Capitalism, socialism and overproduction

Prabhat Patnaik 24/02/2020
These notes are meant to clarify a point made earlier (Peoples’ Democracy, June 30, 2018) about the erstwhile socialist economies not having over-production crises as capitalist economies do.

It is in the nature of capitalism to have “over-production crises”, i.e., crises arising from “over-production” relative to demand. “Over-production” does not mean that more and more goods keep getting produced relative to demand, so that unsold stocks keep piling up. This may happen only for a brief period in the beginning; but as stocks pile up, production gets curtailed, causing recession and greater unemployment. “Over-production” in short is ex ante, in the sense that if production were to occur at full capacity use (or at some desired level of capacity utilisation), then the amount produced could not be sold because of a shortage of demand. But it manifests itself in reality in terms of recession and greater unemployment.

It is a mistake to believe that such crises are only cyclical in nature, i.e., that they get automatically reversed after a certain period of time. On the contrary, the Great Depression of the thirties, which was a classic over-production crisis, lasted nearly a decade and was finally overcome because of the war, or, to be precise, because of military expenditure in preparation for the second world war. Since 2008 there has again been an over-production crisis that has persisted with varying intensity right until now. There is thus no question of an over-production crisis under capitalism automatically disappearing. But what was striking about the erstwhile socialist economies of the Soviet Union and Eastern Europe is that they were free from over-production crises. The question is why?

Over-production crises under capitalism arise because of two main reasons. One, investment decisions under capitalism depend upon the expected growth of demand, for which the current growth of demand is taken as a clue: if demand slows down then investment gets restrained. Two, whenever investment gets restrained, so does consumption and hence total income (this is called the “multiplier” effect of investment).