In a free market, profit is an indication of the consumer’s valuation of one product or service relative to all others. The higher the profit expectation, the more resources investors will commit to future production.
There is no guarantee of future profits. Increased production might result in increases in scarce component prices or conversely result in learning curve efficiencies that bring costs down. Reducing prices, and with it profits per sale, may offer greater total profits by attracting additional buyers. Initial consumer demand may disappear or ramp up for the new “in thing”. Competition might force prices down or eliminate demand by offering a superior product. Investors must consider all these factors, but the clinching decision is estimate of future profits. The investment with the highest profit potential should always be selected, because it is a reflection of the greatest opportunity for consumer satisfaction.
In any one-to-one transaction, the selling party has a product or service to sell. The buying party has cash. Since the buyer can buy anything he might want, at the point in time when the sale takes place, the price he is willing to pay for that item is a measure of the satisfaction he believes he will receive from the purchase, because he has not elected to buy something else, dicker for a lower price, or hold on to his money.
Government can, and frequently does, interfere with the free market. Existing businesses attempt to limit competition to maintain high profit margins, and frequently collude with regulators to bar new entrants or make entry difficult, in what is called “regulatory capture”. Licensing and excessive regulation can be used to create barriers to entry, to benefit “cronies”. Obviously, restricting markets cannot work if buyers have alternatives, like the internet.
Under socialism, there is a conscious effort to limit competition, for being wasteful duplication of effort. However, a single source with no competition has no incentive to be efficient, innovative, or reasonably priced. The link with consumer satisfaction is broken. True socialism cannot work, because there is no mechanism to efficiently allocate resources. A central planner will always be out of phase with the real world.