Marx did not create this theory however remains one of his central economic critiques to the inevitable flaws of capitalism. The theory refers to the value of a commodity only being related to the labor involved in producing it.
Marx referred to this as the "aggregate of those mental and physical capabilities existing in a human being", which constitutes for the "exploitation of the working class". The theory refers to the inevitable drive of capitalism, profit. Which is achieved through the Capitalists underpaying the Workers. It also follows that the advancement in productivity, through technology and education, promotes this exploitation through the workers doing more then they used to,, with the same pay. Evidence of this taking place is depicted by US productivity rates increasing by 83% from 1973 to 2007, although real wages only increasing by 5%. Thus suggesting that there is exploitation through workers not gaining more through their advancements in productive efficiency, hence the Capitalists gain a lot more then the Workers do. “The essential difference between the various economic forms of society, between, for instance, a society based on slave labour, and one based on wage labour,” explained Marx, “lies only in the mode in which this surplus labour is in each case extracted from the actual producer, the labourer.”
Capitalism had become “accumulation for accumulation’s sake”, explained Marx. “Production for production’s sake.” Those industries where the productivity of labour lags behind the average are driven out of business by those using the most up-to-date methods. In this way, the introduction of machinery increases the productivity of labour, and reduces the necessary labour time (thereby increasing surplus labour time). It allows those who introduce new techniques to sell their products above their individual value (the labour time it costs to produce them) but less than the average cost, thereby gaining super profits. The tendency for the rate of profit to fall is perceived as the long run empirical trend for the internal rate of return on Capital invested to produce industrial products to decline - http://en.wikipedia.org/wiki
Marx referred to this as the "most important law of the political economy", hence suggesting its large significance to my question withstanding. “The rate of profit in the major G7 economies peaked in 1997; it fell sharply to 2001 and then recovered up to 2007”, states Michael Roberts in January 2009. The slump of 2000-1 had hit the US particularly hard. But by 2005, profits had dramatically recovered almost to 1997 levels, which “was the highest level of profits reached since the 1960s”, explained Roberts (September 2005). This process was confirmed by figures produced by Robert Brenner. “Between 1965 and 1973, US manufacturers sustained a decline in the rate of return on their capital stock of over 40 per cent”, states Brenner.20 The Housing bubble that took place in the US maintains deep significance in its connection to Marx's theory of Overproduction. Housing prices started to peak in 2006 quarter 1, declined following on and into 2007/08. The fall in prices led to many "workers" not being able to pay back their mortgages, with the rapid decrease in consumer confidence diving down prices further into to new lows of 2012.
The essential cause of the crises was the over supply of credit into the US economy, most notably the highly risky Subprime mortgages supplied by high profile financial institutions such as Fannie Mae and Freddie Mac. The excess credit had resulted in devastating effects following the collapse in the US housing market, the most notable of which being the Financial crises. Subprime mortgages amounted to $35 billion (5% of total originations) in 1994, 9% in 1996, $160 billion (13%) in 1999, and $600 billion (20%) in 2006 - these figure convey that credit was oversupplied in the US economy. In October 2007, the U.S. Secretary of the Treasury called the bursting housing bubble "the most significant risk to our economy", this emphasises my initial point that the housing bubble ,influenced by Overproduction, caused the Financial crises. Exploring the causes of the Financial crises I discovered a potential point towards answering my question. This bring the relevance of the Overproduction theory towards Credit.
Amongst my research I found that one of the initial causes of the crises was the excess credit supplied to the people. This had in turn resulted in the banks revamping these 'subprime' mortgages into low risk securities which were then pooled with stronger assets. This overproduction had followed in the influence of easy credit conditions; interest rates were lowered by the Federal reserve by 6.5% to 1% in 2006; downward pressure on interest rates created by the high and rising US current account deficit, between 1996 and 2004 it had increased by $650 bn, 1.5% t0 5.8%. In 2008 17% of homeowners had a mortgage that exceeded the value of their home, conveying that mortgages were over supplied, and the demand for them had restricted as people couldn't pay them back. |