proportioning rates is the much maligned one
of "charging [in proportion to] what the traffic will bear." The
argument against this principle is so very plausible that, until he
had given the subject thorough study he held a diametrically
opposite opinion.

To make plain to the reader that this is really the only equitable
principle, the following illustration may serve: A coal-mine
operator and a sewing-machine manufacturer build together a railroad
to carry their respective products to a market. They will fix the
total rates of freight at such a point as to just pay the cost of
service; but it is required to find what relative rates each should
be equitably charged on the shipments from his works. Evidently, to
have the rates perfectly equitable, they must be in exact proportion
to the _benefit_ which each party derives from the use of the road.
But this benefit which each derives is _measured_ by the profits
which each makes from his business; and this profit, in turn, is the
measure of the amount each can afford to pay for the use of the
road,--that is to say, "what the traffic will bear." _Q. E. D._

"But," the objector says, "is it not true that when you limit the
profits of the companies and base rates on cost of service you take away
all incentive to economy and careful operation? The public, and not the
company, gain if the cost of service is reduced; so why should the
manager exert himself to economize? This very same principle has been
tried. Many States have chartered railway corporations, and provided
that fares and freight rates should be reduced when dividends exceeded a
certain per cent., or else that a percentage of the surplus earnings,
above the amount necessary to earn, say 10 per cent. dividends, should
be paid into the State treasury. Of course the railway corporations who
have been able to earn surplus dividends which they were not permitted
to pay, have been sharp enough to spend their surplus on their own
property instead of turning it over to the State treasury. How is it
possible, then, to base rates on cost of service and still leave the
incentive to economy, frugality, and efficiency which exists, when the
corporation is permitted to make all the profits it can?"

To discover a means of overcoming this difficulty, let us see how it is
overcome under competition. A man invents a new machine, for instance,
which effects a s