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Why Profit Is So Important

December 27, 2017 in Economics

By Frank Shostak

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By: Frank Shostak

In most cultures, profit is seen as the outcome of exploitation of some individuals by some other individuals.

Hence, anyone who is seen as striving to make profits is regarded as bad news and the enemy of society and must be stopped in time from inflicting damage.

Profit however, has nothing to do with exploitation — it is about the most efficient use of real funding or real savings.

Profit as such should be seen as an indicator as it were, with respect to whether real savings are employed in the best possible way, as far as promoting people’s life and wellbeing is concerned.

If the employment of real savings results in the expansion of the pool of real savings, this could be seen as indicative that this employment was done in a profitable manner.

Conversely, if there is a decline in the pool of real savings as a result of the particular actions of individuals then this could be seen as indicative of a loss. These actions caused the squandering of real savings.

Obviously, an expansion in the pool of real savings, which is the heart of economic growth and is manifested through profits, should be regarded as the key factor for raising individuals’ living standards.

Rather than being condemned, individuals that are instrumental in the expansion of the pool of real wealth, which is manifested in terms of profits, should be praised.

For it is these individuals that are instrumental in raising the living standards of the population as a whole.

If anyone is responsible for the lowering of living standards, it is those individuals that squandered scarce real savings thus weakening the process of real savings formation resulting in the weakening of profit formation or in an outright loss.

Profit or loss can be ascertained only in a market economy where prices of goods and various factors of production can be established. Needless to say that the existence of money is the key in establishing the prices of goods and factors of production. The rate of exchanges of various goods and factors are expressed in terms of money i.e. the amount of money per unit of a good or a unit of a factor of production.

Profit emerges once an entrepreneur discovers that the prices of certain factors are undervalued relative to the potential value of the products that these factors, once employed, could pro­duce.

By recognizing the discrepancy and acting upon it, an entrepreneur …read more

Source: MISES INSTITUTE

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