others. This is simply the process of trial and error that has led to the advancement of civilization.
The free market is like a giant laboratory where the mistakes are the experiments. The market is not perfect, but it is better than anything man could design on his own. The free market does not have an intelligence of its own, but it has the best intelligence available to man. Perhaps a better way to describe the free market is that it is a “self-generating fractal pattern”. Fractals are infinitely repeating patterns, and the free market is the most interesting self-generating fractal pattern I know of. The patterns that can be found in the free market are beautiful, and they will be appreciated by future generations. In the free market, people are pushed toward the best possible decision, but the best decision is not guaranteed. The free market is like a machine that produces the best possible answer, but there is always a chance that the machine will malfunction and produce an inferior result. Even the wealthy are not immune to these malfunctions!
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