For example, the overproduction of cotton caused by the invention of the ginning machine periodically created economic panics in the United States in the 19th century. This overproduction of cotton was due to the excess of consumer demand over production demand. To make matters worse, the increased supply of cotton has led to a sharp drop in the price of cotton to less than half of its previous price. Obviously, the production cost was much higher than the selling price. Therefore, cotton traders, especially those with large stocks, suffered losses, and some even went bankrupt. According to proponents of underconsumption, this was the main reason that the economy went into crisis.
Underconsumption advocates believe that while a free market can provide a high standard of living, it cannot prevent economic crises from erupting. Depression is the inevitable price society pays for a high standard of living.
In terms of insufficient consumption, the free market will always face the problem of periodic overproduction. The reason is that in a capitalist free market, capitalists will use their capital to produce as many consumer goods as possible.
The production of consumer goods is carried out to make a profit, which is made up of the difference between the selling price and the cost of production. But since the supply of consumer goods is very elastic, production costs have little effect on the selling price. Consequently, an increase in supply leads to a sharp decrease in the selling price of consumer goods.
Due to overproduction of consumer goods, the selling price is likely to fall well below cost. Even if capitalists could make a profit by producing consumer goods, falling selling prices for consumer goods would force them not to invest in their production.
This situation is called underconsumption. Therefore, underconsumption advocates believe that periodic economic crises are inevitable in a free market economy due to insufficient consumption of consumer goods.
Overproduction or underproduction in a free market economy is associated with the production of consumer goods for profit. On the contrary, underconsumption is the overproduction of manufactured goods for profit.
A free market economy is assumed to be free from government interference; So, if the government does not intervene, then what causes the periodic overproduction of manufactured goods?
The reason the free market faces periodic overproduction of manufactured goods is because the overproduction of consumer goods sets in motion an increase in demand for manufactured goods.
For example, to keep up with the increase in cotton fabric production, a person will need to buy more sewing machines in order to produce more cotton fabric. In addition, he would also like to replace his old sewing machine with a newer and more powerful one.
The increased demand for industrial goods was the result of an increase in the supply of consumer goods. Since the supply of manufactured goods is always inelastic, manufactured goods will be sold at high prices. This, in turn, will encourage manufacturers to invest in more manufactured goods at the expense of consumer goods.
Due to the overproduction of one, we get an underproduction of something else. When one is underproduced, we get an overproduction of the other. Note the roundness of this line of reasoning. The dynamic flow and flow of this situation underlies the equilibrium of the free market.
Free market equilibrium
A free market comes into balance when bad breeds good. Thus, the market is like nature, where the bad ultimately trumps the good. Some people in the free market may initially make mistakes in judgment, but over time, these mistakes are eventually replaced by good decisions from others. It is just a trial and error process that led to the development of civilization.
The free market is like a giant laboratory where mistakes are experiments. The market is not perfect, but it is better than anything that a person could create on their own.
The free market has no intelligence of its own, but it has the best intelligence available to humans. Perhaps the best way to describe the free market is that it is a “self-generating fractal pattern.”
Fractals are infinitely repeating patterns, and the free market is the most interesting self-generating fractal pattern I know of. The models that can be found on the free market are beautiful and will be appreciated by future generations.
In a free market, people are encouraged to make the best possible solution, but the best solution is not guaranteed. The free market is like the machine that gives the best answer, but there is always a chance that the machine will fail and give the worst result. Even rich people are not immune from these faults!
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