## Metaveri Başlık: **Basic Economics** Yazar: *Thomas Sowell* Kategori: #books Etiketler: #economics ## Altı Çizilenler - **Economics is the study of the use of scarce** **resources which have alternative uses.** - “Unmet needs” are inherent in these circumstances, whether we have a capitalist, socialist, feudal, or other kind of economy. These various kinds of economies are just different institutional ways of making trade-offs that are inescapable in any economy. - Not only scarcity but also “alternative uses” are at the heart of economics. - Although the word “economics” suggests money to some people, for a society as a whole money is just an artificial device to get real things done. Otherwise, the government could make us all rich by simply printing more money. It is not money but the volume of goods and services which determines whether a country is poverty stricken or prosperous. - One of the ways of understanding the consequences of economic decisions is to look at them in terms of the **incentives** they create, rather than simply the **goals** they pursue. This means that consequences matter more than intentions—and not just the immediate consequences, but also the longer run repercussions. - Things like this are what make the study of economics important—and not just a matter of opinions or emotions. Economics is a tool of cause and effect analysis, a body of tested knowledge—and principles derived from that knowledge. - Prices play a crucial role in determining how much of each resource gets used where and how the resulting products get transferred to millions of people. Yet this role is seldom understood by the public and it is often disregarded entirely by politicians. - In countries where prices coordinate economic activities automatically, that lack of knowledge of economics does not matter nearly as much as in countries where political leaders try to direct and coordinate economic activities. - Prices are not just ways of transferring money. Their primary role is to provide financial incentives to affect behavior in the use of resources and their resulting products. Prices not only guide consumers, they guide producers as well. - Although a free market economic system is sometimes called a profit system, it is in reality a profit-and-loss system—and the losses are equally important for the efficiency of the economy, because losses tell producers what to stop doing—what to stop producing, where to stop putting resources, what to stop investing in. Losses force the producers to stop producing what consumers don’t want. - Price-coordinated markets enable people to signal to other people how much they want and how much they are willing to offer for it, while other people signal what they are willing to supply in exchange for what compensation. - When more of some item is supplied than demanded, competition among sellers trying to get rid of the excess will force the price down, discouraging future production, with the resources used for that item being set free for use in producing something else that is in greater demand. - Money talks—and people listen. Their reactions are usually faster than central planners could get their reports together. - Whatever the mistakes made by central planners, there are mistakes made in all kinds of economic systems—capitalist, socialist, or whatever. The more fundamental problem with central planning has been that the task taken on has repeatedly proven to be too much for human beings, in whatever country that task has been taken on. - Prices in a market economy are not simply numbers plucked out of the air or arbitrarily set by sellers. While you may put whatever price you wish on the goods or services you provide, those prices will become economic realities only if others are willing to pay them—and that depends not on whatever prices you have chosen but on how much consumers want what you offer and on what prices other producers charge for the same goods and services. - Competition in the market is what limits how much anyone can charge and still make sales, so what is at issue is not anyone’s disposition, whether greedy or not, but what the circumstances of the market cause to happen. A seller’s feelings—whether “greedy” or not—tell us nothing about what the buyer will be willing to pay. - Since scarce resources have alternative uses, the value placed on one of these uses by one individual or company sets the cost that has to be paid by others who want to bid some of these resources away for their own use. From the standpoint of the economy as a whole, this means that resources tend to flow to their most valued uses when there is price competition in the marketplace. - From the standpoint of society as a whole, the “cost” of anything is the value that it has in alternative uses. - This separation of power and knowledge was at the heart of the problem. - Central planners could be skeptical of what the enterprise managers told them but skepticism is not knowledge. - While history can tell us that such things happened, economics helps explain why they happened—what there is about prices that allows them to accomplish what political control of an economy can seldom match. - Knowledge is one of the most scarce of all resources, and a pricing system economizes on its use by forcing those with the most knowledge of their own particular situation to make bids for goods and resources based on that knowledge, rather than on their ability to influence other people in planning commissions, legislatures, or royal palaces. - In a feudal economy or a socialist economy, leaders can continue to make the same mistakes indefinitely. The consequences are paid by others in the form of a standard of living lower than it would be if there were greater efficiency in the use of scarce resources. - When people try to quantify a country’s “need” for this or that product or service, they are ignoring the fact that there is no fixed or objective “need.” Seldom, if ever, is there a fixed quantity demanded. - Likewise, there is no fixed supply. Statistics on the amount of petroleum, iron ore, or other natural resources seem to indicate that this is just a simple matter of how much physical stuff there is in the ground. In reality, the costs of discovery, extraction and processing of natural resources