Karl Marx and Fredrick Engels say in their famous work ‘The Communist Manifesto’:

“It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production.”

So according to Marx and Engels, capitalist economies suffer from an inherent trait of periodic depressions. They go on to explain further:

“Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property”

According to them, the root cause of a depression is too much prosperity. For better understanding of this subject, I would also like to cite the Marxian crises theory, which revolves around the concept of the falling tendency of the profits in capitalist economies. Marxist writers often use this in various ways to put forward their theory of Imperialism. However, I would restrain myself from explaining that here.

The basic premise of the overproduction doctrine is that a capitalist economy, as it gets more and more efficient with labor-saving machines introduced for the production of goods, moves towards a state of increased efficiency which leads to overproduction and that overproduction causes losses. Therefore the core reason behind the losses are overproduction and increased efficiency. Because of overproduction, there are no more profits in the economy, and hence the economy goes into a deep depression. So, it is the lack of profits which causes depression.

In order to debunk this Marxist proposition, we need to understand what causes profits to exist in the market. I will explain how profits never cease to exist in a non-stationary economy where consumers’ preferences and production conditions change so often. I will start of by quoting Austrian economist Ludwig Von Mises from his famous work ‘Human Action’:

“Profit is not related to or dependent on the amount of capital employed by the entrepreneur. Capital does not “beget” profit. Profit and loss are entirely determined by the success or failure of the entrepreneur to adjust production to the demand of the consumers. There is nothing “normal” in profits and there can never be an “equilibrium” with regard to them. Profit and loss are, on the contrary, always a phenomenon of a deviation from “normalcy,” of changes unforeseen by the majority, and of a “disequilibrium.”

What Mises says here is that the origin of profits (and losses) is due to the “disequilibrium” phenomenon. So how does this “disequilibrium” phenomenon actually express itself like in a real economy?

Suppose that a market is dumped with millions of tonnes of potatoes much more than the consumer’s desire to purchase. This causes the market gets cleared only when the prices decrease to a large extent. This might lead to immense losses to the farmers, but can these losses caused by the overproduction in one sector of the economy cause a recession? The answer is no.

Lets go further and ask, does this overproduction in any way lower the average rate of profit in the economy. Again no, it doesn’t. The partial overproduction in a particular sector of the economy leads to partial underproduction in some other sector of the economy. Like in our example, the overproduction of potatoes means that the equipments and labor that were used in growing potatoes could have been used better in some other sector of the economy.

How would this show up in the price levels? The prices of the commodities that are underproduced(because of employment of resources in overproduction of potatoes) will rise proportionately and lead to higher profits. The losses that are made in the sector where overproduction causes havoc is compensated by profits in the sectors where commodities are underproduced. In simple words potato farmers will be making huge losses and the wheat, rice, barley farmers will be making huge profits.

This is what Mises calls a “disequilibrium” phenomenon. The market always moves in a direction to minimize this disequilibrium, but almost never reaches equilibrium because of various factors like the change in consumers’ preferences, natural causes etc.

Having explained the basic misconception, I would also like to deal with such speculations which contemplate the possibility of an overproduction in every sector of the economy. People argue overproduction everywhere could lead to losses everywhere completely wiping out profits from the economy. But there is no need to worry, the market has answers again. An overall overproduction everywhere in the economy still doesn’t set the “disequilibrium” that exists between the preferred quantities of various goods into equilibrium. Here one needs to understand that people’s needs are humongous and can never be satisfied. The market can only try to provide the proportionate quantities of various commodities according to the consumers’ preferences. Profits (and losses) are nothing but the signals that guide producers to adopt to the consumers’ preferences, and they never would cease to exist.

Being a Socialist up till a few months ago, I spent countless hours figuring a way out to enable a central planner to somehow manage to order the exact amount of production required to satisfy the maximum demand for the maximum people, and I did reach onto some complicated unrealistic solutions, but nothing beats the simplicity and realism of the Free Markets.

Venezuelan President Hugo Chavez who rose to the chair in 1999, and since then been holding power despite the Washington backed coup attempt of 2002, is certainly in news now than ever before. Chavez has always been vocal about his aim of establishing 21st century Socialism in his country. Whatever that means, lets hope the almighty Marxist Praxis does not trust price controls as the economic tool towards that dream.

