Dynamic Theory of Profit is associated with the name of an American Economist J. B. Clark. In the world of reality, according to J. B. Clark profit arises only in a dynamic economy.
An economic is said to be dynamic when there is a change in the population growth or change a change in the method of production or a change in the consumer’s want etc. A society which is without these changes is called a static society. In static society only monopoly profits continue to exist. All other economic profits are gradually eliminated by competition.
In a dynamic society an entrepreneur is always confronted with continuous unpredictable changes in demand for his product. The variation in demand may take place due to change in fashions, tas les, standard of living, distribution of income, population, new inventions, international repercussion and technological advances etc. A prudent entrepreneur will always keep an eye on future demand for his products. If he succeeds in increasing his sale by lowering the cost of production or by adoption of an innovation, then he can secure profits.
Thus we find that profits are reward of progress. Schumpeter calls it reward of innovation. In dynamic economy, if an entrepreneur produces a new thing and creates demand for his products, then he is likely to obtain big profits. But profits of the entrepreneur can not continue to exist for long period. The other entrepreneurs also adopt innovation and produce similar products. A total output increases, the profits gradually comedown. Thus we find that perpetual profits are the result f the perpetual successful innovations.
Criticism
Professor Knight has criticised the Clarkian theory of profit on the ground that it is wrong to attribute all profits to dynamic changes. According to him, there are certain changes which are of a recurring and calculable nature. They can be anticipated and the output can be adjusted according to that. The profits do not arise on those regular changes but on those which are unforeseen or unpredictable. He thus observes that “It is not dynamic changes no only changes as such which cause profits but the divergence of actual conditions from those which have been expected and on the basis of which business arrangements have been made.”
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