Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

4.10 UNCERTAINTY-BEARING AND PROFIT
Modern theories of profit maintain an inevitable connection 
between profit and uncertainty-bearing. The assumption of 
uncertainty, like that of waiting, is a disutility and must therefore 
be rewarded. Just as it is the function of the capitalist to supply 
waiting, so it is the peculiar function of the entrepreneur to bear 
the uncertainties of production. Profit, the income of the 
entrepreneur, is therefore the reward for uncertainty-bearing. 
Uncertainty has been defined by one writer as "the 
expectation of the irregularity of income." Knight makes a 
distinction between risks and uncertainties in this way. Not all 
kinds of risks give rise to uncertainty. There are some risks, e.g., 
the risks of death, whose average incidence in a community is 
statistically measurable, and to cover which a premium may be 
fixed. These are 'risks' proper, and do not generate a feeling of 
uncertainty. There are, however, other risks which cannot be 
foreseen, or measured in that way. These risks give rise to 
uncertainties. And in order to induce people to shoulder these 
risks, we must offer them a reward over and above that expected 
in industries where there are no uncertainties. That reward is 
profit. 
Uncertainty-bearing has been regarded as a factor of 
production like waiting. The unit of uncertainty- bearing has been 
defined by Pigou as 
Uncertainty-bear- 
"the exposure of one pound to 

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a given 
factor of 
scheme of uncertainty in an act the 
production 
consummation of which occupies a year." The demand for 
various units of uncertainty-bearing comes because they are 
productive. This productivity of uncertainty-bearing is best 
illustrated by Pigou's example of breaking the vases. Uncertainty-
bearing, i.e., people's willingness to assume uncertainties has a 
supply price, depending (a) on the character of the entrepreneurs. 
Men of cautious temperament will be attracted only by a very high 
reward, while gamblers will rush in where wise men will fear to 
tread. It depends (b) also on the total amount of resources 
possessed by investors, and (c) on the proportion of these 
resources to be exposed. Rich persons are more willing to venture 
into risky investments because they may afford to do that. When a 
business requires the investment of a smaller proportion of the 
total resources possessed by a person, he may be willing to risk it 
for a smaller reward, while he will expect a higher profit if it 
requires the investment of a greater part of his capital. 
Moreover, uncertainty-bearing as a factor is seldom found 
in isolation. One must have something to lose when one is 
assuming risks. That something is generally capital. This 
association of uncertainty-bearing with capital is another source of 
profit. In many cases it is difficult to find a combination of these 
two factors. Men who are willing to assume risks may not possess 
capital, while rich persons may prefer safe investments. Persons 
who combine these two thus possess a strategic advantage and 
earn some revenue which is of the nature of quasi-rent. 
The first criticism that has been urged against this theory is 
that uncertainty-bearing is not a separate factor of production. If 
only we accept the doctrine of real cost,
—that all costs are 
ultimately reducible into pains or 
disutility‘s, then we can rank it as 
a separate factor. But modern opinion is not inclined to accept the 
doctrine of real costs. The fact that labourers working in 
disagreeable circumstances may obtain higher wages does not 
constitute disagreeableness into a separate factor. So the fact that 
entrepreneurs have to produce in uncertain circumstances does 
not constitute uncertainty-bearing as a separate factor. It is merely 
a characteristic of the entrepreneur-functions, a characteristic 
which results in increasing the supply-price of capital and 
enterprise. In a risky business, people expect a higher reward.
That is all. 
Further, uncertainty-bearing cannot furnish the sole 
explanation of profit. It may be the most distinctive function of 
entrepreneurs, but it is not the only function. There are also other 
features,
—the entrepreneur's capacity for co-ordination and 
innovation for which a reward is expected. Lastly, uncertainty-
bearing is only one of the forces that limit the supply of the 

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entrepreneur class. There are also other influences, e.g., the 
different elements of social stratification, and the environment 
which are as patent in limiting the supply of entrepreneurs as 
uncertainty-bearing.