or even that they comprise everything that can be said on the evolution and decay of slavery and serfdom. But no penetrating thinker can doubt that this is an economic phenomenon of fundamental importance. The fact that the slave and serf employed his money, as soon as it had reached the requisite amount, for buying his liberty, which opened to him access to landed property, was far from being " a creation of my imagination of which I could give no proof "; it was formally embodied in legislation. It suffices to cite the rescript of Marcus Aurelius and of Severus about servus suis nummis emptus, where the manner and the effect of the purchase of the slaves by himself are carefully regulated (Buckland, The Roman Law of Slavery, Cambridge, 1908, pp. 606 et seq.). Now the effort was always made to counteract the slave's endeavor to buy himself by raising the price in such way that it should exceed somewhat the amount of his savings. And hence it is that the price of slaves, as has been well said by one of your own economists, Mr. Philipps, is the central fact in slavery. If Professor Day prefers to hold a different opinion, if he finds this analysis simply grotesque, I have nothing more to say.

According to my investigations, so long as the isolated laborer produces all his subsistence, he never associates his labor with that of another, and in consequence the association of labor takes place by compulsion, either through the compulsion of a collective authority, as in the ancient communities or despotisms, or through that of a private capitalist, as in the case of a bonanza farm. But it follows also that if the isolated laborer does not succeed in producing his entire subsistence, his opposition to the association of labor ceases, and the association becomes spontaneous. This conclusion, which Professor Day calls nonsense, is simply the logical outcome of premises established with precision.

I might add that my critic, notwithstanding the exuberance of his detailed remarks, finds not a word to say about my chapter upon the rational imposition of taxes, or on my studies concerning the distribution of revenue, the contest between the different revenues, the pyramidal distribution of

funded incomes which results from this struggle, — all subjects which form the essence and core of my book. I merely note these topics in order to enable your readers to judge for themselves the solidity and impartiality of my critic.

ACHILLE LORIA.

TURIN, ITALY.

DEPRECIATION AND RATE CONTROL
A QUESTION OF JUSTICE

PROFESSOR Allyn A. Young's recent heretical utterances on depreciation in the valuation of public service properties for the purpose of rate control, compel every true believer to gird on his armor and come forth in defense of the faith.1 Professor Young's ideas are dangerous and his arguments are plausible; so all the more zeal for their destruction! So long as they had been advanced only by engineers and public utility experts employed by the corporations, or perhaps even by Mr. James E. Allison and the St. Louis Public Service Commission, there was no need for serious alarm. But when they are taken up by Professor Young, a vigorous thinker and a progressive economist of high standing, then indeed it is time to rush for the defense of righteous belief.

Professor Young's principal thesis is that when a public utility is newly brought under regulation and its property is valued for the purpose of rate control, to deduct accrued depreciation from cost new would be unjust to the investors. The rates to be fixed in any case will presumably be just so high that the revenues will cover operating expenses and bring a reasonable return upon the valuation. Professor Young assumes that in the great majority of instances, a public service company, before it was brought under active

1 44 Depreciation and Rate Control," Quarterly Journal of Economics, vol. xxviij, pp. 630-663, August, 1914.

regulation, did not include in operating expenses provisions for accruing depreciation and therefore did not build up a depreciation reserve; that instead it maintained the efficiency of the plant by charging to operating expenses the cost of replacements, and calculated its annual profits accordingly; that it had made its investments with the expectation that returns were to be received upon the full money outlay in the business, and had not made excessive gains from the property. If under such circumstances, the newly prescribed accounting standards require current depreciation to be included in operating expenses, and if the valuation upon which a return is allowed be cost new less past accrued depreciation, Professor Young urges that the company would not get the return the expectation of which induced the investment, and would therefore be treated unfairly by regulation.

