A common critique of capitalism is that it places “profits over people.” But this implies a false choice—the idea that we must choose one or the other. But the reality is that people can’t survive without profits. Every living creature must make a net energy profit—if it doesn’t consume more calories than it burns, it dies. Living organisms have a built-in alarm—hunger—that warns them when they’re running a deficit, but organizations have no such mechanism. Societies—whether capitalist, socialist, or communist—cannot survive if their primary energy producers use more energy than they generate. But how does an oil producer, for example, know whether a given well will yield more energy in the form of oil than it costs to pump it out of the ground, transport it to a refinery, and process it?
Theoretically, the producer could perform a net energy balance by comparing the BTUs contained in the recoverable oil with the energy required to manufacture the pipes, valves, fittings, and other equipment used in extraction, transportation, and refining. But even if the energy balance is positive, does producing the oil make us better off, or does it just leave us with a storage problem? The energy balance tells us nothing about demand. Nor does it tell us what should be produced from the oil—gasoline, diesel, plastics, lubricants, or any of hundreds of other products.
Moreover, the only reason an energy balance works is that energy appears on both sides of the equation. I’m willing, for example, to expend 10 BTUs of energy to produce 100 BTUs worth of oil, but how much energy should I expend to produce a bushel of corn or a pair of shoes?
Marx advocated using incorporated labor time as a proxy for value, but labor content is as difficult to calculate as energy content. And, like energy content, it tells us nothing about demand. In addition, both labor and energy content are static; they don’t adjust to changing conditions or the discovery of new technologies.
Money is a far more useful proxy because monetary prices emerge from countless voluntary exchanges of goods and services around the world. As circumstances change, the relative values people place on those goods and services change as well, and the resulting price adjustments signal those changes almost instantly.
Our oil producer doesn’t need to calculate how much energy or labor went into manufacturing the pipes, valves, and equipment used to extract and refine oil. All he needs to know are the prices of the equipment, the cost of its installation, and the price he can hopefully get for his oil. Because market prices incorporate the costs of energy, labor, and resources that went into production, they distill an enormous amount of information into a single number. As long as the oil producer is making a net monetary profit, he can be confident that he is serving consumers. Profits serve as a signal that resources are being used efficiently, allowing producers to allocate scarce resources to their most valuable uses.
Price distortion—whether caused by manipulating the money supply, imposing price controls, enforcing anti-gouging laws, or excessive regulation—creates disinformation that ripples through the economy. Market prices aren’t arbitrary; they are signals that convey information about scarcity, demand, and opportunity costs. When these signals are distorted, producers and consumers make decisions based on false information, leading to the misallocation of scarce resources that have alternative uses. For example, artificially low prices may encourage overconsumption and waste, while artificially high prices may stifle production and innovation. In either case, the result is inefficiency, which ultimately reduces wealth, safety, and living standards.
Profits aren’t immoral—they’re necessary. Just as organisms need a net energy surplus to live, societies need profits to sustain themselves. As Isabel Patterson wrote, “Production is profit; and profit is production…they are the same thing. When a man plants potatoes, if he does not get back more than he put in, he has produced nothing.” Energy and labor content are clumsy, inadequate guides for complex economic decisions. Only market prices, which reflect the ever-changing preferences and constraints of individuals, provide the real-time information needed to allocate resources efficiently.