Venezuela is currently suffering from severe shortages in the supply of various goods, in particular rice. The nation reminds us of the erstwhile USSR in this aspect, as it does in many other perspectives. Only that direct physical force against the masses has not been let loose yet. Venezuela has been reeling under the impact of shortages in the supply of various goods since 2003, and now the crisis has hit rice supply as well. Keeping up with propaganda records, Chavez has launched a propaganda tirade against private suppliers. He has accused private suppliers of hoarding supply of rice. There could be a certain element of truth in it, suppliers could indeed be hoarding supplies to a certain extent. But that’s definitely not where the fundamental problem lies. The causal problem of this crisis lies in price-controls which have grown in size ever since 2003.

I will first explain the economic basics of prices, and then lead into the cause of shortages, inflation and hoarding.

What are prices, and what do they say? The price of a product simply shows how much money you should give up to obtain it. Then, what do you prices say? And why do prices of commodities change so often in markets? The answer is, people are willing to give up different quantities of money for the same homogeneous product at different points of time. This might sound vague, so lets get on with an example.

You are given 3 bags of rice. You have a particular preference scale based on your individual liking, and it shows those immediate needs that you would like to satisfy with the three bags of rice. The first immediate need that you fulfill with a bag of rice is to feed yourself. So, the first bag of rice goes to feeding yourself. You decide to use the second bag of rice to make some cakes. The third bag goes to feed your pet dog. This explains your preference scale. Your highest valued purpose is to feed yourself, followed by making some cakes, and finally feeding your dog.

Now imagine, you have only two bags of rice, and you are to decide what among the different uses of rice you are going to sacrifice. Since you have feeding your pet dog the least important of all uses, you decide to let your dog starve. Now suppose your neighbor has some extra bags of rice in his kitchen and he is ready to sell it to you for some money. How much would you be ready pay for that extra bag of rice which you would use now to feed your dog? You would see if the utility (or use) you gain from that extra third bag of rice is more than the utility you attach to the money you pay to your neighbor for that extra bag. Lets assume you would probably pay $2 to get a third rice bag from your neighbor, and you use it to feed your starving dog.

Lets further assume now that you have only one bag of rice. So you would have to give up on both feeding your dog as well as making tasty cakes. Now again, your neighbor has an extra bag of rice. How much would you be ready to pay for that second bag of rice? The same kind of reasoning as used earlier applies here as well, you would buy the second bag of rice only when the utility you achieve by buying it is greater than the utility you attach to its price. Perhaps you’d be ready to pay $5 to get the second rice bag from your neighbor, to make some cakes.

Now lets go further and assume that you have no rice bags with you. And again, your neighbor has an extra bag to sell. This time too you’d buy the bag of rice only when the utility you gain from the rice bag you buy is greater than the utility that you attach with the money that you spend to buy it. Now, you would be ready to pay almost anything to buy that bag of rice from your neighbor, and that’s because the utility you attach with the bag of rice is your life itself. You would have to starve without that bag of rice.

We have now seen three instances where the price offered to buy an extra bag of rice varies, quite drastically in fact. Economists explain this as the “law of diminishing marginal utility”. Marginal utility of a commodity is the utility that you gain (or lose at times) from an additional unit of the commodity.

This explains why prices change at different moments in the market. When there is excess supply of a commodity in the market, people would have the liberty to use those commodities for less valuable goals, like how you used the third bag to feed your pet dog. So they are willing to pay only low prices. On the other hand, when there is deficit in the supply of a commodity, people are strained to obtain sufficient goods. They are forced to cut down on their frivolous expenses, like your preference to feed your pet dog. The price of the commodity in this case is high. This explains how prices are set in a market.

What the market does is it rations the goods that are available to the most immediate needs by raising prices when supplies are constrained. So, high prices enables everybody to satisfy their most intense immediate demands, while restricting them from using further units of the commodity towards less intense needs.

So when supplies are inadequate, the price of the commodity increases to make sure that the commodity is diverted towards the most urgent needs rather than being wasted in satisfying less intense needs. This means that suppliers would gain lots of profits.

The suppliers then invest this extra revenue to expand their production in order to gain more profits. Note, monopolies might restrain from producing more to maintain current profits, but they won’t be able to do it for long, until competing firms sensing profits enter the business to produce more of the commodity. This increase in supply would cause prices to go plunge. So high prices leading to high profits are market signals to encourage increased production. And this is how the free market deals with the economic problem.

