Assumption of full employment

Loan able fund theory is based on the unrealistic assumption of full employment but the Keynesian theory of interest is applicable both even in full employment and in less than fall employment conditions.

Profit

            There are four factors of production. They are Land, labor, Capital and organization, which is also called entrepreneur.

            According to the pricing theory of factors of production or theory of distribution, all the factors of production are paid according to their contribution on the total national product or equal to their marginal productivity. In this regard, rent, wages & interest respectively are paid as the reward to the factors of production Land, Labor & capital. Alike mentioned factors of production, entrepreneur also gets remuneration which is termed as profit. Hence, profit is the reward of entrepreneur.

            Entrepreneur is the active factor of production. An entrepreneur collects the factors of production Land, Labor & capital in one place and uses them skillfully in the process of production. In this regard, entrepreneur has to perform entrepreneurial functions such as organizing & co-coordinating the other factors. So some economists argue that entrepreneur earns profit for his performing this function.

            A part of the confusion in the theory of profit is due to the lack of agreement among economists about the true or proper function of the entrepreneur.

            Some economists have described the use preneur as performing joint and, in separation functions of final risk bearing and final decision-making.

            Alfred Marshall gave the first systematic explanation of the nature of profit in terms of demand and supply of entrepreneurs.

            Walker looked upon profit as the reward of the entrepreneur with a superior ability than others. Hawley ascribed it to the entrepreneur's risk- taking, the greater the risk undertaken, and the larger the profit according to him.

            Mrs. Joan Robinson, Prof. Chamber line and Mr. Kalecki have associated profits with the imperfect competition and monopoly. Monopoly profits arise became a monopolist is able to restrict output and keep the price of his product much above the average cost of production.

            Though these are various views of economists on the meaning of profit. Profit is defined as the residual income rescind after paying all the expenses in curved in the process of production. Profits can be divided into two parts cross profit Net profit.

Dynamic theory of profit

            An American economist J.B. Clark propounded the dynamic theory of profit in 1900. According to him, profit is the difference between the selling price and the cost of production of good Commodity. But profit is the result of dynamic changes, which mean change in the condition of demand and supply. Now, in competitive long run equilibrium, as the price equals to the average cost of production, an entrepreneur cannot earn pure profit. In this condition, a normal profit is included in the cost of production. But this normal profit is called a wage received as a reward for supervision and management of an entrepreneur by Clark.

            To know the state of dynamic changes Clark has divided the whole economy into two parts. (i) Static economy (ii) Dynamic economy.

(i)   Static economy

            This is the stationary state of economy where no changes in the condition of demand & supply are made. So, all the factors affecting demand and supply are assumed to be constant in such a economy. There is no uncertainty & risk at all in these types of economy. As all the factors are constant, all the firms including industry are constant in such a situation. Hence, the cost of production of good is equal to the price. This creates no profits to the entrepreneur in static economy. According to Prof. Clark, the entrepreneur gets only wages for his labor and interest on his capital in such a static economy.

            But due to same reasons, if price is more than the cost of production, then the entrepreneur may earn profit, which will be only frictional profit and a kind of short-term phenomenon. But after some time, due to perfect competition in the economy, this profit will be disappeared.

(ii)  Dynamic economy

            The world is changing day by day. So the static economy is only an imaginary concept. So, there is change in the factors affecting demand for and supply of goods. Due to these changes, the state of equilibrium also after in the economy in this condition, if entrepreneur can make the situation favorable he gets profit. According to Clark, there are five kinds of changes which creates profits