own expense.1 There is, of course, the handling of the cars from and to team and industrial tracks, and the assembly into and distribution from trains, but, in so far as the cars are consigned to distant points, they will have to pass through division terminals, say every two hundred miles or so (except where lightness of traffic throws division yards farther apart), and in the majority of cases there will be additional handling of the train, involving new "terminal" expenses. It may be that these divisional yard expenses en route are not so heavy as the initial or final" terminal expenses, where the latter are incurred in large, traffic-congested centers, but to the extent to which they are incurred, roughly in proportion to distance, they minimize the depressing influence of the so-called "terminal" expenses upon long-haulage costs as compared with those of short-haulage.

Overemphasis of the relation of the law of increasing returns, as Dr. Ripley applies it to long-haul traffic, weakens part of his argument in connection with market competition. Such competition, he remarks, is facilitated by the fact that the carrier is "able to exercise a wide range of choice in fixing that margin of value created which it reserves for itself." At all times, primarily by reason of its subjection to the law of increasing returns, this intermediate share of the carrier tends to adjust or accommodate itself to the end that it may discover or produce a wider margin between values in the hands of producer and consumer. In other words, "the greater the distance between the producer and consumer, the greater the possible margin of place value remaining as its individual share." Literally construed, Mr. Ripley's language is not open to objection since he speaks of this as a possibility; and that it is possible for a supra-normal rate of profit to enure to specific long-distance traffic is not to be denied. But the average reader will be apt to gain the impression that, without regard to economical production, the railways seek to maximize their own profits by unduly stimulating traffic at a distance. As the above discussion indicates, there is by no means a prima-facie case for such a contention, at least so far as the great bulk of railroad traffic is concerned.

In the consideration of the railway-rate problem from the aspect of the costs of production a second question presents itself, namely, as already stated, whether the expenditures incurred to produce the various services are distinct and separable or, to a greater or less degree, joint and inseparable. Some twenty-four years have elapsed since Taussig

'The case of the less important less-than-carload traffic is different inasmuch as all loading and unloading expenses are borne by the railroad.

published his memorable article dealing with this question. Like his colleague, Ripley accepts the traditional examples of wool and mutton, gas and coke etc., as representing typical instances of joint costs. He goes on to point out that the railroad is hardly an example of joint costs in the same sense, inasmuch as the increase of any one kind of transportation, say that of coal, does not produce necessarily an increase of any other, say cotton, but, nevertheless, he insists that

the general law of joint costs holds good, in that it is a demand for each service rather than its costs which finally determines the chargeable rate. This must be so, because of the fact that the cost of each shipment is so largely joint and indeterminate and that a large part of the entire plant is indistinguishably devoted to the general production of transportation without reference to particular units of business.

Strictly analyzed, the argument does not appear convincing, even though the conclusion be not unacceptable. It might be urged that the joint and indeterminate costs are really no other than "common" costs, no more inseparable, theoretically, than the common costs of the production of two distinct articles that happen, for the sake of convenience, to be produced together in the same factory. Given free competition, the normal price of each of the commodities would be determined by normal cost of production, and the mere accident of producing them together cannot alter this relationship of price to cost. To quote Professor Edgeworth:

If the same ground is equally suitable for peas and beans-joint effects in the way of rotation of crops being abstracted-then if the prime costs (in the sense explained) of (properly assigned) units of peas and beans are the same, the same will be the selling price for peas and beans of units (so assigned). The orthodox economist stating this familiar doctrine would not be put off by the affirmation that a great part of the cost was indeterminate, being joint for all the products in large part; that it is impossible to allocate the amount proper to each product.'

If the restriction of competition, made inevitable in the railway industry by the limitation of the factor" land," could be removed, prices of railway transportation would be found to tend always towards normal cost of production. Thus, the presence of monopolistic conditions, not of production at joint costs, causes actual railway rates to be adjusted to consumers' marginal utility rather than to producers' costs. This view of the nature of production in the case of the railway is borne

1 Economic Journal, 1913, p. 221.

out by the fact that "joint," as distinguished from "common," production exists only "when two or more things are produced by one and the same process, so that the expenses of producing them all together are not greater than the expenses of producing one of them alone would be.” ' Only to an insignificant extent can the production of transportation be said to exemplify such "jointness." Such is the objection that might be urged.

1

However, as the reviewer has pointed out in another place,' the definition of joint cost that has been handed down to us from the classical economists is itself, perhaps, open to criticism as substituting for the general case of joint production merely an important sub-case. It is rash to advise the oracles, but may it be suggested that an appropriate statement of the general law would allow joint cost to be operative whenever the total costs of production of two or more commodities produced together by a single plant are less than would be the sum of the costs of their separate production by separate plants. Granted such a definition, the attribution of discriminatory charges to conditions of " joint" production becomes, theoretically, more acceptable. However, actual rates may be other than those that would be established by joint cost under conditions of competition, for the super-imposition of monopoly upon joint production may bring about readjustment of total supply with possible reaction upon the price relations.

