pany has tied up in current operations, i. e., its working capital. Suppose in a given case that the operating revenue for a year (on the basis of past rates) is $1,200,000, that the operating ratio (expenses to revenue) is 60 per cent, and that the average time used by consumers in paying for service is two months. The operating revenue for this period would then be $200,000 and the expenses incurred $120,000. This would be the necessary working capital. If the company were starting new, with its actual fixed capital and volume of business, it would practically have to provide this amount in its initial investment. And we may assume, therefore, that the company actually has this sum tied up in the business and has a right to earn a return on the amount.'

Much may be said in favor of this method of calculating working capital. It seems, nevertheless, that the amount thus determined should not be taken directly as the working capital of a company, but rather as a check on the reasonableness of the sum shown by the statement of current assets and current liabilities, as presented earlier in this paper. We must remember that the company has a right to a return on its property actually devoted to service, provided it is reasonably needed. If, in the case assumed, where the funds tied up in current operations amount to $120,000, the company has an actual working capital of $500,000 (i. e., current assets above current liabilities), the latter amount would seem excessive and might justifiably be cut down. But the $120,000 may be viewed as a necessary minimum, and the company may be justified in having considerably greater funds in available materials and supplies,

'The above method of calculating working capital has been employed in several cases, notably in the Commonwealth Edison Appraisal, Chicago. See Report to the Committee on Gas, Oil, and Electric Light of the Chicago City Council on the Investigation of the Commonwealth Edison Company, by Ray Palmer, City Electrician, and John E. Traeger, City Comptroller, May 14, 1913. The method of calculating is needlessly involved. Substantially the same results would be obtained if, when the average period used by consumers to pay for service has been determined, we should simply determine the fair average expenses incurred by the company during that time. Thus, in the case assumed, the working capital would be equal to two months' expenses. The above general method of determining working capital is suggested by Commissioner Maltbie's discussion in the Kings County Lighting Case, 2 P. S. C., 1st Dist., N. Y., Oct., 1911.

cash, and various prepayments. The conclusion might well be that $500,000, current assets less current liabilities, is a greater working capital than is reasonably required, and that $200,000 would be a fair amount to allow in the valuation. Thus, the $120,000 carrying charges would not be taken directly as the working capital in the case but as a basis of comparison in judging the reasonableness of the actual working capital held by the company.

On the other hand, the $120,000 carrying charges might be greater than the actual working capital on which the company should get a return. If the materials used are regularly purchased on time, and if payment for labor and other expenses is usually deferred for a considerable period, then to this extent it is clearly not the company but the current creditors that bear the carrying costs of the business, and the amounts involved should not be included in the valuation. Thus, the actual working capital in the case may be only $50,000, and there would be no reason for allowing a return on the full $120,000 tied up in current operations. Of the latter amount, $70,000 should be viewed as contributed by creditors or the public and not by the company.

If, nevertheless, the carrying charges are taken as the primary basis in determining the working capital in a case, then, clearly, adjustments should be made so that the amount may correspond with reasonable actual conditions. Thus additions should be made for the balance of cash, materials and prepayments, and subtractions for any current obligations. The net result, therefore, would be theoretically the same as shown by the statement of current assets and current liabilities, unless by comparison the latter amount would appear to be excessive. It would seem, therefore, that in the determination of working capital, the clearer and more direct calculation would be to take as the primary basis current assets less current liabilities, and then to make such adjustments as would seem reasonable through analysis of the carrying charges of the business. This procedure would clearly conform with the fundamental principle of regulation, that a return should be allowed on a company's actual property used in serving the public.

PRINCETON UNIVERSITY.

JOHN BAUER.

T

FETTER'S PRINCIPLES OF ECONOMICS'

HE strong disagreements which persist today with regard to the methodology and content of political economy make the appraisal of a newly appeared "Principles "an undertaking of no small difficulty. When giving commendation or passing criticism, one feels he must either deliver himself of his mere ipse dixit or involve himself in arguments to defend his evaluations before the majority who are almost certain not to judge from his standpoint, even if they possess no common standpoint. Such arguments are nearly interminable by nature. Their laboriousness and general ineffectiveness are indeed disheartening. And so neither the alternative of the ipse dixit nor that of the argument is altogether attractive. Fetter has made certain amendments to the theory of value in the interest of casting out hedonism. It is discouraging to think of attempting to argue the questions involved in reasonable compass, especially if one imagines himself addressing that present-day company who rely upon hedoism's total and irretrievable destruction as a philosophical fait accompli and see nothing but hedonism in "classical" economics. This is that group of gentlemen engaged in demolishing everything tinged with hedonism in our fair science. For each of them that has appeared in our forums there are numbers who have not as yet discharged their shots in public. It seems, according to their way of thinking, that the banishment of hedonism will leave nothing much in economics but the "genetical" account. The syllogism implied in their conversations is :

Major premise. The entire structure of "classical" or "deductive economics is hedonistic.

