able argument. Wiping out the reserve would increase stated profits by an equivalent amount and this would permit corresponding dividends. That the assets thus released might not be in a form for immediate distribution or conversion is a matter of no significance.

The matter of provision for replacements is entirely similar. So far as any bearing upon the general problem under discussion is concerned, it matters not a whit whether that part of gross earnings which the inclusion of depreciation charges in operating expenses makes unavailable for distribution to stockholders is used in building up a segregated body of quick assets or is put into general additions and betterments. In both cases the general result is that as compared with liabilities (other than the depreciation reserve) resources are larger than they otherwise would have been. In each case retirements can be made without affecting stated profits, and assets, equal in amount to those purchased with earnings set aside on account of depreciation, can be converted for replacements. If these additional assets are not in easily convertible form, extraordinarily large replacements might even necessitate borrowings; but the net effect on the balance sheet would be unchanged. By "ability to make replacements" Mr. Davis merely means the convenience and (within narrow limits) the economy with which replacement needs may be met. But the important thing to a company is the ability to retire old properties and replace them with new without affecting its degree of solvency as shown on the balance sheet. For this purpose it is immaterial whether the property set aside for replacement purposes is segregated or is scattered among the general assets.1 In this sense every depreciation reserve

"The only question as to the wisdom of this [latter] policy is the question of the availability of the fund, that is, whether in case of need the property could be quickly converted into cash so as to be put to its intended use."-W. M. Cole, Accounts; their Construction and Interpretation, p. 89.

is a replacement reserve, and so far as such a reserve represents a permanent accumulation, it is perfectly accurate to say that it is to that extent "useless for replacement purposes."

2. In setting up the market value of the plant (not of the business) as the amount on which a fair return is to be conceded, Mr. Davis frankly accepts the logical consequence of his emphasis on the correlation between physical depreciation and what he prefers to call “ productive power." Moreover, he frankly rejects the currently received principles of valuation, and it may be that I should be right in assuming that he assents to my principal thesis, which is that deductions for depreciation in public service valuations are at variance with the general principles on which such valuations now seem to be based.

I cannot now enter into a discussion of the general validity of the market value standard or of the difference its adoption would make in practice. But I must enter an objection to Mr. Davis's identification of market value and investment. One is a matter of current imputation, the other is a matter of the interpretation of historical fact. I should define investment as the aggregate money sum expended in creating or acquiring income-yielding goods or rights, minus whatever part of it may be properly said to have been paid back out of earnings. The investment in a piece of idle real estate is merely the purchase price plus carrying charges; it is that, whether its market value has doubled or diminished since its acquisition. The difficulty in measuring the investment in public service plants

1 Secondary and derivative meanings of the word are (1) the goods or securities in which the money is invested and (2) the present market value of such goods or securities. Not all the investment in a public service plant may be entitled to a return. The investment entitled to a return must have been appropriate and (within reasonable limits) necessary.

comes from the practical impossibility of drawing a line between return on the investment and return of the investment. I do not think there is so definite a line of demarcation as Mr. Davis holds, except for investments that have been terminated by the distribution of the assets.

For going concerns even modern accounting does not really attempt accurately to define annual profits. Note, for example, the difference in its treatment of unrealized depreciation and unrealized appreciation. Again I submit that where realized depreciation is normally and easily met out of operating expenses and where, with the sanction of law and custom, unrealized depreciation in market value has not been charged to operating expenses, it is by no means a demonstrable fact that this unrealized depreciation has nevertheless been a virtual operating expense. Business policies .were not framed with reference to the marketability of capital assets, and were quite properly not so framed.

From Mr. Davis's discussion of the probable actual earnings of public service undertakings in the past I infer that the difference in our views is in large part not so much a matter of logic as of our very different impressions of the degree of success which has attended the average undertaking. I impute no high degree of accuracy to the statistics in the Commissioner of Labor's Report. But I am inclined to give more weight than Mr. Davis does to the explanation offered by the editor of the tables (presumably Mr. G. W. W. Hanger) who must be supposed to have been conversant with the various limitations of the figures. Mr. Davis's

alternative explanation may have significance for a few isolated cases, but I do not think that the practice of making improvements out of earnings without charging them to the property account has been so common

among local public service companies as he supposes. It is easy to let one's impression of the general profitableness of such undertakings be derived from a few conspicuously successful examples. Looking at the general run of the cases in the reports of state commissions, one's impression of the facts is not far out of line with that given by the Commissioner of Labor's report. The theory of monopoly price has no bearing upon the matter, for that theory assumes the most important variable the amount of the investment in fixed capital as a given quantum.

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No rules of rate regulation can be applied without making some exceptions. There are cases where the rigid application of any general principles would have to be somewhat tempered, just as there are cases where obvious extortion in the past might properly be taken into account. But for the most part principles for the valuation of properties which were installed under conditions of risk taking, and sometimes of potential destructive competition, must be general in their application. We can neither penalize past success nor make compensation for past failure. Our rules must be shaped with reference to the normal or most numerous cases. I suspect that it is possible that Mr. Davis might agree with me in upholding Mr. Allison's contention if he shared my view as to the degree in which the absence of depreciation charges has tended to increase the ratio of investment to gross earnings in the case of the average public service company.




YEARS ago Loria expressed his dissatisfaction with the generalizations which economists presented as scientific laws. He found them "nothing more than more or less perfect abstractions from transitory phenomena," while that which he sought was "the true economic law, immutable, independent of space and time, and therefore filling all the requirements of a scientific law." The present book on the Economic Synthesis,1 which he describes as "the complement and the theoretic crown" of all his earlier work, embodies his attempt to break the bonds which have fettered other writers. "The Egyptian statue, rigid in its outlines, and with the hands attached to the knees, was succeeded by the Greek statue, animated and alive." So in the field of economic thought the author believes that beyond the imperfect generalizations of his predecessors there lies "a synthesis scientific and positive in character, at once static and dynamic," and this synthesis he has here endeavored to achieve.

With the author's aim we may have much sympathy. Any one who works in the fields both of economics and history must gain the conviction that, on the one side, the laws of modern economics are partial and very fragmentary statements of the whole truth, while on the other side the facts of history invite generalizations of commanding importance, which promise to give significance to the minor laws. Further, it seems to me that Loria indicates in his introduction the only right way toward a satisfactory interpretation of

1 The Economic Synthesis. the Italian by M. Eden Paul. 368. $3.

A Study of the Laws of Income. Translated from
New York, The Macmillan Company, 1914. Pp. xii,

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