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The Function of Profits 143make it, but their long-run effect is to prevent a balance of productionin accordance with the actual demands of consumers. If theeconomy were free, demand would act so that some branches of productionwould make what government officials would undoubtedlyregard as “excessive” or “unreasonable” profits. But that very factwould not only cause every firm in that line to expand its productionto the utmost, and to reinvest its profits in more machinery and moreemployment; it would also attract new investors and producers fromeverywhere, until production in that line was great enough to meetdemand, and the profits in it again fell to the general average level.In a free economy, in which wages, costs, and prices are left to thefree play of the competitive market, the prospect of profits decideswhat articles will be made, and in what quantities—and what articleswill not be made at all. If there is no profit in making an article, it isa sign that the labor and capital devoted to its production are misdirected:the value of the resources that must be used up in making thearticle is greater than the value of the article itself.One function of profits, in brief, is to guide and channel the factorsof production so as to apportion the relative output of thousandsof different commodities in accordance with demand. No bureaucrat,no matter how brilliant, can solve this problem arbitrarily. Free pricesand free profits will maximize production and relieve shortagesquicker than any other system. Arbitrarily-fixed prices and arbitrarilylimitedprofits can only prolong shortages and reduce production andemployment.The function of profits, finally, is to put constant and unremittingpressure on the head of every competitive business to introduce furthereconomies and efficiencies, no matter to what stage these mayalready have been brought. In good times he does this to increase hisprofits further; in normal times he does it to keep ahead of his competitors;in bad times he may have to do it to survive at all. For profitsmay not only go to zero; they may quickly turn into losses; and aman will put forth greater efforts to save himself from ruin than hewill merely to improve his position.