Certainty??

A businessman seeking government support for dealing with the coronavirus made the following statement on television.

We just want certainty!!

I suspect that he does not understand the basic reality that faces all businesses, in fact the whole of life, and that is uncertainty. All businesses face uncertainty all of the time.

When a new business starts, its success is uncertain. Even if it has a really good product, the behaviour of consumers is uncertain. They might choose to stick with their existing suppliers, even if their products or service is not as good. Competitors might undercut the new businesses with a cheaper price. There are dozens of other things that could go wrong. Even if the manager/owner has planned for all possible eventualities, things could happen that they have not planned for.

Existing businesses also face uncertainty. Even if a business had a good year last year, there is no guarantee that it will be successful in the next year. Customers might switch to different suppliers with different products. Competitors might find a source for a product that is cheaper and better. Other unforeseen events could cause problems for the business.

A business owner or manager that expects certainty is dreaming. Successful businesses are those that can adapt and respond to uncertainty. Profit is a reward for dealing with the uncertainties of life effectively.

Piketty (16) Uncertainty

Piketty shows that r is usually greater than g. This might be true on average, but averages cover a multitude of sins.

People involved in business know how easy it is to get a negative rate of return, and even lose capital. Piketty makes it seem like a 4 percent rate of return is automatic. This is misleading. Getting a good rate of return on assets is extremely difficult. It takes a lot of energy, diligence and wisdom.

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.