Too much supply, too little demand



There is a long list of those who have prophesied the imminent demise of capitalism, only to be discomforted and dismayed by the resilience of this hugely energetic and zestful animal.  Marx was only the first in the field.  One should intone prophecies of doom with caution, therefore.  Nevertheless, I think it likely if not probable that capitalism will collapse during the course of this century.   Capitalism nearly crashed in 2008 and was only saved because, instead of addressing the structural weaknesses that had caused the crash, governments set the whole system rolling again with 12 trillion dollars of public money.  What are these unadressed structural weaknesses that might well cause a second and even greater crash, one that this time will not be bailed out by 12 trillion dollars of public money?  Well here’s one.


An imbalance between supply and demand


At the very centre of capitalist theory is the equilibrium between supply and demand.  If there is too much supply and too little demand goods will remain unsold and suppliers will be forced to produce less until what they are supplying falls to the level demanded and the two come back into equilibrium.  Conversely, if there is too little supply for what is demanded suppliers will take the opportunity to supply more until equilibrium is once again achieved.  But now the two are out of correspondence to such an extreme degree it is hard to see how equilibrium will ever be achieved.   The gap between rich and poor is now so great that eight, yes eight, people own as much wealth as half the world’s population.  Apart from the injustice of this it is, in the long run, economically disastrous.

Even billionaires need only one, or at most two or three, fountain pens.  But if much of the consuming world cannot even afford one fountain pen then, because there are not many billionaires, the demand for fountain pens will be too small for the possible supply.   Fountain pen manufacturers will go out of business.  Of course there are plenty of people who can afford to buy fountain pens as well as billionaires.  But the principle holds.  A healthy economy needs a multitude of consumers well enough off to purchase the multitude of goods that a modern economy can produce.  This is not the case at the moment.  There are too many, far too many, people in the world too poor to buy what industry produces.   Not only are rich people rich but they often avoid paying their taxes.  This means that everybody else has to pay more to maintain the roads and pay the police which reduces disposable income.  Rich people also often invest their wealth in property, residences in Kensington and Chelsea for example.  Since there is a limited supply of posh residences in Kensington and Chelsea and the people competing for them are very rich, the prices they fetch reach ridiculously astronomical heights.  No matter how high for the purchasers because the higher the price goes the higher the re-sale value.  But this means that the people who sold them have large sums with which to compete for the next lower level of properties, so these too soar in price.  So it goes on, all the way down the chain.  Everybody is paying more for their mortgages than they otherwise would, which again means that there is less disposable income with which demand can meet supply.

The austerity measures which governments have taken to service the loans with which they bailed out the banks also mean that people are paying for services that previously were free, which is again shrinking disposable income.  The sickness of economies in the industrialized countries is indicated by the stubborn refusal of wages to rise, even though in economies beginning to recover from the disaster of 2008 unemployment is falling to remarkably low levels.  In economic theory competition for labour should raise wages.  But they are not rising.  Why?  It is partly that in a global economy workers in the UK are competing not only with each other but with workers abroad who will work for far less. If workers in the UK demand too much manufacturers will look abroad. Thus, both Marks and Spencer and Dyson were forced to close down their UK factories and move elsewhere.  The workers they fired become added competitors in the UK labour market which further depresses wages in the UK.  There is not enough disposable income, for the reasons given above, for people to be able to pay what suppliers would like to charge, so they have to sell for less which means they pay their workers less.    As economies grow richer more and more people become poorer.  More is less.  So how are people surviving? They are borrowing on an unprecedented scale, which leads us on to another structural weakness of contemporary capitalism, a topic for another time.


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