Tuesday, 17 March 2009

Money as allocation of wealth and allocation of labour

Some of the resentment over the distribution of wealth comes from the fact that money has two functions in the society. It is both redistributing wealth and also redistributing labour.
Society's demand for different skills vary as time goes on. In a socialist society, people would not be free to choose what they do, rather they would be told what the state needs. If the state needs an engineer, you would become an engineer, if the state needs a farmer, you become a farmer. Everything happens according to a state-wide schedule.
In a free society, people cannot be assigned to certain types of work, but society still needs to the demand for certain skills. So the market raises wage for skills that are undersupplied while lowers wages for skills that are oversupplied. Should an accountant be paid more than a lawyer? This is why IT workers got paid huge money in the dot-com boom and are now getting paid less due to oversupply. The effect? Fewer students pursue computer science and turn to other fields. This way, the society keeps supply & demand in balance. Further side effect is that some people got incredibly wealthy for performing a task that can now be outsourced to India.

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