UNCERTAINTY THEORY OF
PROFIT
According
to professor Knight, profit is the reward for uncertainly-bearing and not of
risk-taking in a business. According to him there are two kinds of risk which
entrepreneur has to bear. Some risks are of such a nature that they can be anticipated
to a fair degree of accuracy, e.g. the risk of death, accident, etc. and so can
be insured in return for premium. The entrepreneur can include the payment made
in the form of premium in the total cost of production. So such risks which can
be calculated and insured should not entitle the entrepneur to a profit. On the
other hand, there are some risks which are unpredictable and unforeseen and so
they are non-insurable. For instance, if the demand for the product of at
entrepneur suddenly comes down due to changes in fashions, tastes, etc. then he
may not be able to cannot be statistically measured are called by Knight, as
uncertainly-bearing risks. Profits,
according to him are the reward of uncertainty-bearing rather than risk-taking
which is insurable.
CRITICISM:
1.
The
total profit which an entrepreneur receives cannot be attributed solely to the
element of uncertainty in a business. He performs other functions also such as
coordinating, bargaining, and innovation in the business. So he must be paid
for these services also.
2.
It
is not simply due to uncertainty-bearing that the supply of entrepreneur is
restricted. There are other factors also which influence the supply of the
entrepreneur for instance, etc. do restrict the supply of an entrepreneur in a
business.
MARGINAL PRODUCTIVITY
THEORY OF PROFIT
According to this theory, the earning of
entrepreneur like the reward of other factors of other factors of production
can be explained by the marginal productivity analysis. In words of Champ man.
“the profit tend to be equal to the
marginal social worth of the employers in exactly the same sense in which
the labour gets his marginal net product from the employers. The marginal net
product of an entrepneur is the amount which the community is able to produce
with his help over and above what it could produce without his help.
Thus, we
conclude that under conditions of perfect competition, the reward of the
entrepreneur tends to be equal to the marginal social worth of the employer. If
the marginal productivity of the employer is high, the profit will also be high
and if the marginal net productivity is low, then profit will also be low.
CRITICISM:
One very important
criticism levied on this theory is that the unit of factor, I.e. the enterprise
is very large. If for finding out the marginal net productivity of the entrepreneur,
we withdraw it from the business, then it will disorganize the entire
productive organization. It thus, becomes very difficult to ascertain the
marginal net productivity of labour
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