Organizing Production - Role of Prices
If all businesses are not-for-profit, if the prices of labor and raw materials are controlled, and if loans are abundant, inflation would be impossible. The total dollar value of what businesses produce would be equal to the total dollar value of the labor and raw materials they use. The function of money and prices is to link the purchase of a good or service to the labor and raw materials that are used to produce it. If you hand over enough money to pay for the labor and raw materials used to produce what you buy, the money, perhaps after being passed from business to business several times, eventually ends up in the hands of the workers and whoever has control of the raw materials being used.
In this system, prices can’t respond to a mismatch between supply and demand for goods and services produced by the economy. Prices are tied to the cost of the labor and raw materials. Supply and demand need to be matched in another way. Since prices cover the cost of production, all that is needed is a good method for businesses to decide to expand or contract.
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