[Dr House]

Exactly what causes them, and why are they systemic?

[Maxim Litvinov]

We're talking about capitalism here? This seems to be a general summary.

[FallenRaptor]

Exactly what causes them

Firms produce more than what is demanded. Hence the term 'over production'.

why are they systemic?

Because of the 'anarchy' of the market. Trial & error in economic calculation, competition, technological change, falling rate of profit, credit & debt, etc.

[Potemkin]

Because of the 'anarchy' of the market. Trial & error in economic calculation, competition, technological change, credit & debt, etc.

Not quite. The crises of overproduction are not caused merely by the 'noise' in the capitalist economy. Even if all agents had perfect knowledge, these crises would still occur. They are linked to the tendency of the rate of profit to fall over time in a capitalist economy; this is a global tendency rather than merely 'noise' or imperfect information. This is why the crises cannot simply be avoided by the appropriate reforms or by installing computers.

[HoniSoit]

Firms produce more than what is demanded.

To add to that, the enormous productive capacity of a mature capitalist economy - which need to keep producing and making profits in order to survive as well as expand - has been increasingly running against the barrier of inadequate aggregate demand created at least partially by the highly uneven distribution of wealth resulting in relatively low consumer demands.

tendency of the rate of profit to fall

Though there is quite a bit of debate within Marxian economy, as far as I know, as to what causes the rate of profit to fall, and alternative explanations (as opposed to the standard explanation related to the organic composition of capital) have been offered. I'm wondering what you think of the reason for the tendency of rate of profit to fall.

[FallenRaptor]

I added falling rate of profit in the last minute in hopes that no one would notice.

IIRC, the tendency of the rate of profit to fall is primarily caused by the introduction of new technologies. Since new technologies cut the amount of labor-time necessary for production, it cuts down surplus value, and in doing so decreases the amount of profits made per unit. As more is produced, less profit is made for each individual product.

[HoniSoit]

I added falling rate of profit in the last minute in hopes that no one would notice.

IIRC, the tendency of the rate of profit to fall is primarily caused by the introduction of new technologies. Since new technologies cut the amount of labor-time necessary for production, it cuts down surplus value, and in doing so decreases the amount of profits made per unit. As more is produced, less profit is made for each individual product.

I'm no Marxist so there is a good chance I'm completely wrong. But I think the tendency is a result of the replacement of human labor power by machines (or new technologies as you describe it) - but since labor power is the source of profits - the replacement of it by machine would necessarily reduce the rate of profit.

[Potemkin]

There is also the factor that as fewer workers are employed, there is less demand in the marketplace, which compounds the problem.

[Dr House]

Firms produce more than what is demanded. Hence the term 'over production'.

To add to that, the enormous productive capacity of a mature capitalist economy - which need to keep producing and making profits in order to survive as well as expand - has been increasingly running against the barrier of inadequate aggregate demand created at least partially by the highly uneven distribution of wealth resulting in relatively low consumer demands.

This theory runs headlong into the fact that wealthy capitalist economies mostly do not produce consumer goods; they produce capital goods. Therefore it seems more income inequality, which results in lower consumer demand and higher savings, would in fact be beneficial to production in places like the US or Israel, where most manufactured goods are purchased by investors rather than end-users.

Furthermore, even in an economy that produces its own consumer goods all that would cause is for prices to follow a declining trend, which would cause a disincentive to invest and lower growth (which can be easily fixed by permanent inflation), but I still don't see how it would cause the massive disruption necessary for a recession, let alone a depression.

the tendency of the rate of profit to fall is primarily caused by the introduction of new technologies. Since new technologies cut the amount of labor-time necessary for production, it cuts down surplus value, and in doing so decreases the amount of profits made per unit. As more is produced, less profit is made for each individual product.

But the cost per unit also declines, so I don't see how the total rate of profit could be affected. And again, why would this cause a disruption rather than a decline in the growth rate?

[HoniSoit]

This theory runs headlong into the fact that wealthy capitalist economies mostly do not produce consumer goods; they produce capital goods. Therefore it seems more income inequality, which results in lower consumer demand and higher savings, would in fact be beneficial to production in places like the US or Israel, where most manufactured goods are purchased by investors rather than end-users.

Just to make sure I understand you correctly, when you say 'higher savings' are you referring to household savings? And can you expand on how lower consumer demand and higher savings would be beneficial to production?

Furthermore, even in an economy that produces its own consumer goods all that would cause is for prices to follow a declining trend, which would cause a disincentive to invest and lower growth (which can be easily fixed by permanent inflation), but I still don't see how it would cause the massive disruption necessary for a recession, let alone a depression.

