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Dynamic Theory (Introduced by J.B. Clark)

According to J.B. Clark's dynamic theory, profits are only possible in a dynamic world where conditions are constantly changing, not in a static world where everything can be predicted. An entrepreneur can earn profits by anticipating changes and lowering costs of production through inventions or other means. Joseph Schumpeter's innovation theory argues that the entrepreneur's role is to introduce innovations, and profits are the reward for successful innovations that allow businesses to stay ahead of competitors. Schumpeter defined innovations as new production processes, new products, or new markets that disrupt existing markets. While profits from innovations are initially high, they tend to be competed away as other firms imitate the innovations.

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Mohan Babu Yadav
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875 views1 page

Dynamic Theory (Introduced by J.B. Clark)

According to J.B. Clark's dynamic theory, profits are only possible in a dynamic world where conditions are constantly changing, not in a static world where everything can be predicted. An entrepreneur can earn profits by anticipating changes and lowering costs of production through inventions or other means. Joseph Schumpeter's innovation theory argues that the entrepreneur's role is to introduce innovations, and profits are the reward for successful innovations that allow businesses to stay ahead of competitors. Schumpeter defined innovations as new production processes, new products, or new markets that disrupt existing markets. While profits from innovations are initially high, they tend to be competed away as other firms imitate the innovations.

Uploaded by

Mohan Babu Yadav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

Dynamic Theory (Introduced by J.B.

Clark)
According to Clark there will be no profit in the static world, where size & composition of the
population, human taste & desires, technical knowledge, commercial organization etc. remains
constant. In a static world every things are knowable and can be accurately foreseen. There is no
risk hence no profit. Cost and selling price are always equal and there can be no profit beyond
wages for the routine work of supervision.

But we aren’t living in stationary state. It is a dynamic world and changes are taking place
constantly. Clever entrepreneur foresees these changes. Somehow by inventions or otherwise he
lowers his cost of production and makes profits. The changing world offers limitless
opportunities to the far – sighted, claring and clever entrepreneurs to make profits by turning the
facts of the situation in their favor.
In a nutshell, in a static state profits will disappear and the entrepreneurs will only earn wages of
management. It is only because the world is dynamic that it is possible for them to keep the lead
and reap the profits.

Criticisms:
1. Ignores the uncertainty of future.
2. Changes are not clarified.

Innovations Theory (Introduced by Joseph Schumpeter)


According to J. Schumpeter the dynamic and during entrepreneurs continue to hit at one
innovation or others keeping their business ahead of others and thus making handsome profits.
According to innovation theory, the principle function of entrepreneur is to make innovations
and profits are reward for successful innovations.
According to Schumpeter, discovery of new material or a new technique of production resulting
in a lowering of the cost of production or improving the quality of the product is an innovation.

According to the theory there are two types of innovations.


1. Those which changes the production function and reduce the cost of production, and
2. Those which stimulate the demand for the product i.e. which change the demand or utility
function.
First innovations include – new machinery improved production technique / process exploitation
of new source of raw materials new organizational structure / pattern for the firm etc.
Second innovations includes; new product introduction or new variety of an old product, new &
effective mode of advertisement, discovery of new market etc.
Hence, success of these innovations gives reward for the entrepreneur.
However the profits from innovations are short run natured, tend to be completed away or
imitated by rival firms. And profits are both cause and effect of innovations – profits are a cause
of innovations but since innovations result in profits, profits are also the effect of innovations.

Criticisms:
1. Ignores uncertainty as a source of profit.
2. Denies Risk – bearing play role in profit determination.

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