vary greatly from one place to another. - Many false predictions over the past century or more that we were “running out” of various natural resources in a few years were based on confusing the economically available current supply at current prices with the ultimate physical supply in the earth, which is often vastly greater. - For example, not only are high prices often blamed on “greed,” people often speak of something being sold for more than its “real” value, or of workers being paid less than they are “really” worth—or of corporate executives, athletes, and entertainers being paid more than they are “really” worth. The fact that prices fluctuate over time, and occasionally have a sharp rise or a steep drop, misleads some people into concluding that prices are deviating from their “real” values. But their usual level under usual conditions is no more real or valid than their much higher or much lower levels under different conditions. - The most fundamental reason why there is no such thing as an objective or “real” value is that there would be no rational basis for economic transactions if there were. When you pay a dollar for a newspaper, obviously the only reason you do so is that the newspaper is more valuable to you than the dollar is. At the same time, the only reason people are willing to sell the newspaper is that a dollar is more valuable to them than the newspaper is. If there were any such thing as a “real” or objective value of a newspaper—or anything else—neither the buyer nor the seller would benefit from making a transaction at a price equal to that objective value, since what would be acquired would be of no greater value than what was given up. In that case, why bother to make the transaction in the first place? - On the other hand, if either the buyer or the seller was getting more than the objective value from the transaction, then the other person must be getting less—in which case, why would the other party continue making such transactions while being continually cheated? Continuing transactions between buyer and seller make sense only if value is subjective, each getting what is worth more subjectively. Economic transactions are not a zero-sum process, where one person loses whatever the other person gains. - Competition is the crucial factor in explaining why prices usually cannot be maintained at arbitrarily set levels. Competition is the key to the operation of a price-coordinated economy. It not only forces prices toward equality, it likewise causes capital, labor, and other resources to flow toward where their rates of return are highest—that is, where the unsatisfied demand is greatest—until the returns are evened out through competition, much like water seeking its own level. - Prices not only ration existing supplies, they also act as powerful incentives to cause supplies to rise or fall in response to changing demand. - The gains and losses are not isolated or independent events. The crucial role of prices is in tying together a vast network of economic activities among people too widely scattered to all know each other. However much we may think of ourselves as independent individuals, we are all dependent on other people for our very lives, as well as being dependent on innumerable strangers who produce the amenities of life. - We may differ among ourselves as to what is worth sacrificing in order to have more of something else. The point here is more fundamental: Merely demonstrating an unmet need is not sufficient to say that it should be met—not when resources are scarce and have alternative uses. - To go back to square one again, costs are foregone opportunities, not government expenditures. - That is a world of trade-offs, not solutions—and whatever trade-off is decided upon will still leave unmet needs. - So long as we respond gullibly to political rhetoric about unmet needs, we will arbitrarily choose to shift resources to whatever the featured unmet need of the day happens to be and away from other things. Then, when another politician—or perhaps even the same politician at a later time—discovers that robbing Peter to pay Paul has left Peter worse off, and now wants to help Peter meet his unmet needs, we will start shifting resources in another direction. In short, we will be like a dog chasing his tail in a circle and getting no closer, no matter how fast he runs. - This is not to say that we have the ideal trade-offs already and should leave them alone. Rather, it says that whatever trade-offs we make or change should be seen from the outset as trade-offs—not meeting unmet needs. - In short, nothing is a “need” categorically, regardless of how urgent it may be to have particular amounts at particular times and places. Unfortunately, most laws and government policies apply categorically, if only because of the dangers in leaving every government official to become a petty despot in interpreting what these laws and policies mean and when they should apply. In this context, calling something a “need” categorically is playing with fire. - By its very nature as a study of the use of scarce resources which have alternative uses, economics is about incremental trade-offs—not about “needs” or “solutions.” That may be why economists have never been as popular as politicians who promise to solve our problems and meet our needs. - When some people used more housing than usual, other people found less housing available. The same thing happens under other forms of price control: Some people use the price-controlled goods or services more generously than usual because of the artificially lower price and, as a result, other people find that less than usual remains available for them. There are other consequences to price controls in general, and rent control provides examples of these as well. - Economic policies need to be analyzed in terms of the incentives they create, rather than the hopes that inspired them. - Politicians know that there are always more tenants than landlords and more people who do not understand economics than people who do. That makes rent control laws something likely to lead to a net increase in votes for politicians who pass rent control laws. - Often it is politically effective to represent rent control as a way to keep greedy rich landlords from “gouging” the poor with “unconscionable” rents. In reality, rates of return on investments in housing are seldom higher than on alternative investments, and landlords are often people of very modest means. This is especially so for owners of small, low-end apartment buildings that are in constant need of repair, the kinds of places where tenants are likely to be low-income people. - The image that rent control protects poor tenants from rich landlords may be politically effective, but often it bears little resemblance to the reality. The people who actually benefit from rent control can be at any income level and so can those who lose out. It depends on who happens to be on the inside looking out, and who happens to be on the outside looking in, when such laws are passed. - One of the reasons for the political success of rent control laws is that many people accept words as indicators of reality. They believe that rent control laws actually control rents. So long as they believe that, such laws are politically viable, as are other laws that proclaim some apparently desirable goals, whether those goals end up being served or not. - One of the crucial distinctions to keep in mind is the distinction between an increased scarcity—where fewer goods are available relative to the population—and a “shortage” as a price phenomenon. Just as there can be a growing shortage without an increased scarcity, so there can be a growing scarcity without a shortage. - One of the reasons for the political success of price controls is that part of their costs are concealed. Even the visible shortages do not tell the whole story. Quality deterioration, such as already noted in the case of housing, has been common with many other products and services whose prices have been kept artificially low by government fiat. - One of the fundamental problems of price control is defining just what it is whose price is being controlled. Even something as simple as an apple is not easy to define because apples differ in size, freshness, and appearance, quite aside from the different varieties of apples. - Some apples that would ordinarily be thrown away under free market conditions may, under price control, be kept for sale to those people who arrive after all the good apples have been sold. - What is crucial from the standpoint of understanding the role of prices in the economy is that persistent surpluses are as much a result of keeping prices artificially high as persistent shortages are of keeping prices artificially low. Nor were the losses simply the sums of money extracted from the taxpayers or the consumers for the benefit of agricultural corporations and farmers. These are internal transfers within a nation, which do not directly reduce the total wealth of the country. The real losses to the country as a whole come from the misallocation of scarce resources which have alternative uses. - From a purely economic standpoint, it is working at cross purposes to subsidize farmers by forcing food prices up and then subsidize some consumers by bringing down their particular costs of food with subsidies—as is done in both India and the United States. However, from a political standpoint, it makes perfect sense to gain the support of two different sets of voters, especially since most of them do not understand the full economic implications of the policies. - Politically, price controls are always a tempting “quick fix” for inflation, and certainly easier than getting the government to cut back on its own spending that is often behind the inflation. - The greater the difference between free market prices and the prices decreed by price control laws, the more severe the consequences of price control. - Prices are not the only way to ration scarce resources, either in normal times or in times of sudden increases in scarcity. But the question is whether alternative systems of rationing are usually better or worse. - Economics is an analysis of cause-and-effect relationships in an economy. Its purpose is to discern the consequences of various ways of allocating scarce resources which have alternative uses. It has nothing to say about social philosophy or moral values, any more than it has anything to say about humor or anger. - Analyzing economic actions in cause-and-effect terms means examining the logic of the incentives being created, rather than simply thinking about the desirability of the goals being sought. It also means examining the empirical evidence of what actually happens under such incentives. - While causation can sometimes be explained by intentional actions and sometimes by systemic interactions, too often the results of systemic interactions are falsely explained by individual intentions. - Higher prices for people who can least afford them are a tragic end-result, but the causes are systemic. This is not merely a philosophic or semantic distinction. There are major practical consequences to the way causation is understood. Treating the causes of higher prices and higher interest rates in low-income neighborhoods as being personal greed or exploitation, and trying to remedy it by imposing price controls and interest rate ceilings only ensures that even less will be supplied to people living in low-income neighborhoods thereafter. - “First, do no harm” is a principle that has endured for centuries. Understanding the distinction between systemic causation and intentional causation is one way to do less harm with economic policies. It is especially important to do no harm to people who are already in painful economic circumstances. - But it is both intellectually and emotionally easier to blame high prices on those who collect them, rather than on those who cause them. It is also more politically popular to blame outsiders, especially if those outsiders are of a different ethnic background. - Systemic causes, such as those often found in economics, provide no such emotional release for the public, or moral melodrama for the media and politicians, as such intentional causes as “greed,” “exploitation,” “gouging,” “discrimination,” and the like. Intentional explanations of cause and effect may also be more natural, in the sense that less sophisticated individuals and less sophisticated societies tend to turn first to such explanations. - Although the