A Business Encyclopedia

Walker’s Theory of Profit

Definition: Walker’s Theory of Profit, also called as a Rent Theory of profit was propounded by F.A. Walker, who believed that profit is regarded as a rent of differential ability that an entrepreneur may possess over the others.

Walker’s theory of profit works on the same principle as that of land rent, which is the difference between the yields of least and most effective fertile lands. Likewise, the profit is the rent of least and most efficient entrepreneurs. Generally, the least efficient worker tries hard to cover only the cost of production while the efficient worker earns extra for his differential abilities. Thus, the rent theory of profit posits that the profit of an entrepreneur depends on a degree to which his abilities are exceptionally different or unique over the others

The walker’s theory of profit is based on the assumption that a state of perfect competition prevails, wherein all the firms are presumed to attain the same managerial ability. Each firm would draw wages for management ability, which in the Walker’s view do not form a part of the pure profit. The wages of management are regarded as ordinary wages. Thus, under the perfect completion scenario, there will be no pure profit and each firm will earn the management wages, known as normal profit.

The walker’s theory of profit is mainly criticized due to its inability to explain the nature of profit. It provides only the measure of profits and not its real nature, which is of utmost importance. The assumption that profits arise due to the differential ability of an entrepreneur does not always stand true. The rise in the profits could also be due to the entrepreneur’s monopoly in the market.

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