Overproduction in a certain line is often largely explained by overinvestment therein. If a field of investment gives promise of permanent high earnings, capital, and thereby labor, are diverted to it from other industries which suffer in consequence. The capital stocks of the flourishing industries are freely bought, often on credit, and much speculation usually attends the price movements of these shares. If later the expected dividends fail to materialize, the market for the shares also fails and their value falls precipitately. In new countries like the United States, where opportunities seem unlimited and where enterprise has free play, industrial crises are more frequent and severe than in old conservative countries.

Professor T. N. Carver traces this cause of overproduction still further back. He states a general law to the effect that:

A slight fluctuation in the value of the product tends to produce a violent fluctuation in the value of the establishment producing it. Stated in still more general terms, the value of producers' goods tends to fluctuate more violently than the value of consumers' goods. This law is capable of still further extension when we consider that producers' goods are themselves produced by other productive agents. . . . The law might therefore be extended so as to read, that the farther removed the producers' goods are from the consumable product, and the more remotely their value is derived from that of some consumable product, the more violent the fluctuations in the value tend to be. This would be the tendency until that stage was reached where the producers' agents were no longer especially connected with one particular line of production, and were not therefore affected merely by changes in price of the one kind of consumable product. . . . Not every rise or fall in the value of products is believed to be permanent. But where the high or low price of a product continues for some time, it invariably leads to a belief that it is likely to continue; and this raises or depresses the price of the productive agent out of proportion to the rise or fall in the price of the product. . . . Since their willingness to invest depends, not upon the value of the gross product of the productive agent, but upon the excess of that gross product over and above the cost of using the agent, - which excess .... fluctuated[s] more violently than the total value, - the instability of the investors' market is therefore not altogether due to psychological changes on their part, but in large degree to the objective causes which affect the value of the things in which they invest.

A slight rise in the price of consumers' goods will so increase the value of the producers' goods which enter into their production as to lead to larger investment in producers' goods. The resulting large market for producers' goods again stimulates the production of such goods and withdraws productive energy from the creation of consumers' goods. This for the time tends to raise the price of consumers' goods still higher, and this again to stimulate further creation of producers' goods. There is no check to this tendency until the new stocks of producers' goods begin to pour upon the market an increased flow of consumers' goods. This tends to produce a fall in their value, which in turn produces a still greater fall in the value of producers' goods; and so the process goes. There seems, therefore, to be a fundamental reason for the periodicity of industrial depression, which can only be removed by such complete knowledge and understanding of the situation as would enable the business world to foresee the tendencies and take measures to overcome them.3

3 Quarterly Journal Of Economics, May 1903, P. 497.