The Dynamic Theory of Profits was introduced by J. B Clark. According to him profits come only in dynamic economy but not in static economy. Dynamic economy means the economy in which frequent changes will occur. In static economy there is no possibility of coming changes. In static economy there will not be any change both in demand and supply. So, profits cannot arise. According to Clark the following things exist in a static economy.
In such society the demand for goods can be estimated easily. There is no risk and uncertainty. Supply will be always equal to demand estimated. The price will be always equal to the cost of production, because there is perfect competition.
In static society the reward is just equal to the marginal productivity of the factors of production and so there cannot be profits. But we are not living in a static society. Ours is a dynamic world, where some changes are constantly taking place.
According to J. B. Clark, five main changes are constantly taking place in dynamic society. They are :
1 ) Changes in the number of human wants,
2) Changes in the methods of production,
3) Changes in the capital formation in the economy,
4) Changes in the method of organization of the business,
5) Changes in the size of population and incomes of the people.
According to Clark. profit arises in a dynamic society on account of these changes. These changes affect the demand for and supply of commodities and thus lead to the emergency of profit. These are general dynamic changes. But sometimes dynamic changes may be introduced deliberately by the firms themselves. For example a firm may succeed in cutting down its cost by improving its production techniques and there by increasing its profit.
In short, it is the operation of dynamic changes which leads to the emergency of profit. According to Clark, profit belongs to economic dynamics but not economic statics.
Criticism of Dynamic Theory of Profits:
This theory of profit has been criticized on the following grounds
1. Types of risks : According to Knight all types of dynamic changes do not yield profit. According to him two types of changes takes place in society. a) Foreseeable changes. b) Unforeseeable changes. According to him only unforeseeable changes brings profits.
2. Risk in undertaken by entrepreneur : According to Clark, risk is undertaken by capitalist but not entrepreneur, But it is not correct. If the capitalist is a risk taker, entrepreneur loose all his importance and become a salaried employee.
3. Determination of profit: The theory does not explain how the rate of profits can be determined.
4. Distinction between profits and wages : According to Prof. Taussig, dynamic theory has created an unnecessary and artificial wages of management.
5. Losses: According to Clark, whenever there is a change in the economy, it brings profit. But in reality it is not correct. Sometimes they may cause losses also.
6. Profit in the reward: This theory states that profits arises due to dynamic changes. It does not recognize that profits is the reward for entrepreneurs.