Careers: Business/Managerial Economics
Dynamic Theory of Profit
Dynamic Theory of Profits
in a static world, where the size of the population, the amount of capital, the quantity and quality of human wants, the methods of production, technical knowledge, the organization of business, etc., remain the same, profits tend to disappear under the force of competition. Profits represent the difference between selling price and cost. It is a surplus above costs. But if competition works in a frictionless manner, the surplus will vanish. Wherever there is a surplus, production will increase, bringing down the price. That is how the surplus will disappear. In the static condition each factor protects what it manufactures, and since expenditure and selling cost are always equivalent, there can be no profits outside wages for the schedule work of management. In a stationary state, everything is known and knowable. There is no risk and no uncertainty, and hence no profits.
Profits Arise in a Dynamic World
But we are not living in a stationary state. Ours is a dynamic world and some changes are constantly taking place. The clever entrepreneur foresees these changes. He is a pioneer. Somehow by invention or otherwise, he lowers the cost and makes profits. The changing world offers limitless opportunities to the far-sighted, daring and clever entrepreneurs to make profits by turning the facts of the situation in their favor. It is only because the world is dynamic that it is possible for them to keep the lead and reap the profits. In a static slate, profits will disappear, and the entrepreneurs will only earn wages of management.
only those changes which cannot be foreseen and which cannot be provided for in advance will yield profits and not others. He says, It canít, then, be altered which is the reason of profit, since if the regulation of alteration is known, as in fact is chiefly the case no gains can arise. Change may cause a situation out of which profit will be made, if it brings about ignorance of the future.
Thus, it is ignorance of the future or uncertainty, and not necessarily change, which, according to Knight, is the cause of profit.