r, the capital is first measured by the cost of the goods that,
in the inception of the industry, embody it, and in static studies
this cost is regarded as constant. Returns from different outlays are
equalized, and a dollar invested in one kind of business then yields
as much in a year as a dollar in any other. In a dynamic state the
cost standard still prevails, and as the tools of production become
cheaper, in terms of labor, it takes more of them to represent the
same amount of capital that was originally invested. What it would at
any time cost to duplicate every item in the equipment of a business
measures the capital it uses. Nothing but a failure of competition in
the case of railroads prevents the application of this standard to
them. Monopoly makes earnings more or less independent of sums
invested and causes purchasers to buy stock at rates that are
independent of costs of plant and equipment and are fixed by earnings
themselves.

_The Process of Estimating Capital on the Basis of Cost._--If we
undertake here to do by public authority what competition elsewhere
tends to do, we shall have to restore the standard based, not on the
original cost of the railroad's substantial property, but on the cost
of getting another that would be equal to it in working efficiency.
The plant is worth what it would naturally cost to duplicate it; and
an average rate of interest on that sum is the natural return from it.
There are ethical claims which are entitled to respect and which
preclude any sudden reduction of the value of a railroad's properties;
and, moreover, the end in view can be attained in a way that will not
necessarily take anything from the absolute amount which they are now
worth. If the amount of dividends remains fixed, the increase in the
actual value of the plant itself will bring these dividends into the
proper ratio to it. The land that the companies use is becoming more
valuable. Measured by what it would cost to duplicate it, it
represents a larger and larger amount on the companies' inventories.
If the equipment also is enlarged as traffic grows, the entire sum on
which interest and dividends are computed becomes continually larger.
If the interest and dividends earned by the plants now in existence
remain fixed in absolute amount, they will become a smaller and
smaller percentage of the real capital of the companies. Merely
letting railroads earn the amount that they do at present would bring
the net