basic principles of economics are not really complicated, the very ease with which they can be learned also makes them easy to dismiss as “simplistic” by those who do not want to accept analyses which contradict some of their cherished beliefs. Evasions of the obvious are often far more complicated than the plain facts. Nor is it automatically true that complex effects must have complex causes. The ramifications of something very simple can become enormously complex. - In short, complex effects may be a result of either simple causes or complex causes. The specific facts can tell us which. A priori pronouncements about what is “simplistic” cannot. An explanation is too simple if its conclusions fail to match the facts or its reasoning violates logic. But calling an explanation “simplistic” is too often a substitute for examining either its evidence or its logic. - The tendency to personalize causation leads not only to charges that “greed” causes high prices in market economies, but also to charges that “stupidity” among bureaucrats is responsible for many things that go wrong in government economic activities. In reality, many of the things that go wrong in these activities are due to perfectly rational actions, given the incentives faced by government officials who run such activities, and given the inherent constraints on the amount of knowledge available to any given decision-maker or set of decision-makers. - Officials carrying out particular policies may be quite rational, however negative the impact of these policies may prove to be for society at large. - Even in a democratic government, where the personal dangers would be far less, a highly intelligent person with a record of outstanding success in the private sector is often unable to repeat that success when appointed to a high position in government. Again, the point is that the incentives and constraints are different in different institutions. - Failure to supply goods, as a result of government restrictions, must be sharply distinguished from an inability to produce them. - While systemic causation in a free market is in one sense impersonal, in the sense that its outcomes are not specifically predetermined by any given person, “the market” is ultimately a way by which many people’s individual personal desires are reconciled with those of other people. Too often a false contrast is made between the impersonal marketplace and the supposedly compassionate policies of various government programs. But both systems face the same scarcity of resources and both systems make choices within the constraints of that scarcity. The difference is that one system involves each individual making choices for himself or herself, while the other system involves a small number of people making choices for millions of others. - The mechanisms of the market are impersonal but the choices made by individuals are as personal as choices made anywhere else. It may be fashionable for journalists to refer to “the whim of the marketplace,” as if that were something different from the desires of people, just as it was once fashionable to advocate “production for use, rather than profit”—as if profits could be made by producing things that people cannot use or do not want to use. The real contrast is between choices made by individuals for themselves and choices made for them by others who presume to define what these individuals “really” need. - Scarcity means that everyone’s desires cannot be satisfied completely, regardless of which particular economic system or government policy we choose—and regardless of whether an individual or a society is poor or prosperous, wise or foolish, noble or ignoble. Competition among people for scarce resources is inherent. It is not a question whether we like or dislike competition. Scarcity means that we do not have the option to **choose** whether or not to have an economy in which people compete. That is the only kind of economy that is possible—and our only choice is among the particular methods that can be used for that competition. - Most people may be unaware that they are competing when making purchases, and simply see themselves as deciding how much of various things to buy at whatever prices they find. But scarcity ensures that they are competing with others, even if they are conscious only of weighing their own purchasing decisions against the amount of money they have available. - One of the incidental benefits of competing and sharing through prices is that different people are not as likely to think of themselves as rivals, nor to develop the kinds of hostility that rivalry can breed. - The inherent scarcity of materials and labor would still limit what could be built, but that limit would now be imposed politically and would be seen by each as due to the rivalry of the other. - The same economic principle, however, applies to groups that are not based on religion but on ethnicity, geographic regions, or age brackets. All are inherently competing for the same resources, simply because these resources are scarce. However, competing indirectly by having to keep your demands within the limits of your own pocketbook is very different from seeing your desires for government benefits thwarted directly by the rival claims of some other group. The self-rationing created by prices not only tends to mean less social and political friction but also more economic efficiency, since each individual knows his or her own preferences better than any third party can, and can therefore make incremental trade-offs that are more personally satisfying within the limits of the available resources. - Rationing through pricing also limits the amount of each individual’s claims on the output of others to what that individual’s own productivity has created for others, and thereby earned as income. What price controls, subsidies, or other substitutes for price allocation do is reduce the incentives for self-rationing. That is why people with minor ailments go to doctors when medical care is either free or heavily subsidized by the government, and why farmers receiving government-subsidized water from irrigation projects grow crops requiring huge amounts of water, which they would never grow if they had to pay the full costs of that water themselves. - Society as