DYNAMIC THEORY OF PROFIT

DYNAMIC THEORY OF PROFIT

        In the world of reality, according to J.B larks, profit arises only in a dynamic economy. An economy is said to be dynamic when there is a change in the population growth or a change in the method of production or a change in the consumer wants, etc. a society which is without these changes is called a static society. in a static society only monopoly profits continue to exist all other economic profit are gradually eliminated by competition.

    In a dynamic society, an entrepreneur is always confronted with continuous unpredictable changes in demand for his product the variation in demand may take place due to change in fashions, tastes, standard of living, distribution of income, population, new inventions, international repercussion and technological advance, etc. A prudent entrepreneur will always keep an eye on the future demand for his products. If he succeeds in increasing his sale by lowering the cost of production or by adoption of an innovation, then he can secure profits. Thus, we find, that profit are a reward, of progress. Schumpeter calls it the reward of innovation. In dynamic economy, if an entrepreneur produces a new thing and creates demand for his products, then he is likely to obtain bi profits. But the profit of the entrepreneur cannot continue to exist for long period. The other entrepreneurs also adopt the innovation and produce similar products. As total output increases, the profits, gradually come down. Thus, we find that perpetual profit profits are the result of perpetual new successful innovations.

CRITICISM:

        Prof. Knight has criticized the Clarkian theory of profit on the ground that it is wrong to attribute all profits to dynamic changes. According to him, there are certain changes which are of a recurring and calculable nature. They can be anticipated and the output can be adjusted according to that. The profits do not arise on those regular changes but on those which are unforeseen or unpredictable. He thus observes that “it is not dynamic changes nor any changes as such which cause profits but the divergence of actual conditions form those which have been expected and on the basis of which business arrangements have been made.