UNCERTAINITY BEARING THEORY OF PROFIT

Prof. Knight in his work Risk, Uncertainty and Profit (1940) surveyed the existing
theories and famed his own theory. According to Prof. Knight
Profit is the reward of uncertainty risk bearing. Profit accures to entrepreneur,
because he bears uncertainty in business. Prof. Knight divided risk into two heads:

(i) Foreseeable risk: which entrepreneur can risk and provide against such as risk of
fire, theft etc. can be removed by taking out insurance. The premium paid can be
concluded in cost of production.

(ii) Unforeseeable risk: These risks are not foreseeable by the government Prof.
Knight calls that market accures profit to entrepreneur.
Uncertainty may be due to uncertain behavior of competitions. Technical changes in
machines and equipments, business cycle and risks of government intervention.

Knight explained undesirable risks thus “the modern economic order is built around
the concept of enterprise the correlate of which life is necessary involves much
uncertainty referred to as profit system. Economic fife necessary involves much as
more insurance is impracticable.
Enterprise economy adds to this the far greater uncertainty associated with the
almost universal production of goods anticipation of the wishes of consumers.

Uncertainty bearing as a function of the entrepreneur: Knight emphasized

uncertainty bearing as the main function of the entrepreneur. In a way he gave
uncertainty bearing the status of a separate factor which has a supply side on the
degree of uncertainty involved in a venture. Unless uncertainty is rewarded with a
degree of goods in anticipation of the wishes of consumers involved.

Prof. Knight showed that the presence of uncertainty about future may allow
entrepreneurs to learn positive despite product exhaustion and competitive
equilibrium. This positive profit may exist even perfect competition.

Prof. Knight’s theory assumes uncertainty as a unique factor giving rise to profit. His
theory does not contribute profit simply to dynamic change.
In so far as the changes are profits due to risks for known risk is hanged against by
taking out insurance.

Criticisms

The following are some of the criticisms of the uncertainty bearing theory of profits:

1. According to this theory profit is the reward for uncertainty-bearing. But

sometimes an entrepreneur earns no profit despite uncertainty-bearing. Critics point
out that there are other causes of profit in addition to uncertainty bearing. Others
functions like initiating coordinating and bargaining also fetch point.

2. Uncertainty beating is considered as an independent factor of production. If an

entrepreneur earn profit in an atmosphere of uncertainty on the basis of business
ability it does not mean that this profit is due to his ability.

The uncertainty bearing theory like the earlier theories does not furnish a
comprehensive explanation of profit and therefore it is inadequate. However we
cannot ignore its importance as a determination of profit.