Minor premise. All that is hedonistic belongs in the ash can of science.

One of this school, a professor in the making being taught by a professor already made, has been heard to maintain that when a manufacturer of motor cars puts stronger but softer springs in his machines, this is not done because of any greater satisfactions that will be afforded consumers, nor because of any greater amount of money receipts that might fall to the manufacturer in consequence thereof; but is done solely for the maker's entrepreneurial self-realization. It is appalling

See note 1. p. 431.

to think of argument with one so filled to the brim with new psychology. Doubtless what is to follow will slip into the ways of argument, but endurance will be lacking to pursue these ways to their ends. This is to be, in the language of one Ambrose Bierce, merely a "transient record of individual opinion." Wherever" it seems to me" is not expressed, it is by stipulation implied.

Professor Fetter's Economic Principles appeared last autumn. The book is the first half of a two-volume treatise on economics. The second half, Modern Economic Problems, is announced for September, 1916, to make the applications of principles. In general Professor Fetter's theory may be described as mechanistic and Austrian. To call it mechanistic signifies that, like the usual type of economic theory, it treats the industrial and business system as being somewhat analogous to a mechanism, in that the operations of this system are explained in terms of practically contemporaneous causes and effects without reference to the changes in its structure which take place with the passage of time. Here "mechanistic" is substituted for the less appropriate" deductive" as a description of the classical type of theory. Mechanistic explanation contrasts especially with "genetical" explanation, though it seems doubtful if a precise line can in the last analysis be drawn between the two. Fetter's book shows a pride in its own novelties, but as far as methodology is concerned it is as mechanistic as the work of Ricardo, or the theory of interest of Irving Fisher, or the theory of distribution of John Bates Clark. And this is as it should be. For economics is best described as the study of the structure and action of the industrial system, with an object in view, namely, that of making us good judges of questions of the policy of the state (or of any body of persons, such as organized labor or capital) toward the industrial system. That is, the touchstone of importance and relevancy in economics is applicability to questions of public policy. It is on the strength of this test of relevancy that Fetter's methodology is pronounced the right one. It is also merely the dominant methodology of all the leading general texts past and present.

It seems just to state that Professor Fetter's theory is Austrian in its general character, because he conceives of the value of final products as being derived solely from the gratifications of consumers which these goods condition (though he has much impaired his statement of this tenet owing to a misguided deference for the" new psychology "),

Economic Principles. By Frank A. Fetter. New York, The Century Company, 1915; x, 523 pp.

and similarly because he conceives of the value of production goods as being derived solely from the value of their products. He interprets the relation of entrepreneur's cost to price (see chapter 28, sections 8-13) in entire accord with this system of thought, just as von Wieser has done, by a theory of the value of what the latter called "cognate " products. He thus harmonizes the law of entrepreneur's cost with what we were once prone to call the utility theory of value. The reconciliation is a pretty piece of theorizing, more fully worked out by von Wieser than by Fetter, and in any case Austrian. Fetter's theory of price (chapter 7) is like Böhm-Bawerk's. Fetter upholds a pure agio theory of interest, the veritable blood-brother of the utility theory of value. Böhm-Bawerk showed that the agio theory is necessarily part and parcel of the same dialectic as the utility theory, even if this great theoretician did unconsciously depart from the utility dialectic. when he advanced his doctrine of the roundabout method. The present reviewer commends Fetter's theory as much for its Austrian as for its mechanistic character.

In the preface of Economic Principles our author is discovered in a somewhat belligerent frame of mind. Speaking broadly of texts which have appeared since the middle of the nineteenth century, he says:

The ambition of successive writers has been "to modernize Mill" rather than to modernize economics. Books continue to appear, repeating with little essential change the theoretical system of the English classical school. Their innocuous references to more recent constructive criticism have little purpose but to evidence the erudition of the authors and their spirit of Christian charity.

are

The newer criticism, a "body of esoteric doctrine discussed only by the initiated and merely hinted at in undergraduate instruction," has touched the general text-book and the general college course only superficially and here and there, occasioning such changes as the substitution of the novel soporific locutions of the marginal utility school for the older catch-words of cost of production'" (page vii). The purpose of the book now being offered to the public is to give the new thought a positive and systematic exposition which will place it at the disposal of the general reader and the student of elementary economics in college. To accomplish this purpose it carries forward the argument of the author's earlier Principles of Economics published in 1904. While differing much from this prior volume in general plan and detail,

1 Von Wieser, Natural Value (English edition of 1893), page 172.