[Written Testimony before the Subcommittee on Domestic Monetary Policy and Technology Committee on Financial Services, US House of Representatives, May 8, 2012]
In a seminal article published in 1920, Ludwig von Mises demonstrated that there is only one test of whether or not production of something conveys a benefit on society at large. It must be shown that resources have greater value when used to produce a good to satisfy the preferences of some people than when they are used to produce a different good to satisfy the preferences of other people. Production left to the market satisfies the profit-and-loss test of socially beneficial production.
For Tim Cook to obtain computer chips, glass screens, labor, and other resources to produce iPads, he must bid them away from other entrepreneurs who would have used them to produce other goods. By incurring the costs of production, Apple Inc. compensates the owners of resources for the value of the other goods they could have produced to satisfy a different group of consumers. Apple then uses the resources to produce iPads, which consumers of its products value more highly as demonstrated by their generating enough revenue for Apple Inc. to more than cover its costs.
The profit-and-loss test applies to all production in the market, including mining gold and minting coins. A gold-mining company will produce when the revenues from the sale of its output exceed the costs of buying its inputs. The company moves labor, mining equipment, land, and other resources away from uses consumers find less valuable into gold mining, which consumers find more valuable. A minting company will produce when the revenues from the sale of its service in certifying gold exceed the costs of buying its inputs. The company moves labor, minting equipment, land, and other resources away from uses consumers find less valuable into minting coins, which consumers find more valuable…