Uncertainty-bearing Theory of Profits

The Theory. According to Prof. knight, it is uncertainty bearing rather than risk-taking which is the special function of the entrepreneur and leads to profit. We’ have seen that there are certain risks which are foreseen and provided against. Risks of death and of accident like fire and ship sinkings are statistically determinable. Their incidence is measurable.

Uncertainty-bearing Theory of Profits

Uncertainty-bearing Theory of Profits

The insurance
companies undertake these risks in return of premium paid to them. The payments of these premia are included in the cost of production. The entrepreneur gets no profit on account of these risks. Hence, risk taking is not the function of the entrepreneur, but of the insurance companies. But the genuine economic risks of the marketability of the product due to shifts in demand, are unforeseen and unpredictable. Knight will not call them risks but uncertainty. The term ‘risk’ is applied to those dangers which can be known and foreseen. The entrepreneur gets a remuneration for bearing uncertainties (unforeseeable risks) and nothing for the risks which have been for seen, the incidence of which is on the insurance companies . Just as waiting (capital) is a factor of production, uncertainty-bearing has also been given the status of a factor of production. Like other factors of production, uncertainty-bearing has a supply pnce. i.e., unless a certain return is expected, no entrepreneur will be induced to face uncertainty. The supply of this factor, uncertainty-bearing, depends on the temperament of the entrepreneur, the total resources at his command and the proportion of these resources he is inclined to .expose to uncertainty. A rich entrepreneur of a bold and venturesome spirit, who has made up his mind to invest a big proportion of his wealth, can bear greater uncertainty. A greater gain is necessary to induce an entrepreneur to expose a large proportion of his capital than when only a small proportion is exposed. Criticism. The theory of uncertainty-bearing, as a cause of profit, has been criticised on the following grounds:

(ii) Uncertainty-bearing is not the only function of the entrepreneur. The profit that he gets is also the reward for other services that he renders, e.g., initiating, coordinating, etc. (iii) Uncertainty Bearing cannot be elevated to the status of a factor of production. It is an element of real costs which means exertion, abstinence, sacrifice, etc., as distinguished from money cost. Cost is not generally measured in terms of real cost. We know that capital is a factor of production but not abstinence that is needed to have capital. Prof. Knight. (iv) Knight’s theory does not seem to have much relevance to thc real world Businessmen continue to estimate profits ex-ante in defiance of this theory. This theory has been criticised as heavily insulated from empirical testing and empirical relevance

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