AUSTRIAN ECONOMICS ADDICT

PROFITS AND LOSSES

This is a video from Libertypen.com, starring the great Walter E. Williams. He is speaking about the role of profits and losses in the free market. Many people think that free market capitalism is all about profits, but free market capitalism is a profit and loss system. Losses tell businesses to stop producing because there is not enough consumer demand to support the activity at that particular price. Because the business bears the loss, it has every incentive to stop the unprofitable activity as soon as possible. This keeps scarce resources from being wasted for a longer period of time. A longer period of waste would definitely happen if the Government got involved and tried to prop up the failing business. We talked about this in my previous post, “Capital Consumption, aka, Eating Our Seed Corn”.

OPPORTUNITY COSTS ARE UNSEEN LOSSES

The Fed’s counterfeiting of money, and artificially lowering interest rates, directs scarce resources into activities that consumer demand wouldn’t have been able to support before the Fed’s intervention. When the money injections stop, the error is revealed, and the scarce resources will be redirected into activities that are profitable. If the Fed keeps counterfeiting money, and keeps interest rates artificially low, it prolongs the misallocation period. The waste of resources, land, labor, capital and time, will be much greater than if the Fed would have stopped counterfeiting when the correction (recession) occurred. The time wasted on these unprofitable activities, is important to understand because of the opportunity costs Dr. Williams mentions in the video. What could have been done with the scarce resources during this time period is the unseen cost of the Fed’s policies.

Related articles

• Walter E. Williams; Free Market Capitalism Produces A Higher Standard Of Living For Everyone. (austrianaddict.com)
• Walter E. Williams, The Free Market Is Not Allowed To Work. (austrianaddict.com)
• Walter E. Williams Speaks About The Economics Of Liberty. (austrianaddict.com)

This entry was posted on February 1, 2013 at 9:59 am and is filed under Econ. 101. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Free market, Opportunity Costs, Profits and Losses, The Fed, Walter E. Williams