How do we know a business is allocating resources correctly? If the answer is 'profitability,' why is monetary profitability the barometer? To clarify, it's a two part question:

How do we know a business allocates resources efficiently?
Assuming the answer to above is: &quot;profitability&quot; Why is is 'monetary' profitability taken to be synonymous with efficiency of resource allocation?
A firm has a business plan. From its perspective, resources are allocated “correctly” if they achieve its business plan. However, it is entirely possible that the business plan makes no sense, e.g., it is supplying a product far in excess of what customers are willing to buy. For public companies, equity market analysts attempt to project the effectiveness of those business plans. The volatility of equity prices is an indication that this is not easy.
A single project is typically evaluated with discounted cash flow analysis. (Similar to this question answer: government analysis) This gives us a project-level profitability measure, but we really need to evaluate the global business plan.
The issue is that “profitability” is somewhat vague: on what horizon? It is entirely possible for a firm to invest in projects to build capacity but those initial projects have very low profits (or even losses) during its growth years. However, the hope is that the firm is very profitable when it has reached its target size. Unless we wait, we cannot be sure whether this strategy will generate future profits or not.