I want to clarify that overproduction is only one (often serving as a long-term, structural and underlying) cause - though an important one. In other words, overproduction doesn't necessarily in itself cause an economic recession, but it slows down growth and discourage investment (as you point out), thus contributing to the conditions for a recession.

Take the example of the current economic recession. The issue of overproduction is kind of in the background - namely that due to overproduction/overcapacity, the capital accumulated has since the 70s been diverted from the productive economy into the financial market in pursuit of higher and quicker returns. While the financial market has blossomed, the underlying real economy continues to stagnate. When this divorce between financial market and real economy becomes extremely huge, it becomes a bubble itself built on others bubbles. In this context, more short-term and contingent causes like the bursts of dot-com or the real estate bubble would be able to trigger a crisis in the financial market e.g. the burst of a huge bubble, which without the support of a growing real economy, would very likely cause a severe recession.

And again, why would this cause a disruption rather than a decline in the growth rate?

Overproduction, as you know, means that there are more products produced that can be consumed. This often results in the sacking of workers as demands slow down, or the use of cost-cutting strategy such as reducing wages or replacing workers with machines/new technology. All of these in turn would further depress consumer demands and may eventually lead to a downward spiral. This is not say, however, every time there is an overproduction issue, all of these would necessarily happen. But these are the general tendencies, and when coupled by other factors, may bring about a recession.

[Dr House]

Just to make sure I understand you correctly, when you say 'higher savings' are you referring to household savings?

I'm referring to total savings, but household savings are generally the most affected by income distribution.

can you expand on how lower consumer demand and higher savings would be beneficial to production?

Simple. Production depends on investment, and all investment necessarily comes out of savings. Demand-side stimulation, where it actually works, simply increases corporate profits resulting in a rise in corporate savings.

I'll get back to you on the rest.

[HoniSoit]

Simple. Production depends on investment, and all investment necessarily comes out of savings. Demand-side stimulation, where it actually works, simply increases corporate profits resulting in a rise in corporate savings.

This may have been very beneficial to production had the consumer demands kept up, or had there not been a financial market that promises a low risk (through complicated financial instruments), quicker (not only because the nature of financial market but also because you no longer need to invest in fixed capitals that takes time to yield returns) and higher returns.

I'll get back to you on the rest.

No problem.

[FallenRaptor]

Furthermore, even in an economy that produces its own consumer goods all that would cause is for prices to follow a declining trend, which would cause a disincentive to invest and lower growth (which can be easily fixed by permanent inflation), but I still don't see how it would cause the massive disruption necessary for a recession, let alone a depression.

By definition, a recession is a slowdown in growth that lasts longer than two quarters. It doesn't have to be caused by a single massive disruption, nor are most recessions started in such a way.

But the cost per unit also declines, so I don't see how the total rate of profit could be affected.

A low rate of profit doesn't necessarily mean that there will be a low total profit, but eventually the rate of profit will go down to the point where it is intolerable for firms to continue production. When production decreases, less capital is invested and wages & employment drops. This triggers a chain reaction into other industries, and voila! you have a crisis.

[Dave]

The real crisis is the overproduction of communist ideologues.

[KurtFF8]

This theory runs headlong into the fact that wealthy capitalist economies mostly do not produce consumer goods; they produce capital goods. Therefore it seems more income inequality, which results in lower consumer demand and higher savings, would in fact be beneficial to production in places like the US or Israel, where most manufactured goods are purchased by investors rather than end-users.

The problem is precisely that "capital goods" are not productive though. And the trend in investing more in financial and capital assets has meant less and less going towards the productive economy (I'm speaking mainly to the US economy but this is also relevant in places like Europe).

Overproduction can still be seen here, though, as the surplus created by the productive economy had to "be put somewhere" which is one of the main factors that lead to the explosion in the financial sector in the first place. As we can see by this recent crisis: this results in some bad economic times.

[Wellsy]

There are few areas in which economic crises are thought to originate from.
https://critiqueofcrisistheory.wordpress.com/crisis-theories-underconsumption/

The most popular explanations for economic crises advanced by Marxists since the death of Engels in 1895 are underconsumption, profit squeeze and disproportionality. The theory of underconsumption explains crises by the inability of the working class to “buy back” the full product it produces.

Profit squeeze theories can be be divided into two sub-theories. One version puts the blame for crises on a decline in the rate of surplus value caused by the fall in unemployment that occurs during a boom. The other sub-theory, in contrast, sees the rise in the organic composition of capital causing a fall in the rate of profit. The fall in the rate of profit leads to the crisis.

The theory of disproportionality can also be divided into two sub-theories. One puts the emphasis on the anarchy of production. For example, raw materials might be produced in insufficient amounts as industrial production expands leading to an economic crisis. The other sub-theory puts the emphasis on the relationship between the two great departments of production, the one that produces means of production (called Department I by Marx) and the one that produces consumer goods (called Department II by Marx). It is asserted that either Department I produces too much relative to Department II or Department II produces too much relative to Department I and that this leads to a general economic crisis.

