Capitalism Fails Wealth First

26 Jul 2023

On the internet you get to read a lot about people proclaim that the problem with capitalism is a shortage of one or the other product or service. The shortage aspect may be true, but is that truly the “problem”?

Let us imagine a society with perfect competition, with zero shortages and no wage exploitation. What an utopia that would be! Yet limited forms of this utopia grace us every now and then and communists have even got an interesting name for it. They affectionately (of course I’m sarcastic) call it “overproduction crisis”.

Why is it a crisis? It’s good for the consumer. There is no producer surplus! All of the surplus goes to the consumer! Why could this be a bad thing? It’s a bad thing for the producer, because there is no way to perfectly plan production such that there is zero oversupply of a given product. Due to the illiquidity of the real economy, factories in the real world have a fixed size and therefore an inflexible production capacity.

If there is demand for 1000 units but there are two factories with 600 unit production capacity, the market has 200 units of capacity too much. It is possible that both manufacturers will have 100 units of overcapacity at which point they will simply raise their prices together and everything is fine. If there is a way to lower their capacity closer to 500 then both the consumer and the producers will win from the lower costs. However, what if a single manufacturer ends up stuck with his excess capacity of 200 units? The second manufacturer only sells 400 units out of 600 possible units. His prices will be higher simply due to the underutilization of his capital! If the number of units sold is influenced by advertising, then both companies will start an advertising war, so that the overcapacity problem is shifted onto a competitor to make them less competitive.

This deadweight gives the first manufacturer the ability to slowly increase his production capacity little by little as his overcapacity is practically zero and he gets to charge the lowest costs due to not having to price in idle machinery. A short lived advantage in the beginning can be leveraged into a permanent and slowly growing one. If the first manufacturer adds another 100 units, then the second manufacturer will lose 100 sales and his products will become even more expensive and this can be repeated until the second manufacturer is driven out of the market entirely and acquired to form a monopoly. The monopoly is able to serve the entire market but it is also able to price in the costs of idle overcapacity into its product prices so it ends up being a stable equilibrium. This will give rise to the appearance that the company earned its position, when in reality the dynamics of reducing excess production capacity skew towards monopoly.

Thus, hypothetically, if there was a world war three and industrial capacity was destroyed, the rebuilding phase wouldn’t be remembered as bad economic times. In fact, the opposite would happen, because there is no excess capacity as there is a shortage of production capacity to begin with, there is no pressure for monopoly formation and every company has fair a chance to participate in the economy. This then gives rise to fondly remembered “golden years of capitalism” and then when overcapacity is reached and the magic is over, people will then start blaming some boogeyman that things are no longer as they are used to and possibly instigate another war.

Yes, this does play into the broken window fallacy but the point isn’t that broken windows help the economy. The point is that broken windows create the temporary appearance of a fair and just economy when it is nothing but unjust.

What this means is that our problem isn’t “infinite wants and limited resources”. It’s the exact opposite! Once our wants and needs are satisfied with an overabundance of resources, we feel like we have reached the end of our life or career and don’t know what to do next! What we do know is that there is no known downside to having too much money, nor do we even have to know or care what we want to spend the money on! We can just accumulate money to maintain a personal highscore.

In an economy with growing productivity but without economic growth, the amount of labor hours that we have to work will shrink below 40 hours! If the distribution of labor hours is inequitable and some people insist on working the full 40 hours without themselves demanding 40 hours of labor in return, then this means the overcapacity could possibly exist as full people! There will be people who can’t find work, because someone else is already doing it! The workaholics will chastise the jobless even if the workaholics are the reason why some people are jobless in the first place!

Overproduction as a driver of wars?

A country that has no domestic growth left to experience, might consider growing its borders instead. Excess production capacity can be diverted into the production of weapons. There is no shortage of demand for weapons. If one country produces too many weapons, then every other country will have to invest into the same technologies at least enough to defend itself. The new defense technology then spurrs a need for attackers to develop even more sophisticated technology. This is a cat and mouse game that nevers ends. If one country has an extreme military edge and stockpile over another country, it might decide to use that stockpile to gain some territory (cough, Ukraine, cough).

Communism fails poverty first

I am not a communist nor do I hate communism. I do have something against people who preach Marx and his writing as if “Das Kapital” was the bible. I am in favor of a pluralistic economy instead of a monoculture of economic ideas. One problem with communism is that its only major achievement is bringing a country from extreme poverty into moderate poverty (no Russia is not a rich country) without relying on foreign aid. I am not going to claim to know the full history of the soviet union or China but they started with potato farmers and ended up industrializing very quickly to the point where it scared the West. Even if we assume that communism is more sustainable than capitalism, having a system that fails as late as possible is beneficial, because lots of countries would love to have a ‘civilized’ high tech world war every eighty years due to stockpiling too many weapons from their overproduction capacity, if it meant leaving extreme poverty behind.