State and explain Rent Theory of Profit

The Rent Theory of Profit is associated with the name of American Economist, Francis. A Walker. According to him profits are of the same gains as rent. The main points of Walker’s Theory of Profit can be summed up as under.

1. Profit is rent in character. Just as superior grades of land earn more rent than the inferior grades of land, similarly superior entrepreneurs due to their exceptional ability or opportunity earn more profit than the inferior entrepreneurs.

2. As in the case of land there is no rent of marginal land, so in the business also is a non-profit or marginal entrepreneur. The marginal entrepreneur is one whose ultimate receipts from the sale of all commodities just cover his total cost.

3. Just as rent is measured from non-rent land in the same way profits of the superior businessman are calculated from the marginal entrepreneur.

4. The rent does not enter into price of agriculture production of manufactured goods.

From all the main points stated above it can be calculated that profits are the reward of differential business ability.

Criticism:

The modern economists have discarded the Walkers rent theory of profit on the following grounds.

1. It simply provides a measure of profit. It does not throw light on the nature of profit which is of more importance.

2. Marshall is of the opinion that there is much difference between the rent of land and the entrepreneur’s profit. The rent of land can either be positive or zero, but in case of business the total receipts from the sale of product can fall short of total costs, so the entrepreneurs may suffer losses and thus his profit may be in the negative. In the opinion of the Marshall the price of the commodity in the market is determined not by the cost of production of the marginal firm but by the representative is that which has a fairly long lease of lift and has a fair degree of success, which is managed with normal ability and which has access to the normal economics of production.

3. It is also pointed out that profit may not form a part of the cost of production of a commodity in the sort period but in the long period if the business is to be continued, it must enter in the price of profit.

4. Profit does not arise simply because of superior or exceptional ability of the entrepreneur, but they can also result due to change gains or monopolistic position of the entrepreneur or they may be of the nature of the windfall income.