THEORIES OF PROFITS
Profit as Rent of Ability One view of profits makes them analogous to rent. The Rent Theory of Profit, as it .nay be called. was
propounded by the American economist, F. A. Walker . He was the first to introduce a distinction between a capitalist and an entrepreneur. An entrepreneur need 1. Thomas. S. E. : Elements of Economics. 1939. pp. 293-94.
2. For the history of the theories of profit see F. H. Knight-Risk, Uncertainly and Profit. 1940.. not be a capitalist. He is a person who may undertake a business without using any of his own capital. Tlu- The.\”. Walker regards profits as rent of
ability. Just as there. are different grades of land, there are different grades of entrepreneurs. The least efficient trepreneur. who must remain in the field of production to meet the current demand, just recovers his cost of production. Above him are entrepreneurs of superior ability. Just as rent arises because of the differential advantages enjoyed by a superior land over the marginal land, profit also is the reard for differential ability of the entrepreneur over the marginal entrepreneur or the no-profit entrepreneur. I Rules an’ thus like rent and, like rent, they du not cntr into price.
Wages of management are not profit and the marginal employer only earns the wages of management, and no more. With a slight unfavourable turn of prices or costs, he may have to work as an employee rather than as an employer. Wages of management, thus, must be paid to maintain the given supply of entrepreneurs. Such wages thus enter into price. Criticism. This theory has the same weakness as Ricardo’s theory of rent. The employer, who will leave the business with a slight unfavourable turn of events. is not necessarily the least efficient. He may be higher up in the scale and may be attracted by more profitable alternative ventures. The theory, moreover, does not explain the real nature of profits; it merely provides at best a measure of profits.
It is wrong to say, again. that profits do not enter into price. They may not enter in the short period, but they must be covered by price in the long-run. The entrepreneur performs the essentiaL function of risk bearing and unless the price of the commodity is high enough to compensate the entrepreneur for this, the supply of entrepreneurs will decrease until the price
rises high enough to pay for the risk-bearing service. Some entrepreneurs may earn high profits and others may suffer heavy losses. When the average is taken over a long period. the so-called surplus tends to disappear.