Governments on the other hand have a very different way of dealing with high prices due to insufficient production of a commodity. They deal with the economic problem with price ceilings. The Government sets arbitrary prices to commodities whose prices are “too high”, and it thinks the problem is solved. But that’s exactly where the problem starts. The lower prices leaves no profits to be gained or even sends firms right into losses, and that discourages firms from increasing production. Witnessing lower prices, consumers demand more of the commodity than they would at the genuine free market price level. That is like, if a sack of rice were available for just 50 cents you’d probably buy hell a lot of rice bags and waste them for weird reasons. We have in hand a very critical situation, production of the commodity plunges due to decreasing profits or outright losses, but at the same time people are demanding more of the commodity. This leads to shortages.

This is what is being experienced in Venezuela because of price controls imposed by Chavez’s government.

The other fact to remember is that price controls which are imposed initially on a a few commodities are spread to other commodities as well. In fact governments are forced to spread the price control regime because of their initial mistake of controlling prices of a few commodities. Why does this happen? When the price of a commodity is arbitrarily set low, people are encouraged to demand more of the commodity but since there is not sufficient supply available, goods are sold to people on a first come first serve basis. This could have a very important side-effect. The supplies do not get diverted to the most intense needs because those customers whose demand for the product is extremely important is prohibited from bidding higher prices for the commodity.

So when such needs are not satisfied, consumers search for alternative goods to buy. People who failed to secure rice because of the shortages would try to buy wheat which is not controlled by the government’s price control regime. As more people who failed to get rice start bidding for wheat, the price of wheat skyrockets. And now the government steps in again to impose price controls on wheat as well. And thus, the price control regime keeps spreading and turns into a universal price control system, with no kind of free market pricing to guide production and consumption.

Now coming to the problem of hoarding. First reason why some people hoard supplies is because they are unsure about the availability of future supplies due to chronic shortages. The second type of hoarding is carried out by speculators who expect a higher price for the product in the future when the price control regime collapses, or they might sell the supplies in the black market at prices higher than the government set arbitrary ones. It must be realized that the problem of hoarding is definitely not the cause of the shortage, it is a minor side effect of the real culprit–price controls.

The Venezuelan economy is in the mud, and the price control regime is spreading all over the economy. The system is bound to collapse and cause serious problems to the Chavez government. It should also be observed if Chavez does a Stalin here, to use force against his own people. Reports emanating from Caracas already show the seizure of rice processing units, and also the spread of the price control regime towards other goods like meat, sugar ad other goods. Just another case of price controls bringing disaster.

Venezuela will not be able to reach Socialism because Socialism is an impossible theory, it demonizes the same tools by which pro-Free Market economies achieve efficiency in distribution of resources and satisfies the demand of the market. In the name of achieving more Socialism Hugo Chavez keeps on grabbing more and more power, and this is causing Venezuelan people to lose their Liberties.

“Paradox of Savings” has been one of the major offerings of Keynesian “economics” to economic policy-making. Not many other policies have contributed a solid assault on savings as a genuine way to economic growth. I will now try to explain the gist of Keynes’ (alleged) paradox and follow it up with a short rebuttal. This article will be longer than what I usually write, but bear with me.

Keynesian economics basically considers two major economic aggregates while checking the health of an economy: the income-output scale, and the savings-investment scale of the economy. The total income must necessarily equal total output, but savings need not always equal investments unless the economy is in a equilibrium. When people decide to save too much for any reason, Keynes argues, the economy would dive into a recession because businesses would have unsold inventories (which in turn induces them to cut jobs and halt expansion). The government could actually play an important role in this situation by encouraging people to spend, or even take the initiative itself and start disposing huge public public spending–all this to get rid off the lack of demand and make businesses sell their products.

This reasoning forms the policy advise of journalists and economists who advise government spending to remedy recessions. Some even go further and say while savings of an individual could mean that she has an essential safety buffer to sustain herself through a gloomy future, on the larger scale however, as in the case of an entire economy savings have unfavorable effects since the economy is spending based. This was called by Keynes as the “Paradox of thrift” or the “Paradox
of Savings”.

