Theory of risk and its development, A look at the risks of classical...

Theory of risk and its development

A look at the risks of classical political economists

In business, the practice of accounting for risk factors has been known since ancient times, when contracts were concluded for collective compensation for losses associated with the risk of loss or damage to ships during the carriage of goods, the safety of overtaken cattle, trade caravans. However, the theoretical aspects of this category have become the object of scientific economic analysis only since the XVIII century.

The classical theory linking the concepts of risk and entrepreneurial profit, belongs to the English philosopher and economist John Stuart Mill (1806-1873). In his book "Principles of Political Economy" he considers entrepreneurial profit as the sum of "wages" capitalist, share (interest) on invested capital and risk payment. Risk payment, in Mill's opinion, is compensation for possible damage related to the risk of loss of capital as a result of entrepreneurial activity.

The formation of the basic principles of the theory of risk in business is connected with the paradigm of economic analysis of classical political economy, and first of all with the works of A. Smith. In his book "The Study of the Nature and Causes of the Wealth of Nations" (1784), he considered the theory of entrepreneurial risk on examples of wages of wage workers, the functioning of lotteries, the practice of insurance business. Thus, characterizing the differences in salary levels from the standpoint of the risk factor, he argued that workers demand a higher payment in cases where permanent employment is not guaranteed to them. This principle of forming the terms of the labor contract was later laid in the basis of one of the known theories, in which it is regarded as a transaction between a risk-averse worker and a firm that risks neutral.

A. Smith was one of the first to suggest that entrepreneurial risk is not only economic, but also psychophysical in nature. Claiming that many people tend to overestimate the chances of success and underestimate the chances of losing, he confirms their "love of risk" examples from the practice of lotteries and insurance business. Investigating the relationship between the economic and psychophysical nature of entrepreneurial risk, A. Smith put forward the hypothesis that the profession of workers with the prospect of relatively high but unreliable incomes is, on average, paid less than comparable professions with a completely predictable income. In his opinion, this is due to the fact that people will always reassess their chances in risky professions, for example, a lawyer, a doctor, many of these activities will be aimed at, as a result, the average level of their profitability will decrease. This theory of risk, A. Smith used and to explain the trend of the rate of profit in various industries. Subsequently, however, A. Smith came to the conclusion that "high-risk occupations guarantee an average higher payment than professions with a low level of risk." This conclusion was later used as a basis for the well-known modern postulate of risk theory about the relationship between levels of profitability and risk.

In the XIX century. German economist I. von Tyunen, who is a representative of the German classical school, revealed a direct relationship between the magnitude of profit and entrepreneurial risk. For the first time he introduced into the theory of market relations the concept of the risk of unused alternative opportunities, leading to a lack of profit. The only driver driving the entrepreneur to take risks, according to the scientist, is to generate profits that should increase in proportion to the increase in risk.

Developing the ideas of I. von Thunen, another representative of the German classical school G. von Mangold first raised the question of the need to assess the degree of risk, taking into account the time factor and the nature of production. The degree of risk, according to G. von Mangold, also depends on the nature of production:

• In the production of an order, the risk is low, i.e. in the case of a clear definition of an order for the production of a product or the provision of services, the risk is minimal or nonexistent;

• manufacture of products on the market is significant risk, i.e. in conditions of market competition, unpredictability, often changing situation, the degree of risk significantly increases. In addition, the more time passes from the commencement of production to the final sale of the finished product, the greater the risk of possible losses and the greater the compensation or reward for it.

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