Profit or loss is working to add more value, and seeing customers decide

Return on assets of US firms shows profit or loss offers on average little margin for error

Return on assets of US firms [1]

Profit or loss means buying low now and selling high later, using capital and labor to add value

The activities of the entrepreneur consist in making decisions. He determines for what purpose the factors of production should be employed.[2]

The capitalist-entrepreneur buys factors or factor services in the present; his product must be sold in the future. He is always on the alert, then, for discrepancies, for areas where he can earn more than the going rate of interest. The difference between the general interest rate and his actual return is his… profit…

Profit or loss measures net value added compared to all other value-adding

Every entrepreneur… invests in a process because he expects to make a profit, i.e., because he believes that the market has underpriced and undercapitalized the factors in relation to their future rents. If his belief is justified, he makes a profit. If his belief is unjustified, and the market, for example, has really overpriced the factors, he will suffer losses.

…profits are an index of maladjustment, but in a sense precisely opposed to that usually meant. …profits are an index that maladjustments are being met and combatted by the profit-making entrepreneurs. These maladjustments are the inevitable concomitants of the real world of change. A man earns profits only if he has, by superior foresight and judgment, uncovered a maladjustment—specifically an undervaluation of certain factors by the market. By stepping into this situation and gaining the profit, he calls everyone’s attention to that maladjustment and sets forces into motion that eventually eliminate it. [3]

Profit or loss is finally booked when customers agree to final prices and quantities

…entrepreneurs… are unconditionally and totally subject to the sovereignty of the buying public, the consumers.

The consumers by their buying and abstention from buying elect the entrepreneurs in a daily repeated plebiscite as it were. They determine who should own and who not, and how much each owner should own.

Each ballot of the consumers adds only a little to the elected man’s sphere of action. To reach the upper levels of entrepreneurship he needs a great number of votes, repeated again and again over a long period of time, a protracted series of successful strokes. He must stand every day a new trial, must submit anew to reelection as it were.

Profit and loss are the instruments by means of which the consumers pass the direction of production activities into the hands of those who are best fit to serve them.[2]

It is the consumers… who make the decisions for the economic system. The consumers, through their buying and abstention from buying, decide how much of what will be produced, at the same time determining the incomes of all the participating factors. And every man is a consumer.[3]


  1. Hagel, John, et al. 2016 Shift Index. The paradox of flows: Can hope flow from fear? Deloitte University Press, 2016, p. 26.
  2. Von Mises, Ludwig. Planning for freedom, and twelve other essays and addresses. 3rd ed., Libertarian Press, 1974, pp. 108-150.
  3. Rothbard, Murray N. Man, economy, and state with power and market. 2nd ed., Ludwig von Mises Institute, 2009, pp. 509-516.

Initial property rights come from showing up in force, and developing your claim

California gold rush miners with pistol showing illustrates the origins of initial property rights

California gold rush miners, with pistol showing [1]

In the most general sense, ownership rights are “the expectations a person has that his decision about the uses of certain resources will be effective.”

Initial property rights require first showing up

The discovery which started the famous gold rush was made on Janu­ary 24, 1848…

…the rigors of the voyage to California, whether by boat or foot, killed many potential miners before they reached the gold fields, eliminat­ing all but the strongest.

…several wealthy individuals residing on the east coast financed mining companies to go to California. On average, these com­panies consisted of forty to fifty persons who were to mine gold as a group and share it with their financial backers remaining in the states. Well documented accounts of these companies reveal that most did not survive as a group long enough to reach California. Those that did, soon dis­banded, forsaking their original agreement and each individual worked for himself.

…there were no federal laws regulating the private acquisition of exclusive rights to mineral lands.

…even had there been prior legal con­straints… most of the local and federal law enforcers in California deserted to the gold fields.

“Two companies of regulars, every day diminishing by desertions, that cannot be prevented, will soon be the only military force in California…”

By the end of August, 1848, the number of miners was estimated at somewhere between 5 and 10 thousand. …after the famous rush of 1849 which brought people from nearly every country in the world, the population was thought to be over one hundred thousand and, within two more years this figure reached a quarter of a million.

…the first miners… found gold bearing land to exist over an area three hundred miles long and one hundred miles wide along the western foothills of the Sierra Mountains.

Initial property rights require developing your claim

…theory implies that the total amount of homogeneous mining land will always be divided evenly among the competing miners. …individuals holding more productive land will get less land than others whose holdings are not so productive. 

