The Risk Theory of Profit

The risk theory gain was propounded by Professor Hawley in 1907. According to this acceptance, profit is the reward of risk-taking in a business by the entrepreneur all other factors of production like land, labour, and capital have their income guaranteed from the entrepreneur but the income of the entrepreneur is uncertain or nonguaranteed the entrepreneur has various difficulties in conducting of business some example of such difficulties are.

• Produced goods may become outdated.
• Price may suddenly fall.
• A better substitute may available.
• Natural calamities may destroy production.
• Raw materials may not be available.

These things may lead the business to total loss, if this happens then it is the entrepreneur not the other factor of production. Who has to ultimately bear the loss, Hence the entrepreneur must be compensated for undertaking such a risky business. Profit is the name for this compensation. The greater the risk, the higher must be the profit this is because if the returns on a risky enterprise are easy to return on a safe investment. Then no entrepreneur will undertake a risky enterprise.

This theory of profit is criticized by various economists.