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In economics, a price system is any economic system that affects its distribution of goods and services with prices and employing any form of money. Except for possible remote and primitive communities, all modern societies use price systems to allocate resources. However, price systems are not used exclusively for all resource allocation decisions.
Fixed price versus free price systems
A price system may be either a fixed price system where prices are set by the government or it may be a free price system where prices are left to float freely as determined by unregulated supply and demand. Or it may be a combination of both with a mixed price system.
The institutional economist Thorstein Veblen wrote a tract which was seminal in 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 Soviets had not yet at that time become a state (USSR formed in 1922)).
The original conception of socialism involved the substitution of money as a unit of calculation, and thus monetary prices as a whole, with calculation in kind, with business and financial decisions replaced by engineering and technical criteria for managing the economy.
From its beginnings, 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 costs and the potential making of a profit in a price system.
Friedrich A. 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 (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 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
- http://www.britannica.com/EBchecked/topic/475822/price-system Retrieved June-10-2009
- Harbinger Edition, 1963. LCCCN 63-19639. First Published as a series of essays in The Dial (1919) then as a book in 1921.
- Full Text (HTML)
- Bockman, Johanna (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. p. 20. ISBN 978-0-8047-7566-3. "According to nineteenth-century socialist views, socialism would function without capitalist economic categories - such as money, prices, interest, profits and rent - and thus would function according to laws other than those described by current economic science. While some socialists recognized the need for money and prices at least during the transition from capitalism to socialism, socialists more commonly believed that the socialist economy would soon administratively mobilize the economy in physical units without the use of prices or money."
- I Am The Price System R. B. Langan Great lakes Technocrat April 1944, # 66.
- Skarbek, David (March 2009), "F. A. Hayek's Influence on Nobel Prize Winners", Review of Austrian Economics 22 (1)
- http://webcache.googleusercontent.com/search?q=cache:blv3cDigeGcJ:www.econlib.org/library/Essays/hykKnw1.html+origin+of+the+political+price+system&cd=5&hl=en&ct=clnk&gl=us Editor/Trans.First Pub. Date Sep. 1945 Publisher/Edition American Economic Review. XXXV, No. 4. pp. 519-30. American Economic Association Author Hayek, Friedrich A. Retrieved Oct-8-09