Most economists and students of public utility matters probably do not agree with Professor Young's position. The danger, however, in formulating an adequate criticism against his view is to base one's argument upon pure scientific grounds, as if the matter involved fundamental principles of economics and accounting. This, it seems to me, is the difficulty with the recent criticism presented by Mr. Joseph S. Davis, in his otherwise very excellent discussion.1 Professor Young does not base his conclusion on accounting principles, but on principles of justice or sound public policy, which, incidentally, is also the basis for all public regulation, including valuation and the fixing of rates. When Mr. Davis, therefore, considers accrued depreciation as that part of the original value of the property which has been consumed in service, and presents it as an economic fact which is, whether shown in the accounts or not, he misses, it seems to me, the essential point in public utility valuation. Professor Young seems quite right when he urges that we have not to do with value as such but with value for the purpose of rate regulation. The one belongs in the realm of general economic law, but the other is wholly a thing of public policy.

'Depreciation and Rate Control: A Criticism," Quarterly Journal of Economics, vol. xxix, pp. 362-378, February, 1915.

Mr. Davis appears to be entirely wrong when he insists that a public service corporation is rightly entitled to a return upon the value of its property, measured according to its productive power, shown in the accounts as cost less accrued depreciation. Not even in unregulated business can it be claimed correctly that the value of a property is equal to its cost less accrued depreciation (when the latter is based upon the cost and expected life of the different classes of property), unless special adjustments are made for the value of earning power greater or less than normal. The value of an industrial property is, of course, determined by earning power, or productive power (to use Mr. Davis' phrase), and not by cost, as Mr. Davis' argument seems to imply. But in regulated business, we are not seeking the value of a property but a fair valuation for the purpose of control. It is true, the courts in the consideration of rate cases have quite consistently held that it is the "value" of its property upon which a company has a constitutional right to earn a reasonable return; still, practically they have allowed valuations to be made for the most part on the cost of reproduction basis, with due allowance for accrued depreciation. This, it should be emphasized, is not value in the sense used by Mr. Davis, but value for rate regulation as considered by Professor Young. It should be clear that if economic or market value were to be taken as the basis of rates, regulation would be useless, for it would get nowhere. Value would be dependent upon earning power, which would depend upon the rates to be fixed, --the familiar circle.

Actually, however, whatever the language of the courts may be, it is not value but cost which has become the accepted basis of rate regulation, and the proper basis of valuation, let us repeat, is not a matter of economic law, but one entirely of public policy. And in deciding upon the best policy we may very well consider actual cost as against cost of reproduction, or in either case whether the cost should be new or with deduction for accrued depreciation, or even with deductions for other matters. The decision must rest upon broad expediency, which, of course, involves questions of

justice as between the immediate owners and the public, for whose welfare the property is to be operated.1

What we wish, it seems, is such a policy of valuation for rate control as will serve best or promote most the general welfare. It is not to be doubted that Professor Young admits regulation itself to be desirable. If a given policy in general promises to serve the public interest best, it should not be set aside merely because some individuals or relatively small classes are likely to suffer some injury or inconvenience. Regulation apart from the question of valuation, in so far as it has hampered opportunity for personal gains, has unquestionably brought losses to special classes; but surely it cannot be considered socially unjust for that reason, so long as it has really promoted the welfare of the country at large. And the question of valuation should be viewed in exactly the same way. Still, we should avoid so far as possible any serious individual injury or loss.

From the broad view just presented, it seems that Professor Young has disregarded several important considerations, which, if given proper weight, might easily have led him to a different conclusion than that he has presented. Possibly Professor Young may not agree at all as to the best policy with the almost universal practice in providing for complete maintenance of public service properties. The present almost universal practice is to require the inclusion in operating expenses of charges for so-called current depreciation, in addition to the cost of all minor replacements. Then as major replacements are made, they are charged to the property accounts, and the depreciation reserve is debited with the original cost of all property retired. Apparently in the case of large and varied properties at least, Professor Young would prefer a somewhat different procedure. Instead of providing currently for accruing depreciation, he would charge to operating expenses the cost of all replacements as they are made, thus avoiding what he terms a useless reserve. I do not consider that there is here a great economic principle at

1 A friend, Mr. P. W. Saxton, suggests quite rightly that the proper method of valuation involves also a question of justice between the present generation of utility users and following generations.