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  Dynamic-Innovation-Risk theory of profit

Dynamic-Innovation-Risk theory of profit:

The Dynamic Theory of profits:

Professor Clark is the author of this theory. According to him, gains are the outcome of dynamic changes in society. Clark has stated profits as the surplus of the prices of goods over their costs. Some of the significant changes associate to the size of population, supply of capital, production methods, industrial organization and human needs. However the dynamic theory is one of the modern theories of gains, “it overlooks the basic question of the difference among a change which is foreseen a reasonable time in advance and one which is unforeseen”.

Innovation theory of profits:

According to Schumpeter, gains are the prize for innovations. An innovation is somewhat greater than an invention. An invention becomes an innovation only whenever it is exerted to industrial procedures. Innovation involves introduction of new goods, or new techniques of production and opening new market. And innovations are mentioned by the entrepreneur. Modifications and economic development occur since of his activities. Therefore he acquires profits for innovations. The criticism against the theory is that however innovation is a significant factor in the emergence of profits; it can’t be the only factor. This ignores the risk-bearing function of entrepreneur.

The Risk-bearing theory of profits:

According to Professor Hawley, profits are the prize for an entrepreneur for risk- taking. Risk -taking is a significant function of an entrepreneur. Profit-making and risk-taking go altogether. The main criticism alongside this theory is that it does not make dissimilarity among known and unknown risks. Known risks (example, theft, fire) can be insured against. We might say that gains are the prize for taking unknown risks. For illustration there is a lot of uncertainty about these risks.

The uncertainty-bearing theory of profits:

Professor Knight is the author of the uncertainty-bearing theory of profits. He has the view that “profit is the prize not for risk - bearing however uncertainty-bearing”. His major point is that there is risk since future is uncertain. And uncertainty-bearing is a necessary function of an entrepreneur.

The entrepreneur can assure recognized risks. However unknown risks (example: competition risks, risks of government act) can’t be insured against. Such risks are uncertain. The entrepreneur earns gains since uncertainties are bear by him. The criticism against the theory is that uncertainty-bearing only is not the only function of an entrepreneur.

Conclusion:

The main defect with all the above theories is that they strain only one or two functions of the entrepreneur. In addition to the risk-taking and uncertainty-bearing, the entrepreneur executes a number of other functions. And he deserves prize in the form of gains.

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