Mises’s Profit and Loss

~650 words, ~4 min reading time

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The Economic Nature of Profit and Loss

The Emergence of Profit and Loss – Profit and loss emerge as entrepreneurs purchase factors of production in anticipation of future prices of consumer goods. If the future were perfectly predictable, profit and loss would not exist. They only exist because change is constant.

The Distinction Between Profits and Other Proceeds – Entrepreneurial profit is not interest. It is not wages for the labor of entrepreneurs. It is not monopoly gains. Entrepreneurial profit or loss is what is earned because of the quality of decision making. If you want to identify an entrepreneur, identify who would take a loss if things went badly.

Non-Profit Conduct of Affairs – In the absence of profit and loss, bureaucratic rules and regulations are the only viable alternative. This applies to governments as well as other non-profit organizations.

The Ballot of the Market – while entrepreneurs are the decision makers in the market, consumers have the final say, as they vote with their dollars for what they want.

The Social Functions of Profit and Loss – Profit and loss are the return on good (or bad…) entrepreneurial decision making – that is redirecting resources to their highest valued ends, in the minds of the consumers.

Profit and Loss in the Progressive and the Retrogressing Economy – in a progressing economy, profits are greater than losses, allowing for an accumulation of capital, which allows increased production. This requires real saving. An economy that is consuming capital will have greater losses than profits, and will retrogress.

The Computation of Profit and Loss – profit and loss are naturally psychological. However, in a monetary economy we can calculate them.

The Condemnation of Profit

Economics and the Abolition of Profit – Some, inspired by Marxism, have declared that profit should be abolished. If this is a purely moral claim, then economics has little to say about it. However, if the claim is that this would benefit workers and consumers, then economics can analyze whether this is true.

The Consequences of the Abolition of Profit – profit is what makes entrepreneurs accountable to the consumer. Abolition of profit would then turn entrepreneurs into unaccountable managers, resulting in chaos.

The Antiprofit Arguments – All the arguments against profit are  wrong. They ignore that profit and loss put the consumer in charge. The reasonn the US is so rich is that it has tolerated the existence of very rich entrepreneurs.

The Equality Argument – The typical progressive argument against profit is that it leads to inequality. However, for some reason, those advocating for equality only believe in “leveling out upward” – expropriating those wealthier – not “leveling out downward” – giving to those who have less than the equality advocates. A true belief in equality would result in nearly every American having a substantially lower income, since even poor Americans are wealthy by world standards.

Communism and Poverty – Some say that people turn to communism and socialism because they are poor. But, this skips a step. People turn to a set of policies because they think it will improve their situation. However, people often don’t understand the long run impacts, resulting in choosing policies that are harmful in the end.

The Moral Condemnation of the Profit Motive – Some people treat the pursuit of profit as morally dubious. But the rational pursuit of long-run profits is what best serves society and encourages social cooperation.

The Static Mentality – Most people treat reality as if it were static. As such, they don’t understand the importance of entrepreneurs adjusting production in the face of uncertainty and change. So, socializing production looks feasible – as all you have to do is keep doing what we’ve been doing. This, however, is unrealistic, since the world changes and the content of changes is uncertain.

The Alternative – socialism. Production will either be driven by entrepreneurs seeking profit or by some kind of central planner. There is no third option.

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