Each time a new deposit was discovered, a group of miners would rush to the site and form a new district through explicit contract. It is estimated that between 1848 and 1866 there were nearly five hun­dred independent mining districts established, each with its own unique distribution of land among the contracting parties.

“The first workers on the bar had taken up claims of a generous size, and soon the whole bar was occupied. The region was full of miners and they came pouring down upon the river, attracted by the reports of a rich strike, until their tents and campfires presented the appear­ance of a vast army. Those without claims far exceeded in number the fortunate ones. A miners’ meeting was called to make laws. Majority ruled in a mining camp in those days, and it was voted to cut down the size of claims to forty feet. The claim owners were powerless to resist, but had to admit to the fiat of the majority. The miners were then registered in the order of the date of their arrival upon the bar, and in that order were allowed to select claims until all were taken. Even then there was a great crowd of disappointed ones.”

In these contracts, it was provided that each individual was to get a parcel of land of specified size. As long as the miner worked this parcel, called a “claim,” at stipu­lated intervals, he had exclusive rights to the land and all the gold con­tained.

Using a pick and shovel in temperatures approaching 100 degrees, washing dirt in rivers formed from melting glaciers, subsisting on a diet of questionable nutritional content and living in unsanitary conditions quickly destroyed the weak and the sickly.

Initial property rights require showing adequate force

…every mining district had provisions for punishing claim “jumpers” and excluding outsiders in their bid for some of the already claimed land.

Walls were not constructed around claims nor were jails built.

…the miners did not hire specialists in force to help them maintain their exclusive land rights.

…weapons such as cannons or rockets were not used in the gold fields.

The pistol, which nearly every miner wore, was the primary instrument for maintaining exclusivity.

While some men probab­ly could use the gun with greater accuracy or speed than others, I suspect that the variance in ability was not large. The six shooter was not called “the equalizer” for nothing.

…the assumed and observed vari­ance in the ability to use force was insignificant, so all observed distribu­tion patterns were attributable only to differences in land values.

Initial property rights come from taking risk and adding value; they aren’t given up lightly

…the initial allocation is not a random process…

…any reallocation pro­gram which assigns to individuals less wealth than they could have through the use of their own force will be a costly failure.[2]


  1. Arrival of the Watertown Boys: Letters from John C. Gilman.wordpress.com, 17 Feb. 2011, yesteryearsnews.wordpress.com/2011/02/17/arrival-of-the-watertown-boys-letters-from-john-c-gilman/. Accessed 15 Apr. 2017.
  2. Umbeck, John. “Might makes rights: A theory of the formation and initial distribution of property rights.” Economic Inquiry 19.1 (1981): 38-59.

Profit means satisfied customers and investors

Revenue, taxes, expenses, and profit are graphed vs. production rate, and break-even point and shut-down point are identified.
Profit is net income after taxes.
(FIT is corporate federal income tax.) [1]

Profits… resulting from the relationships of costs to prices, not only tell us which goods it is most economical to make, but which are the most economical ways to make them.

…profits… put constant and unremitting pressure on the head of every competitive business to introduce further economies and efficiencies…

…the prospect of profits decides what articles will be made, and in what quantities—and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.

…profits… guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand.

The total profits of General Motors… are taken as if they were typical rather than exceptional.

Profits actually do not bulk large in our total economy. The net income of incorporated business in the fifteen years from 1929 to 1943, to take an illustrative figure, averaged less than 5 per cent of the total national income.

…what government officials would undoubtedly regard as “excessive” or “unreasonable” profits… would not only cause every firm in that line to expand its production to the utmost, and to reinvest its profits in more machinery and more employment; it would also attract new investors and producers from everywhere, until production in that line was great enough to meet demand, and the profits in it again fell to the general average level.

Few people are acquainted with the mortality rates for business concerns. They do not know… that “should conditions of business averaging the experience of the last fifty years prevail, about seven of each ten grocery stores opening today will survive into their second year; only four of the ten may expect to celebrate their fourth birthday.”

…any individual placing venture capital runs a risk not only of earning no return but of losing his whole principal.

…over a long period of years, after allowance is made for all losses, for a minimum “riskless” interest on invested capital, and for an imputed “reasonable” wage value of the services of people who run their own business, no net profit at all may be left over, and that there may even be a net loss. …optimism and self-confidence too often lead… into ventures that do not or cannot succeed.[2]


  1. Couper, James Riley. Process engineering economics. Marcel Dekker, 2003. p. 256.
  2. Hazlitt, Henry. Economics in one lesson. Harper & Brothers, 1946. pp. 168-172.