Theories of profit(3)

detailed explanation of theories of profit- dynamic theory, innovation theory, wage theory

1. THEORIES OF PROFIT
(3)
PRESENTED BY –
DR. JYOTI KHARE
GOVT. DEGREE COLLEGE
MALDEVTA, RAIPUR
DEHRADUN

2. The Dynamic Theory of
Profit:
Prof. J. B Clark propounded this theory in the year 1900.
According to him—“Profit is the difference between the
price and the cost of the production of the commodity”.
Clark said ‘society is dynamic-and is changing every
minutes’. Changes affect mainly the demand & supply
which result in the emergence of profit.
Theory focuses that profit belongs to economic
dynamics and not economic static.
static economic: the quantum of capital invested,
methods of production, managerial organisation,
technology, demand pattern etc. remain constant.


3. Six Dynamic Changes
Profit is the result exclusively of six dynamic changes i.e.:
(1) Changes or increase in population,
(2) Changes in tastes and preferences,
(3) Multiplication of wants,
(4) Capital formation,
(5) Technological advancement and
(6) Changes in the form of business organisation.
Inefficient and careless producers who fail to move with dynamic
changes may not get any real profit and may even incur losses. Thus,
Clark’s dynamic theory of Profit has an element of truth as it emphasis
the dynamic aspect of Profit.

4. CRITICISM
All changes are not foreseen.
All changes do not lead to Profit.
Element of risk involved in business. Risk is born by the capitalist not
by the entrepreneur, it’s not true because capitalist would be
entrepreneur.
This theory can not determine the volume of profit.

5. INNOVATION THEORY OF PROFIT
Associated with Prof. J. A. Schumpeter
“Profit is the Reward for Successful Innovation”:
In his opinion, the entrepreneur initiates innovation in the business
and when he succeeds, he earns Profit as his reward.
Innovation: “Innovation means commercial application of new
scientific inventions and discoveries.”
An innovator is, therefore a businessman with vision, foresight,
originality and is bold enough to bear high risks involved in
undertaking new activities on a new basis.
The innovator is not a scientist, but he successfully introduces new
inventions on a commercial basis.
In giving opinion over this Samuelson has written as an example—
”The scientific theory of radio wave was the brain-work of Maxwell. It was
experienced upon by Hertz and its commercially profitable use was carried
out by Marconi and Sarnoff, who are the innovators in radio manufacturing.

6. Types of innovation
Innovation is of two types:
(i) Product innovations (the cost and quality of the product )
(ii) Market innovations(discovery and exploitation of new market, introducing
new variety of products and product improvement, modes of advertising and sales
propaganda etc. )
It has been said that any form of innovation leads to a Profit.
It is called as innovational profit.
This Profit is uncertain and unpredictable. It is temporary in nature.
Thus, profit is result of constant striving on the part of entrepreneur for
new methods / procedure.

7. Criticism
Schumpeter has never considered Profit as the reward for risk-taking
There is no place of uncertainty in Schumpeter’s innovation theory.
Theory determines the temporary profit.
This is simply institutional theory (by which only structures become
established as authoritative guidelines for social behaviour)

8. THE WAGE THEORY OF PROFIT
by Prof. Taussig and Davenportthe two most prominent economists.
According to them—“Profits are best regarded as simply a form of
wages. They accrue to the entrepreneur on account of his special
ability.”
They have argued that there is very close similarity between a labourer
and entrepreneur. Just as labourersreceive wages for his services,
similarly entrepreneurs receive profit for his service.
Buttheonlydifferencebetweenentrepreneurandothermental
workers(likedoctor,teacher)isthattheentrepreneurreceivesprofitfor
hisspecialabilityandhardwork.Thisisasurplusamountwhichthe
entrepreneursreceiveaftermeetingallexpensesofproductionwhere
asthewageformsapartofthecostofproduction.

9. Criticisms of Wages Theory
Profit is flexible, it may vary. But wage may remain stable and
cannot fluctuate.
This theory is silent over the payment to shareholders.
Entrepreneurs may receive wind fall or may chance profit but the
worker can not have opportunity to get wages of chance or
windfall.
The entrepreneur’s work is full of risk and uncertainty and profit is
given to face this risk. But the workers receive wages simply for his
labour. Risk and uncertainty part do not incorporate anywhere in his
activities. For labourerrisk is of losing the job which is an extreme
step.

10. THANK YOU