F.H.Gidding's letter of Feb.4.1889,to J.B.Clark,Bryn Mawr,Pa.[both ms and typescript copies.]

     F. H. Giddings' letter of Feb. 4, 1889, to J. B. Clark, Bryn
     Mawr, Pa.[both ms and typescript copies.]

Dear Friend:
        Your logic is good if your
assumptions are, but I do not quite
see how it is right theoretically, to put
pure profit at zero when you are
considering the relation of social cap-
ital as a whole to social production
as a whole. In your analysis of pure
profit you have shown that while
in the case of any given entrepreneur
it tends to zero, it continually re-
appears at some new point in
society or by some new process
in the affairs of the same entrepreneur.
At any moment it exists some-
where, and it is not a factor in
price. If, however the man who en-
joys it should sell his business
he would demand an equivalent, a
present worth of that pure profit
and the sum would be a part of
social capital, but the interest on
that part of social capital would
not as I can see be a factor in
prices of commodities.
 I do not see either, that the
value of the poorest instruments in
actual use is merely a residual
value or that it may be ignored
as a price making influence. What
determines what grade of produc-
tive instruments shall continue
in actual use? The competition
of the best instruments is it not?
The paper mill making news-print
at a cost of 3¢ a pound continues
in operation by the suff[e]rance
of the mill making the same
paper at 2 3/4¢ but preferring
to take 1/4¢ as pure profit than
to cut prices. Suppose that
at 3¢ selling price the poorer
mill is making five per cent on the capital
invested. That interest can be
wiped out, let us say, if
the better mill drops its selling
price to 2 9/10¢. The poorer mill
will now have a residual value
only, yet, you will say, it will
continue to run so long as it
makes wages of labor and manage-
ment. Granted: but let us push
the inquiry a step farther. Why
does the better mill drop its price
to 2 9/10¢? To secure the
market for the product, 500
tons a year, let us say, which
the poor mill has been selling.
But to increase its production
by 500 tons a year the best
mill must practically duplicate
the plant of the poorer. It must
invest capital, the interest on
which will be approximately equal
to the interest we thought we
were getting rid of in the poorer
mill. In general, then, I should
say: There is no no-value in-
strument or plant in actual com-
petition except when plant is
duplicated, and normal price
is always high enough to allow
interest on the capital in-
vested in the least efficient
plant as well as wages to the
labor operating that plant. If
the least efficient plant fails
to get interest it is because
duplication has diverted the
interest to other hands.
 It seems to me that you
are departing from the stand-
point you assumed in
your essay on profits and
in your monograph on
capital. In the latter, I think it is,
you speak of cutting a section,
at a given moment, across
the productive operations and
investments of society,and
seeing what would be the ac-
tual relations of interest, rent,
etc., at that moment. That
standpoint, I think, should be ad-
hered to, and certainly such a
section would disclose a
gradation of efficiency in pro-
ductive instruments. All are
tending to become equal under com-
petition, but, since other forces
are at the same instant produc-
ing new inequalities, equality
is never reached in fact. There-
fore actual price of produce
and actual cost of produce
coincide only in the case of
a small proportion of the
productive instruments. For all
others there is a difference between
selling price and cost. It may be
a positive, it may be a negative
difference. If we may speak
of negative as well as of positive
rent, and I think we ought to, this
difference is what has always
been called economic rent. If
the present worth of it is capital-
ized as it must be if the in-
struments are sold the
interest on that part of social
capital is no part of cost
of production. It is the price
paid for a sum that, to some-
body is pure profit. Now I don't
feel a bit
sure that I am nearer right than you are.
It is in dealing with
just such questions as these, in
which everything depends on preci-
sion of statement and adherence
to certain meanings of terms
throughout the argument that
Political Economy has much
to gain from the use of the
mathematical method. I
hope sometime to really master
that method and see what
can be done with it.

       Yours very truly,
           F. H. Giddings