The simplest conception of production is "making stuff". But of course, one can't make something out of nothing. All one can do is transform things, hopefully into a more useful form.
Productive capacity, therefore, is the ability to transform goods from one form into another. In the modern world, this often means highly specialized machinery for transforming particular kinds of "raw materials" into particular kinds of "finished products". The machinery is very effective for this particular purpose, but may be virtually useless for anything else. It is tempting to think of underutilized capacity as wasted resources, and in some cases this may be true. But in other cases it is very much the contrary. "Overproduction" is a misleading word; producing "goods" that no one wants is not merely wasted effort, it is also turning usable raw materials into trash.
The same fundamental error behind thinking that "production" is always good and that unused productive capacity is wasted is behind the idea of "economic stimulus", at least in its most stupid form. Keynes really did suggest that it might be useful for the economy to "employ" men in digging holes to bury jars of money and then digging them up again. It seems obvious that the dubious benefits of transferring money to these "workers" could just as easily be achieved by keeping them on the dole. Bullshit statistics would indicate that people would be transferred from the "unemployed" to the "employed" category, but this transfer would not be in any practical sense true. It is true that keeping them occupied would leave them less opportunity to create trouble, but it would also leave them less opportunity to get anything actually useful done. On balance, for most people, this should be a bad trade.
