“On your view, the buyers on seeing a better product should pay an even higher price!!! Don;t you see that this is impossible in practice AND that it would result in gross mis-allocation of resources.”

Imagine a dozen people stranded on a deserted island. The only two goods in this scenario are fish and coconuts. The only resource in this scenario is labor. Shells are used for money.

Labor is a limited resource. This means that one additional person catching fish is one less person that can harvest coconuts. The optimal division of labor will provide the optimal supply of fish and coconuts.

The point of spending money is for the consumers to communicate how they want the island’s labor to be divided between catching fish and harvesting coconuts.

No matter how many resources or goods we add to this scenario, the point of spending money would be for the consumers to communicate how they want the island’s resources to be divided between the production of all the different goods.

What say you?