In a free market, when a business generates a profit, it signals that it has produced something that consumers value enough to pay a price that exceeds its cost of production.
Entrepreneurs are always looking to discover and capitalize on profit-making opportunities. Their actions play a crucial role in setting the prices of the factors of production. Hence, when an entrepreneur succeeds in making a profit, it means that he has not only satisfied the wants of consumers but has done so better than other entrepreneurs. Conversely, losses indicate a misallocation of the factors of production or a failure to meet consumer demands effectively.
Contrary to the common fallacy, profits aren’t “taken out” of anything. Entrepreneurs profit because they enrich their customers, not impoverish them. Profit and loss are simply signals through which consumers delegate the management of production activities to those who are best fit to serve them.
In our society, a prevailing and dangerous moral stance glorifies altruism and, out of ignorance, condemns profit and those who earn it. This widespread view, despite claiming moral superiority by equating terms like “profit” with “exploitation” and “selfishness” with “callousness”, causes a great deal of harm.
By taxing profits (both monetarily and psychologically), people are discouraged from producing goods and services in the most efficient manner. As Mises wrote, “Increasing costs per unit of output, that is, waste, is praised as a virtue.” How can it possibly be moral to use scarce, valuable resources in a wasteful manner?
There is no such thing as “excessive profits”. In a free market, profit isn’t an automatic return on capital; entrepreneurs cannot guarantee themselves a “normal” rate of profit by engaging in a set of default activities. And entrepreneurs are not obligated to “give back” to society. Profit is the natural reward of an entrepreneur’s contribution to society. Equality achieved through the forceful confiscation and redistribution of wealth is unfair and disintegrating for society.
In the absence of a profit motive, the allocation of resources becomes arbitrary and inefficient. Profits ensure that resources are used in ways that create maximum value, as determined by the consumers themselves. Without the need to make profits and avoid losses, people “in charge of production” would not be bound to the desires of the consumers. I put the phrase in charge of production in scare quotes because those people are not really producing. They are consuming their resources by investing in processes that they themselves think are the best way but not those who are the supposed beneficiaries. Per Bylund said it best: “To want to ‘make a difference’ in society yet not in a way that can earn you profits really means you want to change things for others without asking for their approval.”
“Men must choose between capitalism and socialism. They cannot avoid this dilemma by resorting to a capitalist system without entrepreneurial profit. Every step toward the elimination of profit is progress on the way toward social disintegration.” — Ludwig von Mises, Profit and Loss (1951)
Socialists cannot escape economic reality. A society organized without the profit and loss mechanism still faces the essential task of allocating scarce resources effectively. The abolition of profit will only result in continuous losses, leading to a point where there’s nothing left to lose. We can’t let them win.
