Hawley's risk bearing theory of profit from 1893 states that profit is the reward entrepreneurs receive for taking risks in business. Higher risks taken on by entrepreneurs lead to greater potential profits. There are four main types of risks according to Hawley: replacement risk, risk proper due to time lags between production and sale, uncertainty about possible outcomes, and obsolescence risks from new technologies. While critics acknowledge entrepreneurs bear some risks, they argue risks are not the sole determinant of profits, and entrepreneurs provide additional functions like coordination and supervision beyond only risk taking.

1. RISK THEORY OF PROFIT
HAWLEY’S RISK BEARING THEORY OF PROFIT
This risk bearing theory of profit is associated with the
name of F.B Hawley who gave this in year 1893.
“Profit is the reward of risk taking in a business. During
the conduct of any business activity, all other factors of
production, i.e., land, labor and capital have their
guaranteed incomes from the entrepreneur. They are
least concerned whether the entrepreneur makes profit
or undergoes tosses.’’

2. According to Hawley, there is a proportional relationship between risk and profit.
Higher the risk of entrepreneur, greater will be his profit and vice versa. Risk
taking was an inevitable component of dynamic production and those who took
risk in business had a right to a separate reward known as "profit". The reason
that expected profit must be more than actuarial risk is the assumption that risk
gives rise to dis-utilities of various kinds. Therefore, assuming risk gives
the entrepreneur a claim to a reward in excess of the actuarial value of the risk.

3. Hawley believed that profits arose from the factor of ownership, as long as the
ownership there is risks. If the entrepreneur avoided [risk] by insuring against it, he
ceased to be an entrepreneur and should not receive profits.
According to Hawley, entrepreneur may have to bear four kinds of risks:
1. Replacement risk: It refers to depreciation. It can be calculated and sois
included in the cost of production. It therefore does not give rise to any
profit. An entrepreneur would be willing to undertake
2. Risk proper: It arises due to time-lag between the production of goods
and their sale. During this time-lag there can be so many unforeseen
changes.

4. Consequently, the entrepreneur may have to bear the loss. An
entrepreneur would be willing to undertake these risks only if he gets a
reward for the same. This reward is called profit. An entrepreneur would
be willing to undertake
3.Unceratinity: Something is uncertain if we don’t know what could
happen or we don’t know the odds of what will happen. Uncertainties
are open-ended with many possibilities.
4. Obsolescence; In this no accurate estimate of it is possible. It cannot
be said with any amount of certainty as to whether the machines will be
rendered obsolete with the introduction of new technology, or not.
Nevertheless, its expenses are included in the cost.

6. CRITISICM
1. Risk reducing capacity: Carvar pointed out that profits do not arise because of
risk bearing capacity but because of risk reducing capacity of the
entrepreneurs.
2. Types of risks: According to Knight profits do not arise due to all types of risks.
Prof. Knight divides risks into two types 1) Foreseeable risks, 2) Unforeseeable
risks. According to him profits arise only due to unforeseeable risks.
3. Determination of profit: Hawley said that volume of profits depends upon risks
taking alone. But critics point out that the volume of profits are not only depends
upon risk taking factor but also upon a large number of monetary and non-
monetary factors. So, risk taking is not the sole determinant of profit.
4. No relationship: In reality there is no relationship between profits and risks. In
actual life we find profits are more in industries where there are no risks.
5. Functions of entrepreneur: Risk taking is not the only function of the
entrepreneur. He has to perform several functions like co-ordination, supervision
etc.