Profit Dynamic Theory
J. B. Clark propounded the dynamic theory of profit. He defined profit as the excess of price of commodities overcasts. He was of the view that the entrepreneurs gain profits due to dynamic change in society or due to the fact that society is dynamic. He classified social circumstances into two states (i) static state and (ii) dynamic state.
Static state according to Clark is a state where the element of time is non-existent. In a static state there is no uncertainty. The following elements do not change in static state viz. population, supply of capital, technique of production, industrial organization and human wants. On the contrary in a dynamic state the elements shown above are invariably changing.
In a stationary state the economic activities of the previous year will be repeated in subsequent years without any change. There is, therefore, no risk of any kind for the entrepreneur in a static society. There would be no profit for the entrepreneur. The entrepreneur would get interest on his capital and wages for his labour price of a commodity is higher than the cost of production competition would be soon force it down to the level of cost of production so that there cannot be a gap between cost of production and price.
According to Clark, society is not always static. It is changing every minute. Several changes are taking place in a dynamic society such as (a) changes in the size of population (b) changes in the supply of production (c) changes in the technique of production (d) changes in the forms of industrial organization and (e) changes in human wants
Profits arise in a dynamic state due to these changes. The changes affect the demand and supply of commodities which results in the emergence of profits. These are general dynamic changes. At times firms deliberately introduce dynamic changes. For instance, a firm by improving its technique of producing may succeed in cutting down its cost and this increase of its profit. In short profit belongs to economic dynamics and not economic state.
Prof. Knight's theory has been criticized on the following grounds:
1. Prof. Knight pointed out that profit is not due to all types of dynamic changes but due to changes that cannot be foreseen. The changes that can be foreseen can be provided for expenditure from a part of cost of production. Profits thus return from unforeseen changes.
2. Profit is not exclusively the result of dynamic changes. Profit is partly due to distinction between profits and wages of management.
3. The dynamic theory cannot determine the volume of profit.
4. Clark has rejected the risk theory of profit on the ground that risk is borne by the capitalist and not by the entrepreneur. This is not true. If the risk is borne by the capitalist, the capitalist would be the entrepreneur would merely work as his manager. Risk is, therefore, an important element in profit.
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