F.W. HAWLEY’S THE RISK THEORY OF PROFIT�AND �KNIGHT’S THEORY OF UNCERTAINTY BEARING

F.W. Hawley’s the Risk Theory of Profit:

• This theory of Profit is associated with F. B. Hawley who has considered the risk-taking as the important function of an entrepreneur. The entrepreneur exposes his business to risk, and in turn he receives a reward in the form of Profit because the task of risk-taking is tedious.

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F.W. Hawley’s the Risk Theory of Profit:

• It is definite that no entrepreneur will like to undertake risks if he gets only the normal return. Therefore, the reward for risk-taking must be higher than the actual value of the risk.

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F.W. Hawley’s the Risk Theory of Profit:

• Further, it has been said that more risky the business, the higher is the expected Profit rate. “riskier the industry or firm, the higher is its Profit rate.”

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Criticisms:

• Like other theories, the risk theory of profit has also been criticised on the following grounds:
• a. There cannot be functional relationship between Risk and Profit:
• Those persons who dare to take high risks in certain businesses may not necessarily earn high
• profits.

Criticisms:

• b. Profit is not based on entrepreneur’s ability:
• In this connection Prof. Carve has said that “Profit is not based on entrepreneur’s ability to undertake the risks of the business, but rather as his capability of risk avoidance.”

Criticisms:

• c. It is an incomplete theory:
• From business point of view, all enterprises are risky and an element of uncertainty is present there. But every entrepreneur aims at making large profits which is also uncertain. Therefore, Hawley’s Risk Theory can also be called as an incomplete theory of Profit.

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Criticisms:

• d. Amount of Profit not related to size of risk involved:

The amount of Profit is not in any way related to the size of the risk undertaken. If it were so related then every entrepreneur would involve himself into huge risks in order to earn larger profits.

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Criticisms:

• e. Concentrates mostly on risk and not on anything else:
• This theory mostly disregards many other factors attributable to Profit and just concentrate on risks and risks alone.

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Uncertainty-Bearing Theory:

• Prof. Knight’s theory of uncertainty bearing theory of Profit is an improvement and refinement theory of Profit over Hawley’s risk-bearing theory of Profit. Here, Profit according to Knight, is the reward of bearing non-insurable risks and uncertainties. It is a deviation arising from uncertainty.

Uncertainty-Bearing Theory:

• Uncertainty prevails in the entire society and profits, positive or negative, in a way accrues to all factor services. In other words, there is profits element in all types of income. But the division of social income between Profit and contractual income depends on the supply of entrepreneurial ability.

Uncertainty-Bearing Theory:

• Uncertainty bearing is the most important function in a dynamic state. It is the entrepreneur who either delegates this function among different personnel or assumes it himself. The expectation of Profit is, in a way, the supply price of entrepreneurial uncertainty-bearing. In a competitive economy where there is no risk, every entrepreneur will have a minimum supply price.

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Uncertainty-Bearing Theory:

• In short Knight’s theory implies that:
• (i) Profit is reward for uncertainty-bearing.
• (ii) The un-measurable risks are termed as uncertainty. These un-measurable risks are true hazards of business.
• (iii) Pure Profit is, however, a temporal and unfixed reward. It is turned with uncertainty. Once the unforeseen circumstances become known, necessary adjustment would be possible. Then pure Profit disappears.

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Criticisms:

• a. This theory does not give clear notion of entrepreneurship therefore it has been called unrealistic:

In this theory there is no indication as to who are the real owners because owners are shareholders and policy decision-makers are salaried people.

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Criticisms:

• b. Difficulty in the distribution of profit:

This theory does not solve the problem of distribution of profit among the controlling and ownership group, therefore, this theory keeps the problem of the determination of Profit unsolved.

Criticisms:

• c. This theory fails to expose the phenomenon of monopoly profit:

The theory does not suit well to expose the phenomenon of monopoly profit. When there is least uncertainty involved in a monopoly business.

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Criticisms:

• d. This theory has not said anything on monopoly profit

This theory does not throw any light on the monopoly profit. As we have studied that monopoly firms earn much larger profits than competitive firms and they are not due to the presence of uncertainty.

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Criticisms:

• f. Above all, the uncertainty element cannot be qualified to improve profits.

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