10. The Price System: Profits and Losses
Daniel J. Smith is an assistant professor of economics at the Manuel H. Johnson Center for Political Economy at Troy University.
What is the social function of profits and losses? As Prof. Daniel J. Smith of Troy University describes, they provide an incentive for people to follow the information provided by the price system. By pursing profits and avoiding losses, producers and consumers use scarce resources more effectively. In anticipation of being rewarded with profit, people and businesses are encouraged to undertake activities that will create valuable outputs. At the same time, the potential for losses encourages them to avoid excessive risks and wasteful activity. Policies that reduce profits, such as taxation, or reduce losses, such as bailouts, disrupt this function of prices and lead to inefficient use of resources.
- Competition [Article]: Wolfgang Kasper explains the fundamentals of competition, exchange, and the market process.
- Competition as a Discovery Procedure [Article]: Friedrich A. Hayek explains how competition discovers information that would not be available in the absence of the competitive process.
- Entrepreneurial Discovery and the Law of Supply and Demand [Article]: Israel M. Kirzner shows how the laws of supply and demand influence the market process.
- Formation and Function of Prices [Article]: Hans F. Sennholz explains the importance of prices and the vital role they play in discovering what to produce and consume.
Use these questions to enhance your understanding of the topic. We recommend watching the featured video first; the suggested resources will also help.
- Login or register to post comments
- Back to Top
Comments
I think half the criticism brought forth towards business lies in people failing to make the distinction between those that acquired their wealth by pleasing consumers versus those that have the most political connections.
Ironically, Enron - the sacred cow of anti-capitalists - was in fact the result largely of cronyism and not genuine market circumstances:
http://archive.newsmax.com/archives/articles/2002/1/16/135018.shtml
http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A37287-2002Jan12