In a capitalist economy, production is encouraged by the profit motive, not necessarily need. Prior to the capitalist economy, in the agrarian economy, production was roughly in line with need. The reason for this was the high costs -- capital, time and labor -- that were associated with the production of goods. These high costs ensured that production was largely limited to what was needed, or for what there was a known market. There were trading markets throughout Europe and the East, and so there was the potential for overproduction, but overproduction came at a high enough price that discouraged it. Finding suitable markets for an undesirable good was not necessarily easy, and there may have been associated disposal costs.
With the agricultural and industrial revolutions, the costs of production declined. Marx outlines in the Communist Manifesto that the agricultural revolution and the decline of the old social structures of the agrarian age created surplus demand, which the innovations of the industrial revolution sought to meet. The machines of the industrial revolution, in particular the machines have allowed for excess production to occur. The new industrial class, whom Marx terms industrial millionaires or the modern bourgeoisie, is said to hold most of the political power in the economy, and have helped to create the global market in order to allow them to increase their production.
One of the issues with this -- and Marx has many -- is that this leads to an excess of production. Goods are produced, in essence, because they can be. The problem of selling these goods is something to be addressed later -- usually via the aforementioned political channels and global market. In economic terms, the incremental cost of excess production is relatively low with modern (19th century) industrial scale. With at least the potential for moving costs to a variety of different markets and perhaps by this point a cost of disposal of excess goods...
If the goods can be sold, there are tremendous profited to be reaped. If the goods are not sold, the cost is relatively low because of the new production efficiencies. The cost of not selling something is not as great as the potential profit to be gained from producing it, and then subsequently seeking a market for that good.
To Marx, overproduction is the root of capitalistic economic crisis. Marx sees overproduction as having two forms -- the overproduction of goods and the overproduction of capital. The former is the natural consequence of the efficiencies of scale and potential for new markets as described above. The overproduction of capital occurs when industry is able to sell its goods and earn profits. Some of that capital will be reinvested to further increase capacity and some of that capital will not be reinvested, or may be invested in another business.
A capitalist overproduction crisis is described in the Communist Manifesto as follows:
"The productive forces at the disposal society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them."
Now, this section does not explicitly explain what happens. Fetters are metaphoric, and productive capital is inert. Marx does not in a meaningful way elaborate on what exactly is occurring to cause this crisis. He describes what a crisis might look like in abstraction, but his description lacks the specifics that can be addressed in economic discourse. This is nothing new, of course -- there is no shortage of circular logic in the Communist Manifesto. But it leaves the reader to attempt to make sense of his explanation. In essence, capital must be re-invested, or it will lose its values. Thus, capital can be invested, or destroyed. But the investment of capital often comes with diminishing returns. This…
Both Keynes and Kalecki use Marx's theories as a starting point but quickly moved into new ways of thinking, particularly with regard to effective demand being oriented toward the demand-side. Marx had remained rooted in supply-side demand function, rejecting Say's Law only to note that demand did not necessarily meet supply. Works Cited: Marx, K. (1867). Das kapital: A critique of political economy. Mandel, E. (1995). Marx's theory of crises. International Viewpoint.
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