Pure Profit: Innovation, Uncertainty and Market Power

Abstract

The neoclassical theories covered in the preceding three chapters are all theories of interest. The profits analysed by these theories are profits in competitive equilibria and assume that uncertainty is of no importance. In such a context no agent will pay or receive a premium above the ruling rate of interest, nor will any agent pay or receive interest at a lower rate. There are zero pure profits. The status of such theories is a controversial issue among neoclassical economists. Disputes arise over a number of matters, including the relevance of the competitive assumption, how likely it is that economies will operate in, or close to, equilibria, and the significance which various types of uncertainty have. However, even if one takes the view that competition is limited, that uncertainty results in very different economic patterns, and that economies are rarely close to equilibria of supplies and demands, the theories of competitive equilibria in a context of certainty are still useful. They provide a benchmark with which to assess the importance of any deviation from the assumptions upon which they rest. Indeed, the principal theorists of pure profit, Schumpeter (1912; 1939) and Knight (1921), both developed their analyses in this way.