The Death of Profit and Loss

One key feature of market economies is the “profit and loss test,” whereby successful companies are rewarded for creating value and wasteful companies go bankrupt. But, when the state gets involved, losses can be rewarded, and the financial system can obscure true market signals.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

In a free market, the profit-and-loss system plays an essential role. It signals how resources should be allocated, enabling entrepreneurs to pursue productive avenues and make long-term plans. By the same token, a system of profit and loss identifies those entrepreneurs able to synthesize market information, gather required inputs at a certain cost, and sell the output above that cost. Good entrepreneurs are rewarded with profits while the bad entrepreneurs experience losses and ultimately fail.

However, by adding government intervention, the profit-and-loss system is distorted. In economies with significant intervention, that distortion can be overwhelming, as the signals provided by the profit-and-loss system are entirely drowned out by subsidization, inflation, price controls, artificially low interest rates, cronyism, and fraud.