Keynes’ proposition could be right if we are to consider ourselves to live in an extremely simple economy, where consumers like us can get our products ready in a very short span of time. Like for example, how we could order water from the stream and the workers would get it for us in no time at all. In such a simple economy where ends are met in a very short span of time with very little complications involved in the process Keynes’ proposition that spending keeps our economies running could work. (It would pay here to notice that we have not accounted capital goods in this very simple example. This will turn out to be the key point when we enter into a complex economy.)

There is fundamentally everything wrong with Keynes’ proposition when we place ourselves in a complex economy. Keynes’ fallacious argument roots from the basic lack of understanding of the `structure of production’ which is very complex in a division-of-labor society. Any product we use in today’s extremely complex economy is provided after complex levels of processes which happen at different points of time, and at different pace. This is called the economy’s `inter-temporal
structure of production’. So there is essentially a time lag involved in the production process. This basic understanding can travel us long forward in understanding the economy and refuting arguments of economists like Keynes.

Now we consider ourselves to be in a complex economy, and so, we have extensive division of labor using capital goods to produce products which serve as inputs to subsequent levels of production before arriving at the consumer market as finished consumer goods. The introduction of capital goods into our economy also brings to our purview the importance of savings. The most important function of savings is that they render capital construction, as the following example will explain.

Lets consider a fisherman who is accustomed to catching fishes with bare hands decides to have a net for himself to boost production. He could fish 10 fishes working 8 hours a day with his bare hands. When he decides to have a net to catch fishes he dedicates 3 hours of his normal work schedule towards building a fish net, thus lowering his time spent on catching fishes and thereby essentially cutting down on his present yield of fishes to say 6. What the fisherman actually
does, from an economic point of view, is to annul 4 fishes from his present consumption to save the time equivalent of catching 4 fishes to concentrate on building a net which could boost his future catch of fishes. In simple words, the fisherman forgoes present consumption to fund his future. He simply saves.

Anybody who hears this example should now be able to understand the importance of savings to genuine growth of any economy. But it is this very foundational principle which most economists have done away with.

Now getting back to the issue in hand, excessive savings can actually in no way, as Keynes fears, affect the economy. When people decide to save more of their income, that is when people decide to cut down on their present consumption, they effectively provide a signal (through low interest rates) that they do it to fund their hefty future needs (perhaps a boost in production). This requires investment in capital equipments construction. The entrepreneurs in the economy are those who receive this signal (again the low interest rates). Sensing the availability of loans at low rates entrepreneurs would decide to invest in capital equipments construction projects which essentially require a lot of time lag before the final product reaches the consumer.

The reader must now be able to guess what would happen if people don’t want to save. It essentially means that people don’t wish to cut down their present consumption to fund their hefty future needs. So that would mean higher interest rates, and discourage entrepreneurs to take up loans for capital equipments construction. The economy would essentially, however, keep producing consumer goods with the present amount of capital equipments available at its’ disposal, without any boost in production.

What we see here essentially, and that’s exactly what is pertinent to the issue in hand, is that high savings by people only lengthens the `inter-temporal structure of production’. It would not lead the economy into recession as Keynes fears. It is not that people never spend, only that they decide to save now to spend it at a future date. The bonus consumers get is a boosted future production because of investment in capital goods.

The next question that arises is how then does this model explain recessions that happen so often in modern economies? I will deal with it in the next article I write. Till then people could try to guess it from the alleged mismatch between savings and investments in the economy.

The Machines

A very famous economic fallacy that has won a huge number of supporters has been the belief that machines cause unemployment. Such preposterous beliefs which have neither rational justification, nor any empirical validity have been the roots of growth of primitive ideologies, which have called for mankind’s return to it’s “glorious” past.

For centuries men have believed that machines, or technological changes in general, destroy jobs on a large scale, and that they’d have to stay home jobless the next day on. It is true that technological changes destroy particular jobs, at least partially if not completely, but it should also be understood that these technological changes create new avenues of growth which will create new jobs.

The improvement of production techniques and the resultant mass displacement of jobs from agriculture a century ago, might seem like an unacceptable act of cruelty against the masses. But it’s quite the exact opposite, that is, the technological changes have benefited the masses.

More than half of the labor force of North America and Europe was employed in production of food stuffs during the early twentieth century. But today, less than 3 percent of the labor force is required to feed a population that has grown many times more. In fact, in the last century, the population of North America has increased four times, and Europe’s population has roughly doubled, while the percentage labor force required to feed the increased population has shrunk by about 15 times.

