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economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
, a price system is a system through which the valuations of any forms of property (tangible or intangible) are determined. All societies use price systems in the allocation and exchange of resources as a consequence of
scarcity In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
. Even in a barter system with no money, price systems are still utilized in the determination of exchange ratios (relative valuations) between the properties being exchanged. A price system may be either a regulated price system (such as a fixed price system) where prices are administered by an authority, or it may be a free price system (such as a market system) where prices are left to float "freely" as determined by supply and demand without the intervention of an authority. A mixed price system involves a combination of both regulated and free price systems.


History

Price systems have been around as long as there has been economic exchanges. The price system has transformed into the system of global
capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private ...
that is present in the early 21st century. The Soviet Union and other
Communist state A communist state, also known as a Marxist–Leninist state, is a one-party state that is administered and governed by a communist party guided by Marxism–Leninism. Marxism–Leninism was the state ideology of the Soviet Union, the Comint ...
s with a centralized
planned economy A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, ...
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 Thorstein Bunde Veblen (July 30, 1857 – August 3, 1929) was a Norwegian-American economist and sociologist who, during his lifetime, emerged as a well-known critic of capitalism. In his best-known book, ''The Theory of the Leisure Class'' ...
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 Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes the ...
revolution in the United States comparable to that then occurring in Russia (the Soviets had not yet at that time become a state (USSR formed in 1922)). According to Bockman, 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 __NOTOC__ Calculation in kind or calculation in-natura is a way of valuating resources and a system of accounting that uses disaggregated physical magnitudes as opposed to a common unit of calculation. As the basis for a socialist economy, it wa ...
(or valuation based on natural units), 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 Oskar Ryszard Lange (27 July 1904 – 2 October 1965) was a Polish economist and diplomat. He is best known for advocating the use of market pricing tools in socialist systems and providing a model of market socialism. He responded to the econo ...
and
Abba Lerner Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born American-British economist. Biography Born in Novoselytsia, Bessarabia, Russian Empire, Lerner grew up in a Jewish family, which ...
developed a comprehensive model of a socialist economy that utilized a price system and money for the allocation of
capital good The economic concept of a capital good (also called complex product systems (CoPS),H. Rush, "Managing innovation in complex product systems (CoPS)," IEE Colloquium on EPSRC Technology Management Initiative (Engineering & Physical Sciences Researc ...
s. In contrast to a free-market price system, "socialist" prices would be set by a planning board to equal the
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it ...
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.''Revisiting the Socialist Calculation Debate: The role of markets and finance in Hayek's response to Lange's challenge'', by Auerbach, Paul and Sotiropoulos, Dimitris. 2012. Kingston University London, Economics Discussion Paper 2012-6, pp. 1-2: "He readily acceded to the need for efficiency calculations to be made in value terms rather than using purely natural or engineering criteria, but claimed that these values could emerge along lines consistent with neoclassical value theory, without the need for a market in capital goods and without private ownership over the means of production."


Hayek

Austrian School The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian scho ...
economist
Friedrich Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. 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. In "
The Use of Knowledge in Society "The Use of Knowledge in Society" is a scholarly article written by economist Friedrich Hayek, first published in the September 1945 issue of '' The American Economic Review''. Written (along with ''The Meaning of Competition'') as a rebuttal to ...
" (1945), Hayek wrote, "The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a
division of labor The division of labour is the separation of the tasks in any economic system or organisation so that participants may specialise (specialisation). Individuals, organizations, and nations are endowed with, or acquire specialised capabilities, and ...
but also a coordinated 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."


See also

* Free price system * Regulated market *
Planned economy A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, ...
* Catallactics * Economic calculation debate *
Economic history Economic history is the academic learning of economies or economic events of the past. Research is conducted using a combination of historical methods, statistical methods and the application of economic theory to historical situations and i ...
*
History of economic thought History (derived ) is the systematic study and the documentation of the human activity. The time period of event before the invention of writing systems is considered prehistory. "History" is an umbrella term comprising past events as well ...
*
Lange model The Lange model (or Lange–Lerner theorem) is a neoclassical economic model for a hypothetical socialist economy based on public ownership of the means of production and a trial-and-error approach to determining output targets and achieving ec ...
*
Market economy A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ...
*
Price mechanism In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services, principally by the price elasticity of demand. A price mechanism affects both buyer and seller who n ...


References

{{reflist History of money Economic systems Monetary economics Capitalism Market socialism