Overcapitalisation, or overcapitalization, refers to an economic phenomenon whereby the value or price of an asset is superior to its ‘real’ value, however difficult to define, therefore putting a strain on attempts to obtain a reasonable
return on investment
Return on investment (ROI) or return on costs (ROC) is the ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favorab ...
.
This is especially the case when
capital goods
In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, ...
are at stake which are necessary to engage in the production of goods or delivery of services (e.g. agricultural holdings, industrial plants, etc.). It is less the case with those contemporary financial instruments that are valued not for their returns, but for their potential earnings upon resale. Overcapitalisation is closely related (in causes and consequences) to
assets inflation.
As the
financialisation of the economy has led to the monetisation (also called ‘securitisation’) of many non-financial assets, such as
real estate, infrastructure, etc., overcapitalisation has become rife, with deleterious consequences at the level of firms (struggling to achieve an unrealistically high level of profitability), households (struggling to pay their inflated mortgage), and individuals (whose
equity holding, and hence borrowing and repayment potential, may be vastly over-valued).
History
The concept of overcapitalisation is derived from the writings of
Karl Marx
Karl Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, political theorist, economist, journalist, and revolutionary socialist. He is best-known for the 1848 pamphlet '' The Communist Manifesto'' (written with Friedrich Engels) ...
, and is divided into overcapitalisation relative to savings and overcapitalisation relative to demand.
Examples
In his book ''
Collapse'',
Jared Diamond
Jared Mason Diamond (born September 10, 1937) is an American scientist, historian, and author. In 1985 he received a MacArthur Genius Grant, and he has written hundreds of scientific and popular articles and books. His best known is '' Guns, G ...
gives an example of widespread overcapitalisation where he describes how settlers in Australia bought or leased land at prices derived from those at 'home' (
England
England is a Countries of the United Kingdom, country that is part of the United Kingdom. It is located on the island of Great Britain, of which it covers about 62%, and List of islands of England, more than 100 smaller adjacent islands. It ...
), and then were pushed very hard (and usually failed) to achieve the necessary returns, wrecking the fragile resource in the process by
over-exploitation
Overexploitation, also called overharvesting or ecological overshoot, refers to harvesting a renewable resource to the point of diminishing returns. Continued overexploitation can lead to the destruction of the resource, as it will be unable t ...
.
Problems in business economics
References
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