Article — From the November 1930 issue

The Enemy of Prosperity

Overproduction: What shall we do about it?

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II
 

Overproduction, particularly in this year of world-wide depression, is on every man’s tongue. What precisely does it mean? There are indeed distinguished savants who affirm there is. no such thing. In one sense they are perfectly correct. Let us look into the term a little more carefully. The actual overproduction of goods destined for the ultimate consumer, in the sense that they never reach him but have to be thrown away, is a reasonably rare phenomenon. Cases have been cited of shiploads of bananas and carloads of vegetables making gay the waters of Manhattan because they could not be given away, but the authenticity of such reports is dubious.

Far more frequent is a conflux of goods upon the market which can be absorbed, but only by a very painful lowering of the producer’s price—often below the cost of production. The phenomenon is however a very ancient one; the consumer often secures some advantage from it, if not the producer; while the nation-wide policy of hand-to-mouth buying by both manufacturers and merchants, inaugurated after the depression of 1921, has tended to reduce the ravages of overstocked shelves and sacrifice sales.

The average wage in the United States is somewhere in the vicinity of $1,500 a year. If the gentle reader has ever tried to support his family on that sum he knows the number—the very considerable number—of goods he would like to purchase but must forego. In respect to the whole body of finished goods, it is not so much over-production as underconsumption which is the appalling fact. As a nation we can make more than we can buy back. Save in certain categories, there is a vast and tragic shortage of the goods necessary to maintain a comfortable standard of living. Millions of tons of additional material could readily be marketed if purchasing power were available. Alas, purchasing power is not available.

Thus one horn of the dilemma is a money and credit system which does not throw off purchasing power as fast as factories can throw out vendable commodities. It is the more acute with the entrance of mass production upon the economic field. While average income creeps slowly upward, potential industrial output may increase at twice, five times, a hundred times the pace.

Which brings us to the other horn. The most immediately critical factor in the whole” overproduction” situation, to my mind, is excess plant capacity—which means more mills, more mines, more machines, aye, more farmers’ fields—than can be used. Not only is this equipment almost always in excess of purchasing power, but frequently, if you please, it is in excess of consumption requirements, granted unlimited purchasing power. American shoe factories are equipped to turn out almost 900,000,000 pairs of shoes a year. At present we buy about 300,000,000 pairs—two and one-half pairs per capita. There is admittedly a considerable shortage of shoes, but could we wear out, or even amuse ourselves with, five pairs per capita? I doubt it. For myself two pairs a year satisfy both utility and style. Yet if we doubled shoe consumption—gorging the great American foot as it were—one-third of the present shoe factory equipment would still lie idle. There are more shoe factories than we have any conceivable need for, either here or in Utopia.

Whether the capital equipment exceeds money power to buy, or man power to consume, the hobgoblins in the picture are overhead costs. Taxes, insurance, interest, depreciation, obsolescence, repairs, the services of watchmen, executive and clerical salaries, general office expenses—all go merrily onward whether a wheel turns or not. If few are turning, they will eat up the profits earned on those wheels, and keep the plant as a whole operating at a loss. The greater the plant, the greater the overhead; the bigger they come, the harder they fall. But nobody in his senses builds a plant with any idea except that of continuous, profitable operation. Rosy sunrises illumine every factory chimney which climbs upward. The promoter knows that, granted continuous operation, his overhead expense per unit of output can be kept to a minimum. The greater the volume, the lower the overhead cost; and of course the bigger the plant, the greater the volume. He never stops to consider—the American success saga does not permit him to consider—the reverse of the shield, to wit, the bigger the plant, the greater the costs of possible idleness.

Abnormally low costs when everything is humming. Abnormally high costs when everything is slack. As more plants and greater plants invade any particular field, the chances in favor of slackness are bound to grow. Unless, of course, purchasing power grows equally fast, which it does not. And there we are.

Why do plants so consistently outrun demand? The figures make it perfectly plain that they do, but why does capital take such gorgeous risks? Who, in the light of the facts just cited, would be fool enough to build a new shoe factory? The reasons are many. Promoters do not know the facts; indeed some do not seem to want to know them. A new device, an improvement on an old device, a happy advertising slogan, a new technical method of manufacturing, a rumor of great profits being made by those already in the field, a patent, a selling contract secured in advance—all offer the chance for rushing in where angels fear to tread. And rush we do; others may have failed, but we shall succeed. It is all very human, and profoundly in accord with the American tradition. I bemuse myself sometimes in speculating upon the amount of new capital which has gone into dentifrices, cosmetics, and fat reducers simply on the strength of an advertising man’s showing of copy in advance of any plant construction whatsoever. The plant may make money, lots of it, while the public craze for the article lasts, but it becomes superfluous concrete and steel when the craze subsides.

There seems to be no urgent social need for the 78 sizes of bed blankets now upon the market, or the 278,000 types of men’s sack suits, or the 6,000 varieties of single-bit axes; or for numberless other over-styled commodities concerning which the American Standards Association can give you the most appalling information. Yet every style and size requires as a rule special equipment and added investment.

Untold plants, furthermore, have expanded to meet a peak demand—a demand which never comes again. Thus during the War new coal mines were opened right and left. After the War demand fell away by 100,000,000 tons, and will probably never climb again to the dizzy peak of almost 600,000,000 tons. The War is responsible for current excess capacity in many industries.

Lastly, and very much to the point in connection with our discussion of purchasing power, the margin between total costs and selling price has been so high in the well-situated establishments that an enormous amount of net profit has been available for new investment. The living expenses of the rich have absorbed only a small fraction of their total incomes. The balance has flowed into new enterprises, some of them extremely necessary enterprises, many of them only adding to an industry already overequipped. If more of the gross receipts had been returned in wages, industry would have stood on a more solid base, with less loose capital seeking even looser investment. In brief, a bad distribution of income has done much to foster excess plant capacity. Instead of being used, capital has been abused. It used to be widely held that if profits were tampered with, “capital would leave the country.” We might have been better off to-day if it had. We have altogether too much capital in relation to purchasing power.

More from Stuart Chase:

Article From the August 1962 issue

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