A critic writes:

Our entire system is based is based on profits and losses driving decision making and economic activity, but our accounting does not always capture all the costs. If I open a new factory near a river for 5 million dollars and I make an extra 1 million dollars, but I pollute the river, clear out a bunch of trees, etc… the market says that was a good investment and I should do it again. What about all the dead animals, loss of entertainment value from the river, costs of eventually cleaning up the mess etc… ? If 100 profitable companies all find a way to lay people off and make more money, our accounting says they should do it. What about the impact on hundreds of other companies that got part of their revenue from the people that lost those jobs? What about the human cost? Until ALL the costs are evaluated and included in a profit loss statement, it’s impossible to know whether an investment is actually good or bad even if it is profitable by current standards.

With regard to pollution, a market economy, as opposed to what we have now, punishes pollution as a violation of property rights. Polluters could not simply soil other people’s property, or send sludge down river to invade other people’s land. Here’s what Mr. Libertarian, Murray Rothbard, had to say about pollution and the market economy, and it’s something like the opposite of what our critic would probably expect him to say.

“What about the impact on hundreds of other companies that got part of their revenue from the people that lost those jobs?”

There are lots of logical problems with this objection that I think our critic has not stopped to consider. For one thing, could we not blame this critic himself for the job losses brought on by his own changes in taste? Last year he wanted corduroys, and this year he wants loose-fitting jeans. What about the impact on the corduroy companies, and all the companies with which it does business, made by our critic’s self-centered change of fashion? Did he stop to consider the human cost of his frivolous decision?

Everything we do in a division-of-labor economy will have exactly the same ripple effects our critic rails against here. His complaint could be raised against practically all action.

For another thing, why is our critic so sure that exactly the right number of people happen to be employed in every single industry at this particular moment, such that the decision by a firm or group of firms to lay some off can be explained only by sheer wickedness? It would be a veritable miracle if that were the case. If a firm is more prosperous with fewer workers, all we can say about this is that it had previously employed more people than was optimal. How can our critic say, non-arbitrarily, that it is better for a particular firm to have 150 employees than 120? How can he know that? What unique insight does he possess to tell him that?

What if those extra 30 laborers can satisfy the consumer better in some other sector of the economy? What if demand is falling for a firm’s product, such that it is absurdly overproducing with its current level of employment? In a division-of-labor society we cannot be so self-centered that we assume our present jobs are ends in themselves. The point of a job is to do something that serves your fellow man. If you are no longer serving your fellow man in a way that pleases him, are you entitled to stay in that form of employment in defiance of your fellow man? This is deeply anti-social. And what about all the dislocation caused when the automobile replaced the horse and buggy? What about the “human cost” of that? This whole line of argument, in short, would put an end to human progress and human choice.

The very fact that the firm earns higher profits with fewer employees indicates that it had previously been misallocating scarce resources. Profits are an indication from the consumer that a firm is combining factors of production in ways that add value. The process of economic calculation, whereby a firm compares its sales revenues with its input costs, informs the firm of how well it is satisfying consumer demand at the least cost in terms of opportunities foregone (i.e., what the factors of production employed by the firm could have produced had they been in others’ hands). If the firm is losing money by employing more workers, that means the present configuration of factors of production displeases the consumers, who prefer to see them allocated in some other way.

Ludwig von Mises explained in Human Action that such critics should really be directing their complaints at the consumers, not the firms themselves: