[Letter] Feb.5,1889,Smith College [to F.H. Giddings]

Feb. 5, 1889, Smith College.

Dear Friend,
         Thanks. Your
letters are the next best
thing to the visits
and consultations that
used to be my largest
privileges. I won't say the
substitution is an equivalent.
The present letter shows
that on our part of the
argument we are doing
our best to prove the
same thing. Of course
profits always exist at
an indefinite number of
points. The selling price
of a large number of
things contains generic
wages, generic interest
and something more.
That means that the
selling price of no one of
those things is what Ricardo
termed natural, what I have
called normal. Competition forces, in any one case, the
price ( ) toward a certain
standard. What is that
standard and what fixes
it? This is my whole
inquiry. I have answered
that it is entrepreneur's
cost of production. The
standard is actually reached
when pure profit disappears.
Only in that way do I
disregard profit. It is the
difference between selling
price and the standard I
am seeking. Of course it is
not an element in the
standard I am seeking.
I can hardly agree that the
poorest productive instrument
in use is not a no-rent
instrument until there are
enough better ones to satisfy
the market demand at the
price at any assumed time prevailing.
 If there exists
a series of instruments of
varying quality some of which
as you very truly say pay a
negative rent, that makes
it certain that whenever certain
rent paying instruments happen
to be the poorest in use,
still poorer ones will be
immediately taken into the
field. Let us say the
price of cotton goods suddenly
goes to a point where the
worst located and worst
equipped mill that actually
runs at all pays interest
on $10,000. There are
then $10,000
of capital in
that mill(See later statement). Two things happen
at once. Better mills pay
an enlarged interest and
their owners begin to extend
their plants. This is the
duplication of capital that
you speak of. Secondly,
entrepreneurs press into use
a lower grade of mills.
Those still worse located
and equipped than were formerly
in operation can now afford
wages including those of
superintendence (as well as
interest on operating capital, which
we have not paused to discuss.
It is not a vitiating element
in the calculation).
 The second adjustment
may be the most quickly
made. If so the thing that
happens is that the still
poorer instruments referred to
are run temporarily, and are
in part abandoned after the
duplication is partly effected. I think
it is demonstrated that they are not wholly abandoned.
In any case the tendency seems to
be toward a point where the
poorest instruments in use
are no-rent and no-interest
instruments. That is all we tried to
prove. We could, I think confirm
this conclusion by taking into
account no-rent uses of
good instruments. When the
poorest mill that runs pays
interest on $10,000, then all
mills are crowed in their
working. More labor is put into them.
This takes place even more
quickly than the resumption of
the use of poorer instruments
than those that formerly stood at
the bottom of the list. The
cost of producing what is made
by such a no-rent use of
a rent paying instrument is
a labor cost only.
 I said above, that when
the poorest mill pays interest on
$10,000 there is a capital of that
amount in it. That statement I
take back, for the same reason that
I demur to another point in your
letter, namely that when all mills
are paying a profit, if the owner of
a good one were to sell it, he would be
able to capitalize his pure profit.
I do not see how he can do
that. All parties ought to take
account of the fact that this
pure profit is a vanishing
thing. It will disappear
when the new plant is partly
completed. Let us say the
man with a good mill costing
$100,000 gets $8000 per
year out of it, above all
wages of superintendence and operating
labor. His pure profit is, say,
$3000. Is his mill worth $100,000
plus the sum of which $3000 is
interest at 5%? Could he sell
for $160,000? Could he sell it
for that sum less an allowance
for the risk that the
profit might not continue?
I should say the most he
could do would be to
compound for the pure
profit of $3000 for two of
three years. I should think
even two years would be an
outside figure, and that his
mill would bring only [$]106,000
at the utmost. At the
end of one year the best mills
will have been enlarged,
and some of the profit will
have disappeared. At the
end of two years more will have
gone, and at the end of three
say, all will have vanished.
Now you say I should take
account of this enlargement
as an investment of capital.
It duplicates the capital of
the mills that figured as
no-rent mills. That would be
a way to look at the matter
if (1) we were studying general
drafts on social capital; if
(2) we could regard the profit
temporarily made by the poorest
mill in use as endowing that
mill with permanent value. If
for instance, my mill paying
temporary interest on $10,000 really
contained that amount of capital;
also if (3) still poorer mills
were not at once pressed
into service so that the worst
one in use after the new
adjustment would be one that
paid a negative rent before,
and pays a 0 rent now.
Some of these, for certain reasons, continue
to run. Well, I started to
write two pages, and I have
spoiled 12 pages of paper and
a half-hour of your time.
I fear I have inflicted on
you a half-hour of minus
wages. Even with the 12
pages I have doubts as to
the clearness of the statement.
I think in my mind the
idea is fairly clear When we get on
our bicycles next summer we will have
it out.

            Yours Very Truly,
                  J. B. Clark