Lesson plan
Overcapitalisation
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. This is especially the case when capital goods 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).
Article summary
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. This is especially the case when capital goods 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).
Key claims
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Discussion questions
- Summarise the article in your own words. Which single claim would you verify first, and why?
- Which claim in this article is most likely to be revised as the sources update? How would you check its current status?
- If two sources disagreed about one of these facts, what would you need in order to trust one over the other?
Bibliography
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Key claims and bibliography are generated from the same tracked claims and sources as the article page.