Risk taking Theory of Profits : The risk theory of profit was formulated by F. B. Hawley in 1893. He says, that profit is the reward for risks and responsibilities that an entrepreneur undertakes himself. According to him, risks in business arise from product obsolescence, fall in prices, superior substitutes, natural calamities or scarcity of certain factors of production.
Many people do not prepare to undertake risk. If an entrepreneur is prepared to undertake risks he gets more profit. If the element of risk is high in the business the profits also are higher, and vice versa. Generally the entrepreneur has to face several risks of business. They are:
1) sudden fall in demand,
2) fall in prices,
4) obsolescence of machinery and equipment,
5) fire and marine accidents,
6) competition of new products
7) superior substitutes,
8) natural calamities etc.
As a result of these risks may get loss. Nobody would be prepared to bear these risks if there is no reward for it. Profit is the reward for risk taking. But all persons are not capable of undertaking risks. So risks restrict the supply of entrepreneurs.
Criticism of Hawley’s Risk Theory Of Profit:
Hawley’s Theory is subjected to the following criticism-
1. Risk reducing capacity: Carvar pointed out that profits do not arise because of risk bearing capacity but because of risk reducing capacity of the entrepreneurs.
2. Types of risks: According to Knight profits do not arise due to all types of risks. Prof. Knight divides risks into two types 1) Foreseeable risks, 2) foreseeable risks. According to him profits arise only due to unforeseeable risks.
3. Determination of profit: Hawley said that volume of profits depends upon risks taking alone. But critics point out that the volume of profits are not only depends upon risk taking factor but also upon a large number of monetary and non-monetary factors. So, risk taking is not the sole determinant of profit.
4. No relationship: In reality there is no relationship between profits and risks. In actual life we find profits are more in industries where there are no risks.
5. Functions of entrepreneur: Risk taking is not the only function of the entrepreneur. He has to perform several functions like co-ordination, supervision etc.