Excess capacity

Yesterday I talked about how a bad inflation is caused by a lack of sufficient productive factors, today I want to discuss the issue of excess capacity in the economy. Excess capacity can be caused by various reasons, and often can lead to a reduction in the price level. Excess capacity rarely takes place on a large scale and causes a deflation in the economy, as in general, people often prefer more than less. Excess capacity takes place when a specific good or service no longer meets the market demand and requirement.

For example, last century, quartz watches were invented and rapidly took over the majority of the market which had been owned by the mechanic watches, this is because watches were seen as the tools to track precise time at the time, and quartz watches met the market requirement better than mechanic watches. Many Swiss watchmakers went bankruptcy during that period. There is another example, the Chinese coal and steel industries have been marked as industries with excess capacity. I think this issue is only partially caused by an unthoughtful investment in the industries, the main reason for it is the Chinese market demands better qualities of coal and steel, which can meet the environmentally friendly standards, the needs of high-tech industries (for the aerospace industry, the car industry and other industries). Moreover, the poor quality steel and coal have no advantage to win any market share in the global market, which means the excess supply of steel and coal cannot be exported to other countries.

Therefore, based on the above two examples, I think that the excess capacity is not only caused by an increase in investment and production, it is also caused by a shift of the market “taste”.