Economics Week 27 Profit in the Free Market

Prompt: “How can profit arise in a free market economy if every factor of production is paid what it is worth to customers?”

Trial and error is the most natural way prices and eventual profit arise in the free market. Someone starting a small business will usually have a few years in the beginning where they spend more than they make, or if they’re lucky they may break even. This is healthy for the business, in a lot of ways its the way business’s mature. In these years the business owner learns what form of production works best for them, how to maintain and run the business most efficiently, and what the majority of customers are looking for in their business.

Mises wrote on the topic, “The consumers by their buying and abstention from buying elect the entrepreneurs in a daily repeated plebiscite as it were.” The consumers vote with their dollar, and their vote helps the business owner understand what works best within their business. On a grander scale it helps the economy sift through all the business’s until only the best are left open.

Entrepreneurs hoping to establish a business will have to endure some form of trial and error, Mises sums the process up nicely by saying, “They earn profit not because they are clever in performing their tasks, but because they are more clever or less clumsy than other people are. They are not infallible and often blunder. But they are less liable to error and blunder than other people.” Those who learn from their errors and adjust their business to better them have the best chance at earning profit.