Analysis and Criticisms of the Price System

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A price system is a mechanism of allocating goods and services through the rise or fall of prices caused by interplay of supply and demand forces.

A price system is a mechanism of allocating goods and services through the rise or fall of prices caused by interplay of supply and demand forces. One favorable argument for the price system is its efficiency in distributing goods and services. On the part of the producers, they tend to produce those goods which give them maximum profits. On the other hand, consumers are inclined to purchase those goods which provide them maximum satisfaction. Such tendencies of both producers and consumers are natural and rational.

In the process of free competition, the best methods of production and marketing are developed and used in order to increase output and reduce unit cost of production. Thus, the goal of profit maximization becomes attainable. And at the same time, the welfare of the consumers is enhanced because they are the beneficiaries of quality goods at low prices. This is the "invisible hand" which Adam Smith claimed to promote self-interests of individuals as well as those of the whole society. Smith said:

" When a man directs industry so that its product will be of the greatest possible value, he intends only his own gain, and he is in this as in many other cases, led by an invisible hand to promote an end which in no part of his intention. . . By pursuin his own interest he frequently promotes that of society more effectually than when he really intends to promote it."

Another argument in favor of the price system is the presence of personal freedom. Producers are free to produce any goods and services to satisfy their own economic interests as long as these do not conflict with legal and moral traditions. Other personal freedoms include the free choice of workers or employees. Likewise, employees are free to choose their employers. On the part of buyers, they are free to purchase any goods and services that give them the highest satisfaction. In short, various groups in society pursue their respective individual interests under an atmosphere of free competition and freedom. The government does not interfere in the operations of the price system.

Criticisms of the Price System

Free competition does not really exist long enouhg. Self-interests of businessmen force them to drive away their rivals through cutthroat competition. Another strategy is to merge their companies for market advantage. The small ones find it difficult to compete with the big ones. In the process of competition, it is the big companies that become the price leaders - and no longer the free interplay of demand and supply. Thus, the classical concept of free competition has departed from reality.

Another case against the price system is the unfair distribution of goods and services. In a society where there is unjust distribution of wealth and income, only the very few rich can have a decent life under the price system. Goods and services are allocated on the basis of the ability and willingness of individuals. Obviously, the millions who are poor cannot even buy their basic needs. In not a few instances, some doctors have refused to treat persons in very serious conditions. The only reason is that they have no money. About 40,000 children die every day from hunger and malnutrition. Indeed, the dogs of the rich are far luckier.

Moreover, social goods like anti-pollution, rural electrification, irrigation, or highways cannot be allocated efficiently through the price system. Many investors have been reluctant to put up such projects. Usually, these require huge financing, and yet the returns of investment take a long time and profits may not be attractive. Hence, only the government is willing to undertake such social projects. Aside from their viability problem, it is difficult to price social goods. For instance, in a anti-pollution project for the whole community, it would be inefficient to exclude those who do not pay from getting the benefits of the project. It is entirely different in the case of private goods like cars, rice or clothing. Only those who have the money, and they are willing to pay such goods get them.