a whole always has to pay the full costs, regardless of what prices are or are not charged to individuals. When price controls make goods artificially cheaper, that allows greater self-indulgence by some, which means that less is left for others. - Luck and corruption are other substitutes for price rationing. Whoever happens to be in a store when a new shipment of some product in short supply arrives can get the first opportunity to buy it, while people who happen to learn about it much later can find the coveted product all gone by the time they get there. In other cases, personal or political favoritism or bribery takes the place of luck in gaining preferential access, or formal rationing systems may replace favoritism with some one-size-fits-all policy administered by government agencies. However it is done, the rationing that is done by prices in market economies cannot be gotten rid of by getting rid of prices or by the government’s lowering the level of prices. - A price-coordinated economy facilitates incremental substitution, but political decision-making tends toward categorical priorities—that is, declaring one thing absolutely more important than another and creating laws and policies accordingly. - When some political figure says that we need to “set national priorities” about one thing or another, what that amounts to is making A categorically more important than B. This is the opposite of incremental substitution, in which the value of each depends on how much of each we already have at the moment, and therefore on the changing amount of A that we are willing to give up in order to get more B. - Whenever there are two things which each have some value, one cannot be categorically more valuable than another. A diamond may be worth much more than a penny, but enough pennies will be worth more than any diamond. That is why incremental trade-offs tend to produce better results than categorical priorities. - People who are spending their own money are confronted with those costs at every turn, but people who are spending the taxpayers’ money—or who are simply imposing uncounted costs on businesses, homeowners, and others—have no real incentives to even find out how much the additional costs are, much less to hold off on adding requirements when the incremental costs threaten to become larger than the incremental benefits to those on whom these costs are imposed by the government. Red tape grows as a result. - Ideally, prices allow alternative users to compete for scarce resources in the marketplace. However, this competition is distorted to the extent that special taxes are put on some products or resources but not on others, or when some products or resources are subsidized by the government but others are not. - Prices charged to the consumers of such specially taxed or specially subsidized goods and services do not convey the real costs of producing them and therefore do not lead to the same trade-offs as if they did. Yet there is always a political temptation to subsidize “good” things and tax “bad” things. However, when neither good things nor bad things are good or bad categorically, this prevents our finding out just how good or how bad any of these things is by letting people choose freely, uninfluenced by politically changed prices. People who want special taxes or subsidies for particular things seem not to understand that what they are really asking for is for the prices to misstate the relative scarcities of things and the relative values that the users of these things put on them. - From the standpoint of the allocation of resources, government should either not tax resources, goods, and services or else tax them all equally, so as to minimize the distortions of choices made by consumers and producers. - However much economic efficiency would be promoted by letting resource prices be unchanged by taxes or subsidies, from a political standpoint politicians win votes by doing special favors for special interests or putting special taxes on whomever or whatever might be unpopular at the moment. The free market may work best when there is a level playing field, but politicians win more votes by tilting the playing field to favor particular groups. Often this process is rationalized politically in terms of a need to help the less fortunate but, once the power and the practice are established, they provide the means of subsidizing all sorts of groups who are not the least bit unfortunate. - Sometimes the rationale for removing particular things from the process of weighing costs against benefits is expressed in some such question as: “How can you put a price on art?”—or education, health, music, etc. The fundamental fallacy underlying this question is the belief that prices are simply “put” on things. So long as art, education, health, music, and thousands of other things all require time, effort, and raw material, the costs of these inputs are inherent. These costs do not go away because a law prevents them from being conveyed through prices in the marketplace. Ultimately, to society as a whole, costs are the other things that could have been produced with the same resources. Money flows and price movements are symptoms of that fact—and suppressing those symptoms will not change the underlying fact. - One reason for the popularity of price controls is a confusion between prices and costs. For example, politicians who say that they will “bring down the cost of medical care” almost invariably mean that they will bring down the prices paid for medical care. The actual costs of medical care—the years of training for doctors, the resources used in building and equipping hospitals, the hundreds of millions of dollars for years of research to develop a single new medication—are unlikely to decline in the slightest. Nor are these things even likely to be addressed by politicians. What politicians mean by bringing down the cost of medical care is reducing the price of medicines and reducing the fees charged by doctors or hospitals. - Once the distinction between prices and costs is recognized, then it is not very surprising that price controls have the negative consequences that they do, because price ceilings mean a refusal to pay the full costs. - Despite how obvious all this might seem, there are never-ending