In economics, a price system is a component of any economic system that
uses prices expressed in any form of money for the valuation and distribution
of goods and services and the factors of production. Except for possible remote
and primitive communities, all modern societies use price systems to allocate
resources, although price systems are not used exclusively for all resource
allocation decisions. A price system may be either a fixed
price system where prices are administered by a government body, or it
may be a free price system where prices are left to float "freely" as determined
by supply and demand uninhibited by regulations. A mixed price system
involves a combination of both administered and unregulated prices.
History Fundamentally, price systems have been
around as long as there has been trade or money.
The price system has evolved into the system of global capitalism that is
present in the early 21st century. The Soviet Union and other Communist states
with a centralized planned economy maintained controlled price systems.
Whether the ruble or the dollar is used in the economic system, the criterion of
a price system is the use of money as an arbiter and usual final arbiter of
whether a thing is done or not. In other words, few things are done without
consideration for the monetary costs and the potential making of a profit in a
price system. = Debate on socialism=
The American economist Thorstein Veblen wrote a seminal tract on the development
of the term as discussed in this article: The Engineers and the Price
System. Its chapter VI, A Memorandum on a Practicable Soviet of Technicians
discusses the possibility of socialist revolution in the United States
comparable to that then occurring in Russia).
The original conception of socialism involved the substitution of money as a
unit of calculation and monetary prices as a whole with calculation in kind,
with business and financial decisions replaced by engineering and technical
criteria for managing the economy. Fundamentally, this meant that socialism
would operate under different economic dynamics than those of capitalism and
the price system. In the 1930s, the economists Oskar Lange
and Abba Lerner developed a comprehensive model of a socialist
economy that utilized a price system and money for the allocation of capital
goods. In contrast to a free-market price system, "socialist" prices would
be set by a planning board to equal the marginal cost of production to achieve
neoclassical pareto efficiency. Because this model of socialism relied upon
money and administered prices as opposed to non-monetary calculation in physical
magnitudes, it was labelled "market socialism". In effect, Oskar Lange
conceded that calculations in a socialist system would have to be
performed in value terms with a functioning price system rather than
using purely natural or engineering criteria as in the classic concept of
socialism. Hayek on the price system
Austrian School economist Friedrich A. Hayek argued that a free price system
allowed economic coordination via the price signals that changing prices send,
which is regarded as one of his most significant and influential
contributions to economics. From "The Use of Knowledge in
Society"...'The price system is just one of those formations which man has
learned to use after he had stumbled upon it without understanding it.
Through it not only a division of labor but also a coördinated utilization of
resources based on an equally divided knowledge has become possible. The
people who like to deride any suggestion that this may be so usually distort the
argument by insinuating that it asserts that by some miracle just that sort of
system has spontaneously grown up which is best suited to modern civilization.
It is the other way round: man has been able to develop that division of labor
on which our civilization is based because he happened to stumble upon a
method which made it possible. Had he not done so, he might still have
developed some other, altogether different, type of civilization,
something like the "state" of the termite ants, or some other altogether
unimaginable type'...Friedrich A. Hayek See also
References