There are, according to standard capitalist economics textbooks, three key functions of the price mechanism: informing, incentivising, and rationing.
So, prices firstly collect and make available information about costs and utilities, secondly they ensure that producers have an incentive to make the right amount, and thirdly they ensure that scarce resources go only to those with sufficient desire/ability to buy them.
What might a communist say about this?
EDIT: In the interests of clarity – my goal in this post is twofold. Firstly, it is a critique of society as it now exists. This society is capitalist (dominated by a class who control the means of production), market-based, but not free-market based in the fullest sense (that dominant class has both economic and also political power, which it wields extensively, often distorting markets). Other societies, such as the USSR, might be called (loosely) non-market capitalist: markets were not central to the economy, but a class of capital-controllers were in power.
Secondly, it is a contribution to debates within the libertarian left. Some anarchist socialists support a large role for markets and pricing. Others, such as myself, are communists in the sense of generally supporting conscious collective planning over market-based coordination. In critiquing the claimed advantages of the price mechanism I am thus offering a comradely argument from one anticapitalist strand to another.
Not every point here will apply equally to both of these goals.
Let’s start with the informational function. By looking at the price of something, and how it changes, you can learn about the balance between the costs of producing it and the utility that people place on consuming it. But how well? The first thing to note is how limited it is a measure – most obviously it doesn’t include any of what are called ‘externalities’. If the production of some fridge costs £5 in materials and £50 in atmospheric degradation, only the £5 is registered, because other people pay the £50.
But also, knowing how much something costs to produce now, doesn’t tell us whether we’ll run out of the key inputs in 5 years. Moreover, in conditions of imperfect competition (aka. the real world) prices give us an inextricable mixture of ‘how much it costs to produce’ and ‘how much we can get people to pay’.
And we have no idea why people are buying the product – how much of people’s preference has been created by advertising, and how much by how the product actually tastes? Are they buying it based on expectations about future changes in price, or to actually use?
And most of all, prices don’t distinguish between a rich buyer who has taken a fancy to X and a poor buyer who desperately needs it. That is, all demand information is severely distorted according to the prior distribution of wealth. So without knowing who bought your product, you don’t really learn much about how desired it is.
This is why even now, in our market-based economy, a huge amount of time and effort is spent on gathering the kind of information supposed to be provided by prices. This is a particular application of the argument: if planning is so inferior to markets, why are markets dominated by companies, which are themselves planned?
So the price mechanism is a single very partial source of information, which gives useful information only in conjunction with other sources. So, since economies have worked without many of the info sources currently available, why should they also not work without prices? Is there something specifically important about prices?
The typical answer is that prices have a very great ‘reach’ – they can suck in information from a huge number of individual choices and bring it together, i.e. they don’t depend on the information possessed by any particular agent (a government, a company executive) but on information possessed by every agent.
But that just begs the question – assuming that no other information-processing structure can access the information held by myriad agents. And the obvious answer is: to ensure that information from everyone is processed, put everyone in charge of managing the economy, through federated workers councils. More democracy = more ‘reach’.
The price mechanism is merely the best alternative to economic democracy, the transmutation of individual participation into the mechanical numbers of supply and demand, the separation of each agent from each other agent so that instead of people talking, money talks. Because of course, economic democracy means people organising themselves, and the end of rule by a minority class. Prices are safer.
So once the secrecy that accompanies mutual hostility (in both business and politics) is replaced by publicity and information-sharing, communism has not just as much information as a market economy, but more.
Secondly, then, what about incentivising producers? Well just as prices give a hopelessly skewed measure of what people want, they (or rather, the profit motive) will incentivise people to pursue a hopelessly skewed version of ‘efficiency’ – indeed, will incentivise them to gouge and cheat everyone they can, incentivise them to manipulate the political system against anyone who threatens profits, incentivise them to pander to wealthy 1st world consumers and neglect poor 3rd world consumers.
Moreover, those incentives apply only to ‘the economic agent’ – and where, as is often the case, that agent is a company, the incentivies of the actual people controlling that company will be even more perverse.
So, can those incentives be replaced?
Well, there’s a best-case scenario and a worst-case. The best case is that a cluster of incentives such as personal fulfillment, self-regard, altruism, group-egoism, lust for popularity, fear of contempt, will be strong enough, in most cases, to generate an open-ended incentive to ‘benefit the economy’ by whatever means are judged most suitable. This of course would have the by-product of reducing anti-social behaviour, whether that’s tax evasion, speculation, or drunk driving.
The worst-case scenario is that such open-ended incentives can’t take over all the slack, that people really do desire only ‘self-interest’ in some crude sense (power, comfort, something). All you have to do then is to work out more precisely what it is that pushes these buttons (a task for psychologists) and then offer it in small doses in the right structure.
Of course such a structure will need to be devised – but it already needs to be devised, to make companies work, to make every other organisation work. We need incentives, for example, to work so as to avoid groupthink, the tendency for rational individuals to be collectively irrational. We are so far from having an adequate psychology and organisational theory to deal with this issue that it’s not even funny.
And we can certainly provide people with differential material rewards without relying on market pricing. Just as workers councils can process the same widely-dispersed information as a market, they can assign values to different roles and types of work, based on a rational selection of factors (difficulty or unpleasantness of work, externalities, etc.) rather than the random subset that show up from the blinkered profit-directed outlook.
Thirdly, the price mechanism rations. And here, the critique is quite simple. Prices ration scarce goods according to a mixture of two factors – wealth and desire. Rationing by desire is entirely appropriate (if there’s only one, and I want it more than you do, I should get it) while rationing by wealth is disgustingly unfair.
In consequence, prices are a good rationing mechanism where the differences between the wealth of different individuals are non-existent or very small. That would probably imply (perhaps not necessarily) that the currency being used should be impermanent – you can’t save it up, you have a certain amount per week, if you don’t spend it it vanishes (a more gradual version of vanishing would be a sort of negative interest rate).
This, of course, is in the context of a currency exchanged only for consumer goods, not invested as capital for profit (sometimes called labour vouchers or labour notes). This in turn implies that when you pay for something, what you pay doesn’t go to the person working in the shop, it just goes back to the issuing collective.
So the possibly useful rationing function of prices requires taking them out of a market economy.
In conclusion, communism (democratic control of the economy by directly-democratic assemblies of various sizes) can reproduce all the supposed advantages of the price mechanism. I haven’t talked here so much about the distinctive harms of the price mechanism and of markets, because those are more often pointed out, but they’re certainly real.