Overproduction

In economics, overproduction, oversupply, excess of supply, or glut refers to excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment.

The demand side equivalent is underconsumption; some consider supply and demand two sides to the same coin – excess supply is only relative to a given demand, and insufficient demand is only relative to a given supply – and thus consider overproduction and underconsumption equivalent.

In lean thinking, overproduction of goods or goods in process is seen as one of the seven wastes (Japanese term: muda) which do not add value to a product, and is considered "the most serious" of the seven.

Overproduction is often attributed to previous overinvestment – creation of excess productive capacity, which must then either lie idle (or under capacity), which is unprofitable, or produce an excess supply.

Overproduction is the accumulation of unsaleable inventories in the hands of businesses. Overproduction is a relative measure, referring to the excess of production over consumption. The tendency for an overproduction of commodities to lead to economic collapse is specific to the capitalist economy. In previous economic formations, an abundance of production created general prosperity. However, in the capitalist economy, commodities are produced for monetary profit. This so-called profit motive, the core of the capitalist economy, creates a dynamic whereby an abundance of commodities has negative consequences. In essence, an abundance of commodities disrupts the conditions for the creation of profit.

The overproduction of commodities forces businesses to reduce production in order to clear inventories. Any reduction in production implies a reduction in employment. A reduction in employment, in turn, reduces consumption. As overproduction is the excess of production above consumption, this reduction in consumption worsens the problem. This creates a "feed-back loop" or "vicious cycle", whereby excess inventories force businesses to reduce production, thereby reducing employment, which in turn reduces the demand for the excess inventories. The general reduction in the level of prices (deflation) caused by the law of supply and demand also forces businesses to reduce production as profits decline. Reduced profits render certain fields of production unprofitable.

Henry George argued that there could not be any such thing as overproduction in a general sense, but only in a relative sense:

Is there, then, such a thing as overproduction? Manifestly, there cannot be, in any general sense, until more wealth is produced than is wanted. In any unqualified sense, over- production is preposterous, when everywhere the struggle to get wealth is so intense; when so many must worry and strain to get a living, and there is actual want among large classes. The manner in which the strain of the war was borne shows how great are the forces of production which, in normal times, go to waste; proves that what we suffer from now is not overproduction, but underproduction.