What is rightly pointed out is how there is a crises not of use value but exchange value.

The underconsumptionists point out, correctly, that if capitalist production was production for the needs of the workers, there would not be any crises of overproduction. Capitalist overproduction is overproduction of exchange values, not overproduction of use values. A crisis of overproduction of exchange values breaks out when there is still very much an underproduction of use values, especially use values that the workers themselves need.

I tend towards the rise in organic capital or where dead labor/constant capital/machines and technology become dominant in industries such that there is less surplus value from laborers who are able to produce more than they consume in wages. Wages do not fundamentally change the issue although they do factor into tendencies for the profit rate to fall or not but are not an essential cause. In the same way one may theorize how gravity acts in a vacuum unaffected by counter forces like air friction but can be considered in a practical case. The resistance doesn’t invalidate gravity as a concept.

The return from the grave, or Marx and the present crisis. G. Carchedi, Amsterdam, March 12, 2009

To sum up, both theoretical an empirical investigation has provided substantiation for the thesis that the crises’ ultimate cause is the tendential fall in the average rate of profit. Wage movements can explain neither the crisis nor the cycle. The explanation is to be found in Marx, not in Keynes. But, internal critique aside, one should be aware of each of the two views’ political and ideological ramifications.

If lower wages determine crises, higher wages are the way out of crises. And if higher wages determine crises, lower wages are the way out of crises. Crises are at least in principle avoidable. If they are not avoided, it is because ‘mistakes’ have been made in wage, fiscal, monetary, etc. policies or because labour has not been able to impose better work and living conditions on capital. The reformist matrix of this redistributional view is clear: if the system is reformable, a different system is not needed.

However, if crises are a constant feature of capitalism, we need a theory that theorizes their unavoidability, their necessity. This is exactly what the Marxian explanation does by focusing on the decreased production of (surplus) value due to technological innovations and concomitant rising value composition of capital as the ultimate cause of crises.

Given that this is a constant of capitalism, the necessary, constant and unavoidable way capitals compete with each other, crises are unavoidable. Stated differently, in the former case (basically, a Keynesian perspective), if crises can be avoided, the system does not tend objectively and necessarily towards crises. The possibility is created to conceptualize capitalism as a system being or tending towards growth and equilibrium (even if at a level lower than full employment).

In the latter (Marx’s) case, the system tends towards crises through the economic cycle. In the former case, the system is inherently rational (it tends towards equilibrium and growth) and Labour’s fight to supersede it is therefore irrational. Labour is deprived of the objective, rational base for its fight. This fight becomes a pure act of volunteerism.

In the latter case, the system is irrational and Labour’s fight to abolish it is then both rational and the conscious expression of an objective movement, the tendency the system has to supersede itself. The choice of a crisis theory rather than another is an individual one. But, given the different class content of the different theories, this choice places the individual theorist on one side rather than another in the struggle against capital.

Workers consumption itself does the even have the means to purchase all most commodities in the first place as it is only part of the total product. Many commodities are exchanged between capitalists of different industries.
But basically there can be a drop in value which drops profits and this impact can be delayed in its impact because it is first experienced in another sector such as finances like with the subprime mortgage fiasco where more loans were given out than could be realized causing a cascade across multiple industries. Sometimes such failures are limited to an area of the economy but some ‘fires’ spread throughout.

[Robert Urbanek]

Given all the supply chain problems caused by COVID and the Ukraine War, a thread on “overproduction” seems ill-timed. We have inflation, in part, because demand exceeds production. Perhaps, when the public finally understands and accepts the link between consumption and climate change, demand will drop but I won’t hold my breath waiting for that to happen.

[late]

The answer, kids, is government involvement.

Much of the time, if you want your country to be a player, you need to put government money. It started out, in the 1800s, innocently enough. For example, when American agriculture was banned from Europe, because it was crap, we decided to fix it.

The government invested in R&D (the McCormick Reaper got federal funding), transportation, education (Aggie colleges and outreach) and more.

But what happened is that the involvement increased over time. Look at the history of American support of agriculture. It's long, contradictory, bizarre and byzantine. It's also dumb, supporting agriculture made sense in the past. It's the most common way a country uses to develop capitalism. But govt. ag spending usually gets scaled back after you have a capitalist economy. You want the ability to respond in a disaster or a depression. But continuing high levels of support has a number of costs. That includes squandering international influence to help carrots instead of high tech...

The result is that with governments competing, sectors like hard drives can often double production. That helps hold costs down, but your tax dollars should be chasing the cutting edge.