It makes sense to track the fate of those displaced workers. The technological change has in fact helped mankind, by releasing labor from agriculture to be used for production in other sectors of the economy. The advantage of technological changes is that it increases the marginal productivity of labor, that is, the quantity of goods a laborer can produce has been increased by the use of machines. This is the only way the living standards of the masses could be improved.

The dislike for technological change could be seen pronounced in the writings of economists of the modern era as well. Their concern is about the Information Technology revolution that has made economies knowledge intensive, and the disparity in wages among the members of the labor force.

But this could be no reason to stop technological growth, since even though there may be differences in relative wages, which in fact is an unavoidable character of economic competition, the real wages of laborers increases due to increase in the total wealth of the particular society. That is the real purchasing power of a laborer’s wage money increases as wealth of the society increases.

This sort of faulty reasoning of economists is the product of undue emphasis on the immediate effects of technological changes, with no heed to their tremendous beneficial effects in the long run.

As Austrian economist Henry Hazlitt says:

“Economics is a science of recognizing secondary consequences. It is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run”.

Outsourcing Companies

US President Barack Obama has announced his intent at withdrawing tax-cuts to American companies that outsource work to foreign countries. This announcement comes in as one of the many ingredients, of a slew of populist measures that Obama has been churning out since assuming office last month. Policy-makers claim that heaping the tax burden on American companies that outsource jobs to foreign countries could save American jobs.

This sort of an economic policy could be disastrous to general efficiency of the economy and slacken creation of new jobs. One must take care of the fact that work is always there to be performed in any economy, since human needs are without boundaries. We essentially live in a world of scarcity, and any level of increase in the productivity of labor will never suffice to satisfy the immeasurable needs of the society. So the basic point is, labor is scarce, and will always remain the same.

But what are those statistical figures we get as unemployment numbers in government reports? Nobody could deny unemployment does exist. But such unemployment in today’s world is usually a result of government policies which adversely affect job prospects, and in turn efficiency of the economy in the long run. In a truly free market, the only two kinds of unemployment that could exist are frictional unemployment (that is, the temporary unemployment during the period when people search for new jobs) and voluntary unemployment (where people make a voluntary choice not to work).

Talking about outsourcing of jobs and it’s impact on domestic unemployment, it should serve us better first to imprint in our mind that labor is scarce, as already mentioned. The next important step is to understand and trace the consequences of discouraging outsourcing of jobs to foreign countries.

There are three important points to be considered here:
1) The basic reason why companies from developed countries outsource jobs is the availability of cheap labor from developing countries. So this means the products that these companies produce to serve mainly the American consumers become cheaper considerably. This implies that the real purchasing power of an American dollar should increase.

2) The funds that American companies save by employing cheaper foreign labor while compared with high salaries previously paid towards Americans, could be used as investment in other sectors of the economy, or to increase the size of existing industries which would create new jobs for Americans. In the absence of the outsourcing option, the American companies would be forced to spend comparatively more in the already existing industries (that is when compared with costs incurred when foreign labor could be employed), without having a chance to invest in new industries (or expand existing industries) which could create new jobs.

3) The availability of cheap labor also means American companies become more competitive and efficient than their counterparts in other countries. It also makes Americans compete and become more efficient. More than anything it makes specialization of jobs, which is the reason for the riches of today’s industrial civilization.

The only thing that policy-makers need to understand is that businesses need to be given the complete economic freedom worldwide to create new jobs at home, and increase living standards of Americans. Any short-sighted measure to save current jobs, will definitely halt growth in the long-run.

Editor:This is a guest article written by an ex-socialist I know through Orkut. He went on trying to understand Socialism on a more concrete level(beyond the “from each according to his ability, to each according to his need” rhetoric), and to understand why all the implementations of Socialism failed miserably. His conclusion was, that “Socialism cannot calculate“. In the coming days we will be bringing you more of his articles.

Debates setting the two dominant economic systems of the 20th century viz. socialism and capitalism on opposite poles have always witnessed the acceptance of the superiority of capitalism on account of the better incentives available under it’s basic scheme of things which motivate the individual towards excellence. This induced the depressed to `order’ for the creation of a new `socialist man’ who works for nothing but the goodness of his comrades, and passion he holds for his work. Such moral proponents were the root cause of movements like the Stakhanovite movement in the erstwhile USSR. These things aside, the problems of a Centrally planned socialist economy¹ are immensely larger than mere motivational factors, it lies in the very structure and character of it’s economic institutions.

