Clark''s dynamic theory, Managerial Economics

According to J.B. Clark's profits arises in a dynamic economy, not in a static one. A static economy is one in which there is absolute freedom of competition population and capital are stationary production process enjoy freedom of mobility but do not move because their managerial product in every industry is the same, there is no uncertainly and here is no risk, and if there is any risk, it is insurable. In a static economy therefore all firms make only the normal profit, the wages of management. On the other hand, a dynamic economy is characterized by the following generic changes.

1.    Increase in population

2.    Increase in capital

3.    Improvement in production technique

4.    Changes in the firms of business organizations, and managers multiplication of consumer wants.

5.    The major function or managers in a dynamic world are to take advantage of the generic changes and promote their business, expand their sales and reduce their costs. The who take successfully the advantage of changing condition in a dynamic economy make pure profit. Pure profits however exist only in the short run, competition forces other firms to intimate the changes made by the leading firms. This leads to a rise in demand for factors of production and therefore rises in factor prises and rise in cost of the production. On the other hand in output causes a decline in product prices gives the demand the ultimate result is that pure profit disappears. In Clark's own words, profit is an elusive sum which grasps but cannot hold. It slips through their fingers and bestows itself on all members of the society. This however, should not mean that profits arise in a dynamic economy, generic changes are continuous and managers with foresight continue to take advantage to the change and make profit. Emergence disappearance and re emergence of profit is a continuous process. Hawley's risk theory of the profit the risk theory of the profit was propounded by F.B. Hawley in 1893. Risk in business may arise for such reasons such as obsolescence of a product, sudden fall in prices, non availability of prices introduction of a better substitute by a competitor and risks due to fire war etc. Hawley regarded risk taking as an inevitable of dynamic production and those who take risk have a sound claim to separate reward known as profit. According to Hawley profit is simply the price paid by society assuming business risks. In his opinion, business man would not assume risk without expecting adequate compensation in excess of actuarial value, the premium or calculable risk. They would always look for a return in excess for a wages of management for bearing risk. The reason why Hawley maintained that profit is over and above the risk is that the assumption of risk is irk some, it gives rise to trouble, anxiety and Of various kinds therefore assuming risk gives the reward to a claim in excess of a actual of the risk. Profit according to the risk consists of the main parts: one part represents compensation of actual or average loss incident to the various classes of risks necessarily assumed by the and the remaining part represents an inducement to suffer the of being exposed the risk in their adventures. Hawley believed that profits arise from factor owner ship only so long as owner ship involves risk. According to him to assume risk to qualify for the profit. If an entrepreneur avoids risk by insuring against it, he would cease to be an entrepreneur and would not receive any profit. In his opinion it is the uninsured risks out of which profits arise and until the uncertainly ends with the sale to the products, the amount of reward cannot be determined. Profit, in his opinion is a residue. Hawley theory is thus a residual theory of the profit.

Posted Date: 8/4/2012 7:33:14 AM | Location : United States

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