Uncertainty

The main problem with the neoclassical theory of the firm is that business processes takes time and the future is always uncertain. At the point when the firm makes a decision to invest in a product, they might know what the marginal cost, but they do not know what the marginal revenue will be. Production plans must be based on the current prices of factors of production and the anticipated future prices of consumer goods.

The neoclassical model tends to ignore uncertainty. If any firm can do what any other firm does, and all firms are on their production-possibility frontiers, and if all firms always make optimal choices of inputs, then there can be no economic profit. If there is no uncertainty, economic profits can only be the result of monopoly power or random error.

Modern entrepreneurship literature has begun to recognize the need for a more sophisticated treatment of uncertainty. One solution to this issue has been to decompose business income into interest and profit. Interest is a reward for forgoing present consumption, is determined by the relative time preferences of borrowers and lenders, and would exist even in a world of certainty.

Profit, by contrast, is a reward for anticipating the uncertain future more accurately than others (e.g., purchasing factors of production at market prices below the eventual selling price of the product). This profit only exists in a world of "true" uncertainty. In such a world, given that production takes time, entrepreneurs will earn either profits or losses based on the differences between factor prices paid and product prices received.