RENT THEORY OF PROFIT

RENT THEORY OF PROFIT

       The rent theory of profit is associated with the name of American economist, Francis A. Walker. According to him, profit are of the same genius as rent. The main points of Walker’s theory of profit can be summed up as such.

1.      Profit is rental in character. Just as superior grades of land earn more rent than the inferior grades of land, similarly superior entrepreneur due to their exceptional ability or opportunity earn more profit than the inferior entrepreneurs.

2.      As in the case of land, there is a no-rent or marginal land, so in the business also is a no-profit or marginal entrepreneur is one whose ultimate receipts from the sale of the commodities just cover his total costs.

3.      Just as rent is measured from the non-rent land, in the same way profit of the superior businessmen are calculated from the marginal entrepreneur.

4.      The rent does not enter into price of agricultural production of the manufactured goods.

          From all that we have said above, it can be concluded that profit are the reward of differential business ability.

CRITICISM:

     The modern Economist have discarded the Walker’s rent theory of profit on the following grounds:

Firstly, it simply provides a measure of profit. It does not throw light on the nature of profit which is more importance.

Secondly, Marshal is of the opinion that there is much difference between the rent of land and the entrepreneur’s profit. The rent of land can either be positive or zero, but in case of business, the total receipts from the sale of the product can fall short of total costs. So the entrepreneur may suffer losses and thus his profit may be in the negative. In the opinion of Marshall, the price of the commodity in the market is determined not by the cost of production of marginal firm but by the representative firm. Representative firm is the “which has a fairly long lease of life and has a firm degree of success, which is managed with normal ability and which has access to the normal economies of production”.

5.  It is also pointed out that profit may not from a part of the cost of production of a commodity in the short period but in the long period if the business is to be continued, it must enter in the price of the product.

Finally, profits do not arise simply because of the superior or exceptional ability of the entrepreneur, but they can also result due to chance gains or monopolistic position of the entrepreneur or they may be of the nature of the windfall income.