The meteorologist just like any other natural scientist can easily “hold other things constant” while studying the effects which changes on X may have on Y. It follows that the predictions of the meteorologist would likely be more accurate compared to those of the poor economist. Given that the economist cannot hold other things constant, the most he/she can do is to assume that other things remain constant and this explains why propositions in economics often begin with the phrase “if other things remain equal” (ceteris paribus).

Although the meteorologist is generally more accurate in predicting weather changes than the economist is at predicting what will happen to the economy, it does not follow that the predictions of the economist are that unreliable. The fact that all people are different is not so much of a handicap to the economist or to the social scientist as it may appear at first sight. While the behaviour of any one person may be unpredictable, this is not necessarily true of the whole group. It follows that the economist is capable of making generalizations about economic groups (workers, investors, producers, importers etc) which are quite dependable guides on their expected behaviour. Econometrics may in the near future render predictions in Economics a little bit more reliable although the accuracy gap between the two sciences is likely to remain

The price mechanism in a market economy is what determines what, how and for whom to produce through the interaction of buyers and sellers. The price mechanism is essentially a process by which buyers express what they want to buy and sellers respond by indicating what they are willing to sell. Their combined activities result in the prevailing market price at which the good or service is exchanged.

Consumers determine what will be produced through their spending decisions, or money votes, i.e. consumer sovereignty. Producers will then produce those goods desired, but since they are profit motivated, they will produce only those goods and services that are profitable. They will use the cheapest and most effective combinations of factors of production for maximum profit, and as such determine how the goods are produced. Those consumers, who can pay the price, get to enjoy these goods. In effect, for whom the good is produced is also decided by the market. In this way the price system acts, as it were, like a sophisticated computer, registering people’s preferences for different goods, transmitting these preferences to those responsible for producing the goods, and moving the factors to produce them. Thus the essential feature of the price mechanism or price system is the price signal.

The price system seems to be the best mechanism for allocating resources in many ways.

One advantage is that the price mechanism can run on its own. The fact that its workings are automatic means that there is no need for costly and cumbersome artificial coordination of economic decisions by the government or ruling body, and so massive bureaucratic costs are eliminated.

The aforementioned feature also means that the economy can respond rapidly to changing demand and supply conditions.

The market system is equally very efficient. The whole structure and organization of the market is the most conducive for generating wealth. People are able to work in careers of their own, and can invest in whatever businesses they want. This freedom and the pursuit of self-interest generates economic efficiency.

There is an optimal allocation of resources in that there is economic efficiency. In a highly competitive market situation, there will be both allocative and productive efficiency. This means that the right amount of every commodity is produced and they are produced at the least cost.

The market system is also argued to be the best allocator of resources for society because it allows for private ownership of wealth. This prevents the ruling body from having too much power and in so doing, safeguards the existence of personal liberty and choice. If private ownership of property were limited or controlled, then the ruling body would accumulate wealth and power at the expense of society.

There are however many instances in which the price mechanism has failed to provide the best allocation of resources. When this happens, there is said to be market failure.

One major disadvantage of the price system is that it fails to provide for the poor and the needy because the allocation of resources is based on a consumer’s purchasing power, not need. This results in the production of luxury goods for the rich at the expense of basic necessities of the starving poor. As a result of the inequality of income and wealth, the claims of consumer sovereignty and choice become questionable.

The high level of competition that is necessary for efficient production of goods is also very often absent in the real world. Monopolies and Oligopolies often dominate in markets. They often charge high prices and earn abnormal profit at the expense of consumers.

Advertising and aggressive marketing strategies also disrupt the effective functioning of the price system. This is because demand is distorted by persuading consumers to and even tricking them into buying what these firms are selling.

Another weakness of the price system or market failure arises because of the failure of the price system to take into account both the explicit and the implicit costs of production. Only private costs and benefits are taken into consideration by the price system. It follows that there wouldn’t be a socially desirable level of production of goods without external costs and/or benefits taken into consideration. The practices of some firms may therefore be socially undesirable and bringing about pollution, under and over production etc.

A free market economy will also result in the so called trade cycle, where there are periodical booms and

slumps. This will result in alternating periods of unemployment and inflation. Such instability may discourage investment.

We may end up evoking an ethical objection to the market economy. It is held that a free-market economy, by rewarding self-interested behaviour, may encourage selfishness, greed, materialism and the acquisition of power.

By way of conclusion, it can still be said that the price system or the market economy is by far the most awesome wealth generating economic system mankind has ever known. This is true both in theory and through empirical evidence. The fall of the command economies of the world further strengthens the case for the market system. The price system however has its own weaknesses as earlier pointed out. The best way to allocate resources thus seems to be to have limited government intervention in what is basically a market economy using the price system.