Definition: Clark’s Dynamic Theory of Profit was propounded by J.B. Clark, who believed that profits arise in the dynamic economy and not in the static economy.
The static economy is one in which the things do not change significantly or remains unchanged. Such as, the population and capital remain stationary, goods continue to be homogeneous, production process remains unchanged, and the factors of production enjoy freedom but does not move because the marginal product in each industry remains the same. Also, there is no uncertainty and risk.
On the contrary, the dynamic economy is characterized by the generic changes such as an increase in population, improvement in production techniques, change and increase in the consumer demands, changes in the organizational forms, increase in capital. The major function of an entrepreneur is to work in a dynamic economy to take the advantage of these changes and promote his business, reduce costs, and expand sales.
Clark believed that those entrepreneurs who successfully takes the advantage of these changes in the dynamic economy make the pure profit, which is in addition to the normal profit. Pure profits are short lived because, in the long run, the competitors imitate the changes initiated by the leader. As a result, the demand for the factors of production increases, thereby increasing the factor prices and the overall cost of production. On the other hand, with an increase in the output, the price of a product declines for a given level of demand as a result of which the pure profits disappears.
Thus, according to Clark, the profit is an elusive amount which can be grasped, but cannot be held by an entrepreneur as it slips through the fingers and bestows itself to all the society members. Clark’s dynamic theory of profit should not be misinterpreted as, the profits in the dynamic economy remain for a short period of time and then disappears forever. But, however, generic changes take place frequently, and the manager or entrepreneur through his foresight must capitalize on it and continue to make a profit in excess of the normal profit.
It can be concluded that Clark’s dynamic theory of profit is based on a notion that emergence, disappearance, and re-emergence of profits is a continuous process.