Authored by Deborah Palma via The Epoch Times(emphasis ours),
Economics is not a zero-sum game in which one person’s gain comes at another’s expense; nor is it just about numbers or purposeless statistical aggregates, but conscious human action.
Ludwig von Mises, in his work “Human Action,” explains that individuals act to replace a less satisfactory state of affairs with a more satisfactory one. This process is inherently subjective and teleological, meaning that the values guiding economic activity are rooted in individual choices, and not in physical objects themselves.
Economic calculation serves as the bridge between the subjectivity of human desires and the objective reality of scarce resources. Consider a quantity of steel that could be used to build either a hospital or a factory.Without a system of prices reflecting society’s preferences and the relative scarcity of resources, there would be no way to determine which of these projects creates greater value. Economic calculation, expressed through prices, allows for the comparison of alternatives, whilst directing resources toward their most-valued uses.
Similarly, consider an entrepreneur evaluating whether they should open a bakery. They must decide how much to invest in equipment, rent, labor, and so on. By comparing the costs of these factors with the expected revenue from sales, our entrepreneur can estimate whether the business will create value. If revenues are expected to exceed total costs and taxes, there will be profit.
Profit, therefore, is not merely a financial gain, but evidence that scarce resources have been allocated in ways that better satisfy societal needs, because society has, in an undirected way, decided its needs are satisfied this way. Conversely, losses would indicate that those resources should have been allocated to more valuable uses. Without prices, profits, and losses, the entrepreneur would have no way of knowing whether resources are being used efficiently.
In a complex economy with an advanced division of labor, individuals cannot rely solely on their own direct knowledge to decide how to allocate resources among many possible combinations. They require a common denominator that allows for the comparison of costs and benefits.This denominator is the price, which emerges from voluntary exchanges in the market.
Prices are not arbitrary numbers; they are determined by exchange values arising from the competitive interaction between consumers and producers. Price reflects the relative scarcity of a good in relation to all other possible uses of the same factors of production.
When an entrepreneur invests in new technology or capital infrastructure, they rely on monetary calculation to assess whether the value of the final product will exceed the total value of the inputs consumed. This “surplus” is profit, an unmistakable signal that value has been created by, and for, society. The opposite—loss—signals the waste of scarce resources.
The importance of prices becomes even more evident when we examine historical attempts to artificially control them. Throughout history, governments have sought to replace the market price system with centrally-directed mechanisms, and the results have been consistently disastrous.
Source: ZeroHedge News
