Overproduction and Underproduction But sometimes the commercial and industrial basis is also decidedly unsound. The cycle of prosperity has brought an over extension in many lines, and the necessary adjustments must be more fundamental. Probably the most incisive criticism of our capitalistic system is that production is carried on without proper co-ordination of different lines, so that suddenly society finds that too much of its energy has been devoted to the production of certain things and too little to others. Capitalistic production connotes production in advance of need; it requires much time— and the different industries require different lengths of time—for the delivery of products. Capitalistic production is based on specialization, one group producing one thing which it exchanges for the things produced by other groups. The quantity of any one product that can be absorbed by the community is quite definitely related to the quantities of other goods produced for exchange. Unemployment and overproduction are but ill adjust ments of this proportion. The exchange ratio (the price) of goods is the index by which the production of this or that com modity is actually controlled. Society under the capitalistic system relies upon her enterprisers to gauge and forecast these prices and to adjust production so as to maintain a relatively steady and proportioned flow of goods. In a single industrial plant the general manager so apportions the labor, materials, and space as to secure harmonious adjustment of the outputs of the various divisions. If in assembling the final product five pinions are required for every axle, the plant is organized to pro duce them in that proportion. But society lacks such a general organizer and administrator; each producer is free to produce what he will, in what amounts he thinks best. The result is spasmodic overproduction and underproduction in various lines. A sort of anarchy prevails, and production and consumption are in constant flux and readjustment.
This lack of correlation between supply and demand arises, therefore, from various causes: In the first place, production is made in anticipation of demand, and the interim between produc tion and consumption varies with the commodity and is not always determinable. The demand is also difficult to estimate for it is subject to varying influences and changes often with the caprice of fashion, legislation, politics, and the like. The en terprisers, moreover, are not omniscient. In the second place, even if enterprisers were able to forecast perfectly the demand, they might not be able immediately to readjust their production, for there is a certain immobility in the factors of production; the enterpriser may logically conclude that it is better for him to run at a small loss than to shut down the whole plant; or he may de cide to flood the market on purpose to drive his less able competi tors to the wall. Finally, one enterpriser has no control over his competitors; he may gauge the demand perfectly, but find when he has his product ready for sale that the market is glutted with competing supplies, whereas in other lines of commodities there is a dearth.
Whatever the causes of periodic or spasmodic overproduction, it is a characteristic phenomenon of the capitalistic system that from time to time certain products can be sold only at a loss. The result is that many commercial and industrial concerns fail and also involve their creditors in ruin.
Effect of Investment on Production Overproduction in a certain line is often largely explained by overinvestment therein. If a field of investment gives promise of permanent high earnings, capital, and thereby labor, are diverted to it from other industries which suffer in consequence. The capital stocks of the flourishing industries are freely bought, often on credit, and much speculation usually attends the price move ments of these shares. If later the expected dividends fail to materialize, the market for the shares also fails and their value falls precipitately. new countries like the United States, where opportunities seem unlimited and where enterprise has free play, industrial crises are more frequent and severe than in old conservative countries.
Professor T. N. Carver traces this cause of overproduction still further back. He states a general law to the effect that: A slight fluctuation in the value of the product tends to pro duce a violent fluctuation in the value of the establishment produc ing it. Stated in still more general terms, the value of producers' goods tends to fluctuate more violently than the value of con sumers' goods. This law is capable of still further extension when we consider that producers' goods are themselves produced by other productive agents. . . . The law might therefore be ex tended so as to read, that the farther removed the producers' goods are from the consumable product, and the more remotely their value is derived from that of some consumable product, the more violent the fluctuations in the value tend to be. This would be the tendency until that stage was reached where the producers' agents were no longer especially connected with one particular line of pro duction, and were not therefore affected merely by changes in price of the one kind of consumable product. . . . Not every rise or fall in the value of products is believed to be permanent. But where the high or low price of a product continues for some time, it invariably leads to a belief that it is likely to continue; and this raises or depresses the price of the productive agent out of propor tion to the rise or fall in the price of the product. . . . Since their willingness to invest depends, not upon the value of the gross product of the productive agent, but upon the excess of that gross product over and above the cost of using the agent,—which excess . . . . fluctuate[s] more violently than the total value,—the instability of the investors' market is therefore not altogether due to psychological changes on their part, but in large degree to the objective causes which affect the value of the things in which they invest.