Checking the Scoreboard: Profit as Information

Every morning before they go to work, millions of people, mostly guys, open up the sports page and check the scoreboard to see how their favorite baseball, football, basketball or hockey team performed. If their team scored more points than the opposition, without looking at the statistics, they can predict with high probabilities that their team outperformed the opposition in runs, pitching, fielding, pass completions, number of baskets, and so on. In other words, just by looking at the score, millions of people have a lot of information about their teams.

And so it is with profit. As an information parameter profit is one of the best barometers businesses have to rank the things consumers want. If there is more profit in producing personal computers than there is in producing calculators, then consumers are telling business that they want the one more than the other. Accordingly, businesses will shift their resources to comply with this ranking, and they will make more computers and fewer calculators.

Profit, or lack of it, is also a signal for businesses to enter or exit the marketplace. For example, from 1973 through 1980, when profit was high in the oil industry, there was a surge of entry by new companies. Since then, profit in the industry has declined, and a large number of companies have gone out of business.