by Gary North

The economist rarely uses the words “glut” and “shortage” without adding: at some price. Other scholars are not equally wise. A free market theory of pricing rests on the supposition that gluts and shortages are temporary phenomena. Prices adjust so as to clear a market. If this does not take place, the free market economist goes looking for evidence of state intervention. Consider the problem of excess inventory. It is better to get something for unused and unwanted inventory than to pay for storage. So, selling prices adjust downward. This eventually eliminates the glut. The unpleasant experience also warns the producer not to do this again.

Why does a glut exist? Because of an error in prior forecasting. Suppliers believed that there would be buyers at a specific price. It turned out that there was an insufficient number of buyers at that expected price.

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