Profits Are Not Random. They’re How Entrepreneurs Help Allocate Resources Efficiently.
In many cultures, profit is seen as the result of individuals exploiting other individuals. Profits, however, have nothing to do with exploitation. Instead, they reflect the actions of entrepreneurs who supply consumers in the most efficient ways with valued products.
For an entrepreneur to make profits, he must correctly anticipate consumer preferences, the future prices of products and the future prices of the factors of production. Entrepreneurs who excel in their forecasting of future prices make profits, and those that misjudge future prices will suffer losses.
Profit and loss are instruments by which consumers direct production activities into the hands of those who best serve them. Hence, policies seeking to curtail or to confiscate profits impair this function.
With government and central bank interference, the consequent distortion of prices makes it hard to establish if businesses are making profits. As a result, it becomes a challenge to separate wealth-generating activities from non-wealth-generating activities.
According to Henry Hazlitt:
In a free economy, in which wages, costs and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities—and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.
One function of profits, in brief, it to guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. No bureaucrat, no matter how brilliant, can solve this problem arbitrarily. Free prices and free profits will maximize production and relive shortages quicker than any other system. Arbitrarily fixed prices and arbitrarily limited profits can only prolong shortages and reduce production and employment…. Contrary to a popular impression, profits are achieved not by raising prices, but by introducing economies and efficiencies that cut costs of production. It is seldom happens (and unless there is a monopoly it never happens over a long period) that every firm in an industry makes a profit. The price charged by all firms for the same commodity or service
Article from Mises Wire