Rent Theory of Profit And Its Criticism

The Rent Theory of Profit was first introduced by Senior and Mill. Later this theory was developed by the American Economist F. L. Walker. He regarded profits as the rent of ability. According to him, there was a good deal of similarities between rent and profit.

As per Rent Theory of Profit, rent was the reward for the use of land, while profit was the reward for the ability of the entrepreneur. Just as lands differ in fertility, entrepreneurs differ in business ability. Due to the differences in the fertility of land, rent arises. Similarly due to the differences in the ability of entrepreneurs, profits arise. As superior lands earn more rent, superior entrepreneurs earn more profit.

An entrepreneur with average ability gets only cost of production. He gets no profit. He is called marginal entrepreneur. He is also called no profit entrepreneur. According to him, the amount of profits depends upon the superiority of some entrepreneurs over marginal entrepreneurs. Hence he calls profits as the rent of ability. Since profits are like rent, they do not determine the price. Therefore, like rent profits does not enter into the price.

Criticism of Rent Theory of Profit:

1. According to Modern economists, it is wrong to compare profit with rent. There will be no profiteering entrepreneurs like no-rent land. Even the marginal entrepreneur earns normal profit.

2. This theory fails to distinguish between gross and net profits.

3. It is wrong to say that profit does not enter into the price of the commodity. In the short period this may be possible but in the long period profit must enter into price.

4. Rent can be found in both static and dynamic societies. But profits are found only in dynamic societies.

5. This theory does not explain the real nature of profits.

6. The theory does not explain why the share holders of a joint stock company received profit in the form of dividend without showing any business ability.

7. The critics point out that profit is not always the reward of business ability. Sometimes, it arises due to monopoly and favorable changes in the market.

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