9 essential functions of money in a socialist economy

Functions of Money in Socialism

Various functions of money in a socialist economy are given below.

1. Measure of Value:

The value of all products and services is expressed in terms of money. Thus, money acts as the measure of socially necessary labour embodied in commodities.

2. Medium of Circulation:

In a socialist society, money performs the function of circulation. All buying and selling is done through money.

As distinct from capitalism, under socialism, money in its function as a medium of circulation does not create crisis of over-production because of the planned nature of commodity and money circulation.

The process of circulation, in a socialist cconomy, serves as an important form of checking how far planned production corresponds to the needs of society.

3. Means of Payments:

All payments, which do not involve buying and selling of commodities, are made through money. For example, money provides the means of payment when wages are paid to the workers, when enterprises receive or pay back loans, when cash income is distributed among collective farm workers.

4. Means of Accumulation:

Under socialism, money functions as the medium of saving and of the formation of cash reserves. Working people keep their saving in the form of deposits in the banks.

These savings are used by the state to expand production, lay up reserves and provide credit for other enterprises and organisations.

5. Instrument of Distribution:

Money, under socialism, serves as the instrument of distribution. The working people receive a share of the national product in terms of money according to their quantity and quality of labour they expended.

6. Monetary Incentives:

In addition to basic wage rate, bonuses arc paid to the workers in terms of money in order to induce them to work more. These bonuses help in motivating people to put in extra effort for extra gain.

7. Freedom of Choice:

The individuals have the freedom to spend their money earning on any consumption goods of their choice. The freedom of choice is, however, restricted to the range of goods produced under the plan.

8. Evaluating Economic Activity:

Money helps the state to evaluate the economic activity of an enterprise. Although the pricing system does not influence the basic economic decisions, it helps in the rational allocation of resources by determining opportunity cost.

And all opportunity cost calculations are made in terms of money. “Control of the operation of socialist enterprises through money is the most flexible method of controlling the economy”

9. Influence on Output:

Pricing system and hence money can also to some extent influence output in a socialist economy. Prices, which are set by the central planners, cannot be changed by plant managers.

But they can adjust their output to the existing prices. In this way, prices may sometimes influence output in a socialist economy.