In this article we will discuss about Taussig’s theory of profit. Also learn about its criticisms.
According to rent theory supernormal profit is a surplus above the opportunity (transfer) cost of entrepreneurship. Therefore, it is comparable to economic rent which is also a surplus. According to the wage theory of profit, advanced by Taussig, profit is a type of wage. It is managerial wage. It is given to the entrepreneur for the services rendered by him.
In the words of Taussig, “Profit is the wage of the entrepreneur which accrues to him on account of his special ability.” Taussig found close, if not perfect, similarity between labour and organisation (entrepreneurship). Just as labour receives wage for its services, in the same manner profit accrues to the entrepreneur for its role in the production process.
However, one major difference between the two is that while a labourer puts physical services, an entrepreneur puts in mental work in production. In this sense the entrepreneur is quite comparable to other mental workers like teachers, lawyers, doctors, business consultants, etc. In short, according to Taussig, profit is a type of wage accruing to entrepreneurship.
Criticisms of Taussig’s Theory of Profit:
Taussig’s theory is far from perfect. It has been criticised on two main grounds. (1) First, he has failed to distinguish between labour and entrepreneurship. Three points may be noted in this context — (a) First, while the entrepreneur assumes the risk of business, the labourer always plays safe, (b) The labourer will always get his wage by putting the required amount of effort, but there is no such guarantee for the entrepreneur. The entrepreneur may lose money even after putting his mental labour, (c) Profits may include windfall gains, but wages contain no chance gain.
In a modern organisation there is separation of ownership from management. The managers get wages and compensation. Profits accrue to the shareholders who by, purchasing shares, become the owners of a company. The latter group receive profits and dividend on the basis of the actual performance of the company, but they do not put any effort — mental or physical. Thus, the wage theory of profit is unsatisfactory. Of course, by combining this theory with the rent theory, it is possible to suggest a more satisfactory explanation of profit.
Wages remain contractually fixed, but the essence of profit is that it is unpredictable. Profit is a residual income. It is the income left with the entrepreneur after paying other participants in production. The sellers of labour inputs want their payment before the final goods are sold in the market. Generally, they do not want to take any risk.
Thus, it is not at all surprising that entrepreneurs will not commit time and resources to risky activities unless there is the prospect of making a profit. Profit is a reward for accepting the risk and uncertainty associated with virtually all business decisions. Virtually all of these decisions carry the risk that money will be lost. Clearly, if there is a chance of a loss, there must be the chance for a gain in the form of profit. Otherwise risks will not be taken.