streams of political schemes designed to escape the realities being conveyed by prices—whether through direct price controls or by making this or that “affordable” with subsidies or by having the government itself supply various goods and services free, as a “right.” There may be more ill-conceived economic policies based on treating prices as just nuisances to get around than on any other single fallacy. What all these schemes have in common is that they exempt some things from the process of weighing costs and benefits against one another—a process essential to maximizing the benefits from scarce resources which have alternative uses. - The most valuable economic role of prices is in conveying information about an underlying reality—while at the same time providing incentives to respond to that reality. Prices, in a sense, can summarize the end results of a complex reality in a simple number. - Because knowledge is one of the scarcest of all resources, prices play an important role in economizing on the amount of knowledge required for decision-making by any given individual or organization. - In short, although corporations may be thought of as big, impersonal and inscrutable institutions, they are ultimately run by human beings who all differ from one another and who all have shortcomings and make mistakes, as happens with economic enterprises in every kind of economic system and in countries around the world. - Knowledge is one of the scarcest of all resources in any economy, and the insight distilled from knowledge is even more scarce. An economy based on prices, profits, and losses gives decisive advantages to those with greater knowledge and insight. - Put differently, knowledge and insight can guide the allocation of resources, even if most people, including the country’s political leaders, do not share that knowledge or do not have the insight to understand what is happening. Clearly this is not true in the kind of economic system where political leaders control economic decisions, for then the necessarily limited knowledge and insights of those leaders become decisive barriers to the progress of the whole economy. Even when leaders have more knowledge and insight than the average member of the society, they are unlikely to have nearly as much knowledge and insight as exists scattered among the millions of people subject to their governance. - One of the biggest advantages of an economy coordinated by prices and operating under the incentives created by profit and loss is that it can tap scarce knowledge and insights, even when most of the people—or even their intellectual and political elites—do not have such knowledge or insights. - One of the great handicaps of economies run by political authorities, whether under medieval mercantilism or modern communism, is that insights which arise among the masses have no such powerful leverage as to force those in authority to change the way they do things. Under any form of economic or political system, those at the top tend to become complacent, if not arrogant. Convincing them of anything is not easy, especially when it is some new way of doing things that is very different from what they are used to. The big advantage of a free market is that you don’t have to convince anybody of anything. You simply compete with them in the marketplace and let that be the test of what works best. - Neither individuals nor companies are successful forever. Death alone guarantees turnover in management. Given the importance of the human factor and the variability among people—or even with the same person at different stages of life—it can hardly be surprising that dramatic changes over time in the relative positions of businesses have been the norm. - What is important is not the success or failure of particular individuals or companies, but the success of particular knowledge and insights in prevailing despite the blindness or resistance of particular business owners and managers. Given the scarcity of mental resources, an economy in which knowledge and insights have such decisive advantages in the competition of the marketplace is an economy which itself has great advantages in creating a higher standard of living for the population at large. A society in which only members of a hereditary aristocracy, a military junta, or a ruling political party can make major decisions is a society which has thrown away much of the knowledge, insights, and talents of most of its own people. A society in which such decisions can only be made by males has thrown away half of its knowledge, talents, and insights. - No economic system can depend on the continuing wisdom of its current leaders. A price-coordinated economy with competition in the marketplace does not have to, because those leaders can be forced to change course—or be replaced—whether because of red ink, irate stockholders, outside investors ready to move in and take over, or because of bankruptcy. - Business leadership is a factor, not only in the relative success of various enterprises but more fundamentally in the advance of the economy as a whole through the spread of the impact of new and better business methods to competing companies and other industries. - Market economies must rely not only on price competition between various producers to allow the most successful to continue and expand, they must also find some way to weed out those business owners or managers who do not get the most from the nation’s resources.  Losses accomplish that. Bankruptcy shuts down the entire enterprise that is consistently failing to come up to the standards of its competitors or is producing a product that has been superseded by some other product. - While capitalism has a visible cost—profit—that does not exist under socialism, socialism has an invisible cost—inefficiency—that gets weeded out by losses and bankruptcy under capitalism. The fact that most goods are more widely affordable in a capitalist economy implies that profit is less costly than inefficiency. Put differently, profit is a price paid for efficiency. Clearly the greater efficiency must outweigh the profit or else socialism would in fact have had the more affordable prices and greater prosperity that its theorists expected, but which failed to materialize in the real world.