RISK BEARING THEORY OF PROFIT
Here we understand the Risk Bearing Theory of Profit in detail.
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Risk Bearing Theory of Profit:
The Risk-bearing theory of profit was developed by the American economist Prof. Hawley in 1907.
According to this theory profit is a payment made exclusively for bearing the risk. The essential function of the entrepreneur is considered to be in doing something which only he can do; something which he cannot hire some one else to do. This something cannot be the task of management for managers can be hired, nor can it be any other function which he can delegate to others.
According to Prof. Hawley, it is the risk-taking which is the special function of an entrepreneur. He alone has to bear the risk, and profit is the reward for his risk-taking. As we know every business in modern times involves some risk or the other and the assumption of risk is necessary if production is to continue. But the bearing of risks is unpleasant and risksome. Hence risks would not be borne without the expectation of a reward. Since the entrepreneur undertakes these risks, he gets reward in the form of profit. If the entrepreneur does not receive the reward, he will not be prepared to undertake the risk.
The degree of risk varies in different industries and within the same industry, also different entrepreneurs undertake different degrees of risks according to their ability and inclination and they receive different rates of profit.
Higher the risk, greater is the possibility of profit. But it should be remembered that the rate of profit must be more than the normal return on capital, for if it is equal to or less than the normal return on capital, no entrepreneur would be prepared to undertake the risk.
Risks inherent in the modern business act as a check on the entry of large number of persons into the enterprise. Thus, the supply of entrepreneurs who are willing to undertake the risk becomes limited and those who bear the risks get the reward by way of profit.
Profit, is a reward for risk-taking.
Risk bearing theory of profit
Special function of entrepreneur
Risk bearing is risksome and unpleasant
Profit is a reward for risk taking
Risk Bearing Theory of Profit.
Tech writer at NewsandStory