Criticism of The Innovation Theory of Profit

Here we discuss about the Criticisms of The innovation theory of profit in detailed.

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Criticism of The Innovation Theory of Profit

The innovation theory of profits has been criticised on the following grounds-

First of all, we look at the Main Points of criticism against this theory-

Main points of criticism against this theory are as follows:

It ignores the element of uncertainty.
In addition to innovations, there are many other factors which give rise to profits.
In modern enterprises, it is the enterpreneur who bears the risk, not the capitalist as Professor Schumpeter believes.

Now, we will discuss the above mentioned points one by one in detailed.

The innovation theory does not take into consideration the element of uncertainty as an important factor giving rise to profits. As pointed by Prof. Knight the main emphasis should be placed on uncertainty and not on innovation because even in absence of innovations, the entrepreneur would be able to earn profits if he can predict the future with a fair degree of certainty in so far as the changes in the demand and supply conditions are concerned.
Besides innovations, there are a number of other factors which give rise to profits, for eg- existence of monopoly, chance profits etc.
The theory also does not consider profits as the reward for risk taking. According to Prof. Schumpeter, "The entrepreneur is never the risk-bearer. The one who gives credit comes to grief if the undertaking fails." This however, is not correct, for we know that in the modern industrial organisation, it is the entrepreneur and not the capitalist who bears the entire risk of business.
Lastly, it has also been said that the function of the entrepreneur is not only to introduce innovations but also to organise the business in the most efficient manner by co-ordinating the activities of the various factors of production. As such, profits are not exclusively due to innovations but also due to the superior organisational ability of the entrepreneur.

Innovation Theory of Profits- Criticisms of the Innovation theory of profits.

Kinnari

Tech writer at NewsandStory