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Profits Theory
The study of profits which are said to be the reward for enterprise, the fourth of production is known as profit theory. No doubt profits are associated with entrepreneur and his function but the economists from time to time have expressed diverse and conflicting views about the nature, origin and role of profits. Till today, there is no complete agreement among economists about the true nature and origin of profits. As a matter of fact, there has been perhaps no topic in the whole economic theory which has been in such in such a confused and tangled state as the theory of profit.
A part of the confusion in the theory of profit is due to the lack of agreement among economists about the true or proper function of the entrepreneur. Some have held the view that the function of the entrepreneur is to organise and coordinate the other factors of production. According to them, entrepreneur earns profits for his performing this function. On this view, enterprise is a special type of labour and profits a special form of wages. Some others have described the entrepreneur as performing the functions of bearing risk and uncertainty as he bears risk and uncertainty because as his price and output policies may prove to be incorrect in view of the future business movements. Schumpter has assigned to the entrepreneur the role of an innovator and profits as a reward for his introducing innovations. Lastly, F. H. Knight has emphasized uncertainty in the economy as a factor which gives rise to profits and bearing uncertainty is the task of the entrepreneur.
Besides, some economists have described profits as non functional income. Thus, the view that profits resulted from the favourable conditions of the general price level. Some have associated profits with imperfect competition monopoly. According to them, the greater the degree of imperfection or, in other words, the greater the degree of monopoly power, the greater the profits made by entrepreneur. Thus, profits have been connected with uncertainty with innovations and with the degree of monopoly power. As a matter of fact, profits arise from all these sources. Therefore, no single explanation or theory of profits is adequate; each limits and omits some crucial factors and fails to bring out some view that profits originate from monopoly, successful innovations and a correct estimate of uncertain feature. He thus says, “Profits may come to exist as a result of monopoly or monopsony, as a reward for innovation, as a reward for the correct estimate of uncertain factors, either particular to the industry or general to the whole economy.
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A part of the confusion in the theory of profit is due to the lack of agreement among economists about the true or proper function of the entrepreneur. Some have held the view that the function of the entrepreneur is to organise and coordinate the other factors of production. According to them, entrepreneur earns profits for his performing this function. On this view, enterprise is a special type of labour and profits a special form of wages. Some others have described the entrepreneur as performing the functions of bearing risk and uncertainty as he bears risk and uncertainty because as his price and output policies may prove to be incorrect in view of the future business movements. Schumpter has assigned to the entrepreneur the role of an innovator and profits as a reward for his introducing innovations. Lastly, F. H. Knight has emphasized uncertainty in the economy as a factor which gives rise to profits and bearing uncertainty is the task of the entrepreneur.
Besides, some economists have described profits as non functional income. Thus, the view that profits resulted from the favourable conditions of the general price level. Some have associated profits with imperfect competition monopoly. According to them, the greater the degree of imperfection or, in other words, the greater the degree of monopoly power, the greater the profits made by entrepreneur. Thus, profits have been connected with uncertainty with innovations and with the degree of monopoly power. As a matter of fact, profits arise from all these sources. Therefore, no single explanation or theory of profits is adequate; each limits and omits some crucial factors and fails to bring out some view that profits originate from monopoly, successful innovations and a correct estimate of uncertain feature. He thus says, “Profits may come to exist as a result of monopoly or monopsony, as a reward for innovation, as a reward for the correct estimate of uncertain factors, either particular to the industry or general to the whole economy.
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