This was starkly exposed in the `socialist calculation debate’ of the early decades of the 20th century which involved waring minds (of economists) belonging to hostile camps. The capitalist camp was headed by economists from the Austrian School, most notably: Friedrich August von Hayek and Ludwig von Mises; the Socialist camp was represented by Oscar Ryszard Lange and Abba Ptachya Lerner. This article serves the purpose for purporting the essential ideas of Capitalism and the grave shortcomings of Central planning.

The fundamental feature of the Capitalism is the price system, with profit motive and economic competition as it’s inseparable soul. The price system is thus the most ingenious component of the market economy, so invincible that socialist economists of the 19th century trying to apply the labor theory of value to determine the prices of commodities (based on the amount of `socially necessary labor’ required to produce a commodity) accepted their defeat, and adopted the market pricing system, after all the price system is nothing but an expression of the subjective preferences of market players. In simple words, demand and supply forces determine the price of a commodity. Commodities do not have any magical value in themselves.
This was the essential outcome of the marginalist revolution.

However, a group of economists–namely the “market socialists”–persisting under the auspices of Polish economist Oscar Lange refused to bow down (except for their acceptance of the revelations of the marginal revolution), in fact they were immensely excited about prospects of their own system which could allow for central planning of the economy. These economists proposed a hybrid system – adopting the pricing system of the capitalist economy and also the `goodness’ of central planning. They seriously believed they did it.

The “market socialists” proposed the arbitrary fixing of prices of consumer goods and allow supply and demand to match at some given price. They were able to explain their system with temporary success:
if the prices were fixed too high, goods would stay unsold on the racks of stores; and if prices are fixed too low, shortages would result. The planning board would fix the prices on a `trial-and-error’ basis to determine the `clearing-price’ of the market, and the economy will be on it’s feet.

So far so good, or is it? It didn’t occur to them that they created the body of their economic system without a soul–the absence of private ownership of the means of production–until Austrian economist Ludwig Von Mises came up with his seminal work, “Economic Calculation in the Socialist Commonwealth” in 1920. Mises pointed out that without private ownership of the means of production, in other words, without competitive bidding from various private players for the ownership of capital and land, there was no way to rationally ascertain the prices of the various higher-order goods (capital and land).

This further means there is no scope for profit-loss calculation, and there ends any dream of rational allocation of resources under centrally planned socialism. The acquisition and usage of capital
resources in a centrally planned economy are merely `internal transfers’ within a single body since the State is the only owner of capital goods.

Oskar Lange who talked about such a system himself found convenient to copy the prices of a Capitalist system, than to follow his own suggestion, when he was made a member of Polish Central planning commission. As the famous joke goes, two socialist leaders are discussing their plans to bring Communist revolution all over the world. One of them suggests “well we can convert the whole world into Communism, but lets leave one capitalist country as Capitalism. Lets not convert Hong Kong into Socialism”, the other socialist replies, “Well Comrade what are you talking about? We must convert the whole world into Socialism, and get rid of all the Capitalist oppression, why leave Hong Kong”, the other socialist replies “Well we gotta copy the prices from somewhere.”

For those who did not get the above joke, without a Market system, its really impossible for anyone to rationally allocated the resources in a Society. For all you know you can start creating iPods made of gold covering, and use all that gold on the iPod, rather than making its circuit out of it(which makes much more sense, since gold is a better conductor of electricity). By having a price system you will realize that its not worth making an iPod out of pure gold because of high prices of gold, and less market price of iPods, people are not willing to pay for a gold iPod, also gold can be better used for something else.

Profits and losses play a very vital role in the market system. Profits in a sector indicate that the commodity (or service) in question is of use to the consumers (and hence demanded by them);
losses mean the reverse, that is, the commodity (or service) in question is not of much use to the consumers (and hence not demanded). Because of the absence of economic calculation socialism would lead to massive wastage of resources since the planners would be left groping in the dark to know which sector of the economy is in immediate need of a particular higher-order good.

Some mathematical economists have tried to ascertain arbitrary prices to capital goods by analyzing the price of consumer goods that are produced using the capital good. But such indirect measures have shown no scope of accurate determination of the prices of higher order goods.

1. Socialism, Welfare, Braindrain, Reason for Liberty [↩]