Monday, January 12, 2009

"It's much better to underproduce than overproduce"

This evening on NPR I was listening to an interview of one of the auto executives at the big convention going on in Detroit. When asked about his company's failure to make enough of a particular model of car last year, he responded that it's far better to under-produce a product than over-produce. Most of their current troubles stem from over-production and having tons of unsold inventory. Of course, all of this is perfectly obvious. We have reached the point where it is is simply more profitable to not produce enough to meet demand, even though we have the capability of doing so. Producing enough of a product to meet demand will require producers to sell at a price just high enough to eek out a tiny profit. But producing less than enough allows producers to reap handsome profits because of the pricing power of scarcity.

But isn't the whole point of capitalism that it's the most efficient system for producing goods and services? But if capitalism rewards those who don't produce enough and punishes those who produce too much, then doesn't that mean capitalism is doomed to failure at the task of producing goods and services to meet demand? Of course, in a purely theoretical model, another producer can come along and fill in the gap by producing the same product. But we live in the real world, where patents and trademarks would explicitly forbid a competitor from doing this. If we're going to enforce patents and trademarks, and we're going to embrace capitalism, aren't we simply embracing a perpetual state of underproduction?



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