Profit as a Reward for Entrepreneurship and Innovation
Secondly, profit is viewed as a reward that entrepreneurs reap due to their decision making in the face of uncertainty (Casson, 2001). Entrepreneurs undertake risks by investing their money in the market in order to provide goods and services that satisfy the needs of the consumers at some future time. Uncertainty is involved because the entrepreneur cannot guarantee the satisfaction of the consumer needs with his offerings which will determined at a future time (Williamson, 1998). Therefore, profit serves as reward to the entrepreneur who acts in this face of risk and uncertainty.
Moreover, risk is also involved when the entrepreneur recruits individuals to serve his purpose. The entrepreneur can hire a wrong person and then bear the loss by compensating him from his profits earned (Green & Sutcliffe, 1987). Thus profit serves as a reward against the uncertain action that entrepreneurs undertake and then bear their positive or negative consequences. This makes profit as a reward earned due to risk taking (Foss & Klein, 2002). Thirdly, profit is also viewed as a reward for the innovative skills of the entrepreneur who identifies a need and then tries to satisfy it creatively.
Innovation becomes an integral part of entrepreneurship since the job of the entrepreneur is to create more out of the existing resources and satisfy consumer needs effectively (Fulcher, 2004). The reward that the individual reaps after paying for the innovative products and processes becomes his entrepreneurial profit. As stated earlier, the more entrepreneurs begin copying the innovative idea the lesser is the level of profit achieved. Thus, the profit becomes the reward of the entrepreneur due to his innovative skills and capabilities (Kirzner, 1979).
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Profit is explained by Marshall as a reward that an individual earns due to his management expertise in bringing the factors of production together. He perceives profit as a residual reward and not a return to the factor of production which is a result of the business ability and energy of the entrepreneur (Obrinsky, 1983). The return on land, labor and capital is not considered the entrepreneurial reward but the residual profit resulting due to the management abilities of the individual which distinguishes him as an entrepreneur is viewed as his reward (Heath, 2010).
He stresses the fact that it is the management ability of the entrepreneur to create an innovative idea and implement it in the face of risk that earns him his reward as profit (Wu, 1990). Thus, profit serves as the reward for the risk taking behavior and judgmental ability of the entrepreneur. These profits may rise in the face of high barriers to entry and superior knowledge leading to monopoly pricing (Nee & Swedberg, 2005). The entrepreneur earns profits for his decision making in risky situations about the coordination of resources.
The entrepreneurial reward is different from the return on the factors of production but it is in fact reward for their business ability and effort spent in creating innovative concepts and making decisions in the face of uncertainty (Knight & McClure, 2009). REFERENCES Barbera, R. (2009). The Cost of capitalism: understanding market mayhem and stabilizing our economic future. Mc-Graw Hill. Bowles, S. , Edwards, R. , & Roosevelt, F. (2005). Understanding capitalism: competition, command, and change. New York: Oxford University Press. Casson, M. (2001).
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Moschandreas, M. (1999). Business economics. Cengage Learning Business Press. Nee, V. , & Swedberg, R. (2005). The Economic sociology of capitalism. Princeton University Press. Parker, D. , & Stead, R. (1991). Profit and enterprise: the political economy of profit. Palgrave Macmillan. Schumpeter, J. A. (1982). The Theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. Transaction Publishers. Williamson, O. E. (1998). The Economic institutions of capitalism. Free Press. Wu, S. (1990). Production, entrepreneurship, and profits. Blackwell Pub.
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