Price system

Price system

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In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, a price system is any economic system that affects its distribution of goods and services with prices and employing any form of money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

. 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
Regulated market
A regulated market or controlled market, is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged and/or to whom they are distributed...

 where prices are set by a dictatorial government or it may be a free price system
Free price system
A free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...

 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.

History


Fundamentally, price systems have been around as long as there has been trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...

 or money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

.

The institutional economist Thorstein Veblen
Thorstein Veblen
Thorstein Bunde Veblen, born Torsten Bunde Veblen was an American economist and sociologist, and a leader of the so-called institutional economics movement...

 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)).

From its beginnings, the price system has evolved into the system of global capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

 that is present in the early 21st century. The Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

 and other communist nations with a centralized planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...

 were 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
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 economist Friedrich A. Hayek argued that a free price system allowed economic coordination via the price signal
Price signal
A price signal is a message sent to consumers and producers in the form of a price charged for a commodity; this is seen as indicating a signal for producers to increase supplies and/or consumers to reduce demand.- Free price system :...

s that changing prices sent, which is regarded as one of his most significant and influential contributions to economics.

From "The Use of Knowledge in Society
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 as a rebuttal to fellow economist Oskar R...

"...'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 co√∂rdinated 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


  • Economic history
    Economic history
    Economic history is the study of economies or economic phenomena in the past. Analysis in economic history is undertaken using a combination of historical methods, statistical methods and by applying economic theory to historical situations and institutions...

  • Free price system
    Free price system
    A free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...

  • History of economic thought
    History of economic thought
    The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...

  • Catallactics
    Catallactics
    Catallactics is the praxeological theory of the way the free market system reaches exchange ratios and prices.It aims to analyse all actions based on monetary calculation and trace the formation of prices back to the point where an agent makes his or her choices. It explains prices as they are and...

  • Money
    Money
    Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

  • Price mechanism