One of the greatest fallacies on economic depressions is that it is caused by overproduction. “Overproduction is the natural tendency of capitalism to expand the production of commodities that does not acknowledge the limits of the market (demand). Since the production and circulation of goods is not planned and firms are in constant competition for larger profits and greater market share, capitalist’s booms are always followed by busts as we see in the business cycle. In short, capitalist markets are NOT self regulatory.” This Marxian myth is based on the fact that in a depression there are unemployed factors of production and unsold surplus of goods?The adherents of these fallacy conclude from this that the capitalistic system produces too much in the period of boom,which is cleared away in the depression period.
Whatever be the popular perception,the idea that depressions are caused by overproduction is pure hogwash?Human needs are unlimited and as long as there are unsatisfied wants,there can be no overproduction.When this fact is pointed out,the supporters of this doctrine state that though there are unsatisfied needs,people lack the purchasing power to buy the unsold goods.What they fail to notice is that some money exist even in the deepest deflation and it could be used to buy the unsold goods.The fact that businessmen would suffer losses is besides the point.It leads our attention to the fact that businessmen bid up the costs ,which means:prices of the factors of production,so that they would suffer losses.Why did that happen? Such a question takes us back to the Austrian theory of business cycle.It is only the Austrian theory that explains the bidding up of costs and the cluster of errors,which is due to government intervention in the economy-specifically,government manipulation of money and credit.There is no general overproduction of goods.There is overproduction of specific goods and underproduction of other goods.It means that credit expansion has led to malinvestments-which means:investment in wrong lines of production.Depression is the period of liquidation of these investments in wrong lines of production.
What people fail to realize is that overproduction of specific goods and underproduction of other is not caused by anything inherent in capitalism,but due to government intervention?A free uncontrolled,unregulated economy would never lead to overproduction.