The acceptance of the above definition of joint costs would fail to meet the views of a critic such as Pigou. He would maintain that the service of railway transportation could not in any case be regarded as jointly produced, for "joint" costs imply two or more separate commodities—an article cannot be produced "jointly" with itself—and the service of transportation, the carriage of tons of different things between X and Y, is a single, homogeneous commodity. Such a contention must not be accepted too readily. To the extent that the carriage of tons of A, B and C, between X and Y, involves varying proportions of capital goods and labor per unit of transportation produced, differences in business risks and diverse degrees of managerial skill, the existence of economically distinct services of transportation would seem to be indicated. Certainly this applies as between the carriage of bananas and coal, though it may not do so as between coal and iron ore. In so far as this applies, the service of transport is not technically homogeneous. Professor Taussig would go further and urge that, where

1A. Marshall. Principles, 2nd ed. p. 437.

'American Economic Review, Vol. 4. No. 1. Supplement, p. 89.

technical homogeneity is present, the commodity becomes economically differentiated if the demand schedules are different, and proceeds to urge that the heterogeneity of demand in the case of the railway service establishes that differentiation of commodities upon which the operation of the law of joint costs may be predicted.' But, under conditions of free competition, would the demand schedules for the transport of coal and of iron ore between X and Y be differentiated? Is it not, possibly, the discrimination of monopoly, not of joint supply, that produces the effect of a stratification of demand? In order to reason back to differentiation of commodity (or service) and to joint supply, it would be necessary to establish that actual price (rate) discriminations were not primarily the results of monopoly.'

The task of establishing economic heterogeneity where technical homogeneity exists is far from easy, and requires much more intensive analysis of railway rate practice than has yet been given to it by the economist. But there is reason to hope that a careful analysis would be fruitful of results. There are areas and periods at and during which the rivalry of railway carriers has surely minimized the influence of the monopolistic factor, and yet widely differentiated rates for different commodities have persisted. The reviewer believes it to be possible by a careful study of the details of such cases to give strength to the argument that monopoly, though at times affording the only explanation of specific rate discriminations, is by no means to be regarded as providing a satisfactory general explanation. Ripley had the misfortune to complete his first volume, and with it his discussion of joint costs, before the appearance of Pigou's Wealth and Welfare or of the correspondence in the Pigou-Taussig controversy, or of Edgeworth's review of Pigou. The critical value of Professor Ripley's discussion of joint costs is less than it would have been, no doubt, had this not been the case. Yet such of Edgeworth's articles entitled "Contributions to the Theory of Railway Rates" as appeared during 1911, together with certain earlier writings of his, might well have stimulated a closer inquiry into the relative significance of joint production and monopoly in the determination of railway rates.

1 Quarterly Journal of Economics. Vol. 27, p. 381.

* The same necessity applies in connection with Professor Seligman's conclusion that the transport of silk and of cotton falls under joint cost because the technically homogeneous place utility that is produced attaches in various degrees to different articles and thus completes their production in an economic sense. Seligman, Quarterly Journal of Economics, vol. 21, p. 156).

(See letter of

It is quite practicable to discuss, under the head of "joint costs," the oyster case made famous in Hadley's Railroad Transportation, which Ripley uses as the foundation of his chapter on local discrimination. His analysis falls under two heads: (1) where the intermediate point X is on a circuitous route between Y and P; and (2) where it is on the direct route. The conclusion reached is that, since the danger of local rates at X being actually enhanced, or at least prevented from reduction, because of an unduly low level of competitive rates at more distant points, is much greater when X is a way station on the direct route than when it is an intermediate point on a roundabout route, therefore the direct line through X is, at the outset, put to a justification of its local tariffs as to whether they are inherently reasonable or not: first, by comparison with the general level throughout the surrounding country; and secondly, as yielding a return on the capital actually invested. It must be noted, however, that in his elaboration of the Hadley illustration, Ripley goes considerably beyond the original assumptions. Hadley abstains from the complications arising out of considerations as to the competition of the two routes at Y or as to their relative strength in the determination of the rate from Y. The vital issue in the case outlined by Hadley is simply that of the justification of the policy of the railroad in charging discriminatory rates upon different consignments of the same commodity at X, to be handled in identically the same fashion. This is the familiar problem as presented, for instance, in the case of the import and domestic rates.

Obviously, if the two identical consignments both originated from X, there would be no question of applying different rates to them for the same service. Does the fact that one of these commodities originates at another point than X, namely Y, mark it as economically a different commodity and thereby give some color of justification to the difference in treatment? Certainly, the value of the service is different to the owners of the two commodities. To X oystergrowers the service is worth a dollar per hundred pounds, because that price will enable them to compete at P, but to Y oystergrowers, sending their product to X for shipment by rail, it is worth not more than 75 cents per hundred pounds, because it costs them 25 cents to convey their oysters from Y to X. The demand schedules for what are technically identical services of transportation are dissimilar, and it is because of this fact that the discrimination in rates is justifiable. Since the distinct demand schedules constitute the articles economically distinct commodities of transport, and the transport service cannot be conducted economically except for both commodities together, the production must be regarded as one