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Monday, February 17, 2014

The Role of the Price System

It has been shown that the essence of social cooperation is specialization and the division of both labor and knowledge. This fact has two significant implications for the purposes of this study. The first is that social cooperation results in the production of such a wide range of intermediate and final products that calculations in kind will not allocate scarce resources effectively. A common denominator is indispensable. The second is that the concomitance of decentralized decision-making and social cooperation requires a means of coordinating individual plans that are based upon imperfect knowledge and information. These two requirements are fulfilled simultaneously through the price system of the market economy. Detailed treatment of the workings of the price system will be postponed until later. At this point it will be sufficient to discuss the price system in general terms in order to demonstrate its dual function as a means of economic calculation and as a means of coordinative communication. Actually, as will be shown, these two functions are really of a piece; that is, they relate the same problem of resource allocation under an arrangement of social cooperation and a system of market prices.

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