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white and black abstract illustration — Photo by Morgan Housel on Unsplash

The market is where people use their scarce resources—time, land, commodities, and money—to make themselves useful in the service of others. While this requires some guesswork, this process will eventually lead to reward or failure. This is the profit and loss system at work, and it is a very effective way to know if the choices we make with our time and money are wise. Nobody wants to waste their time, money, or other resources on something that doesn’t reward us, or “pay us back,” in some manner.

Profits are a signal that the scarce resources we put to use were of value to others, while losses signal misallocation of scarce resources and encourage us to redirect them toward better uses. Even if someone believes there are things worth doing that sustain losses (e.g. collecting stamps or helping refugees), it cannot be overlooked that it took profits in the past to fund those efforts that are sustaining losses.

Additionally, this profit and loss system tends to steer individuals in an economy toward innovation and efficiency, allowing the accumulation of profits to be stored for future use. This is called capital formation, and it is a key component for both sustainable charity and for further job creation that enables savings and investment, which drive productivity. When many market actors are doing this peacefully, we can say that the market is cooperating toward human flourishing.

What is the role of profit in the market?