Binary economics

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Binary economics, also known as two-factor economics, is a theory of economics that endorses both private property and a free market but proposes significant reforms to the banking system.[ citation needed ]

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According to theories first proposed by Louis Kelso, widespread use of central bank-issued interest-free loans to fund employee-owned firms can finance economic growth whilst widening stock ownership in a way which binary economists believe will be non-inflationary.[ citation needed ]

The term "binary" derived from its heterodox treatment of labor and capital (but not in the sense of binary opposition). [1] Kelso claimed that in a truly free market wages would tend to fall over time, with all the benefits of technological progress accruing to capital owners.[ citation needed ]

Overview

Binary economics rejects the claim that neoclassical economics alone promotes a 'free market' which is free, fair and efficient. (e.g., as an interpretation of the classical First Fundamental Theorem of Welfare Economics). Binary economists believe freedom is only truly achieved if all individuals are able to acquire an independent economic base from capital holdings, and that the distribution of ownership rights can "deepen democracy". [2]

Binary economics argues financial savings prior to investment are not required on the basis that the present money supply is mostly created credit anyway. [3] It argues that newly minted money invested on behalf of those without access to existing cash savings or collateral can be adequately repaid through the returns on those investments, which need not be inflationary if the economy is operating below capacity. The theory asserts that what matters is whether the newly created money is interest-free, whether it can be repaid, whether there is effective collateral and whether it goes towards the development and spreading of various forms of productive (and the associated consuming) capacity.[ citation needed ]

Another contrast is that, in evidence-based economics, interest (as distinct from administration cost) is practically always necessary; in Binary Economics theory it isn't (not in relation to the development and spreading of productive capacity). [4] Conventional economics accounts for the observed time value of money, whereas binary economics does not.[ citation needed ]

Background

The theory behind Binary Economics was proposed by American lawyer Louis Kelso and philosopher Mortimer Adler in their book The Capitalist Manifesto (1958). The book's title could be seen as a Cold War reference in opposition to communism. [5]

Kelso and Adler elaborated on their proposals in The New Capitalists in 1961. Then Kelso worked with political scientist Patricia Hetter Kelso to further explain how capital instruments provide an increasing percentage of the wealth and why capital is narrowly owned in the modern industrial economy. [6] Their analysis predicted that widely distributed capital ownership will create a more balanced economy. Kelso and Hetter proposed new "binary" share holdings which would pay out full net earnings as dividends (with exceptions for research, maintenance and depreciation). These could be obtained on credit by those not possessing savings, with a government-backed insurance scheme to protect the shareholder in the event of loss.[ citation needed ]

Kelso's writings were not well received by academic economists. Milton Friedman said of The Capitalist Manifesto "the book's economics was bad ... the interpretation of history, ludicrous; and the policy recommended, dangerous" and recalls a debate where even the moderator Clark Kerr "lost his cool as a moderator and attacked [Kelso's arguments] vigorously". [7] Paul Samuelson, another Nobel Memorial Prize in Economic Sciences winner, told the U.S. Congress that Kelso's theories were a "cranky fad" not accepted by mainstream economists, but Kelso's ideas on promoting wider capital ownership nevertheless significantly influenced the passing of legislation promoting employee ownership. [8]

Aims and programme

The aim of binary economics is to ensure that all individuals receive income from their own independent capital estate, [9] using interest-free loans issued by a central bank to promote the spread of employee-owned firms. [1] These loans are intended to: halve infrastructure improvement costs, reduce business startup costs, and widen stock ownership.

Binary economics is not mainstream and does not fit easy into the left–right spectrum. [10] It has variously been characterized as an extreme right-wing ideology and as extremely left-wing by its critics. [11] [12] The 'binary' (in 'binary economics') means 'composed of two' because it suffices to view the physical factors of production as being but two (labour and capital (which includes land). It recognises only two ways of genuinely earning a living − by labour and by productive capital ownership. In its theory humans own their labour, but also productive capital. [13]

Binary economics is partly based on belief that society has an absolute duty to ensure that all humans have good health, housing, education and an independent income, as well as a responsibility to protect the environment for its own sake. The interest-free loans proposed by binary economics are compatible with the traditional opposition of the Abrahamic religions to usury. [14]

Proponents [15] of binary economics claim that their system contains no expropriation of wealth, and much less redistribution will be necessary. They argue that it cannot cause inflation and is of particular importance as more of the physical contribution to production is automated. [16] and that the Binary economics paradigm [17] is particularly helpful in addressing the issue of why developing countries languish. [18] Advocates [14] contend that implementing their system will lessen national debt and encourage national unity. They believe binary economics could create a stable economy.

Productiveness vs. productivity

Binary productiveness is distinctly different from the conventional economic concept of productivity. [19] Binary productiveness attempts to quantify the proportion of output contributed by total labor input and total capital input respectively, [20] Adding capital inputs to a production process increases labor productivity, but binary economic theory argues that it decreases labor productiveness (i.e. the proportion of the total output with the support of both labor and capital that the labor inputs could have produced alone). For example, if the invention of a shovel allows a laborer to dig a hole in quarter of the time it would take him without the spade, binary economists would consider 75% of the "productiveness" to come from the shovel and only 25% from the laborer.

Roth criticised the shovel example on the basis that the shovel is not a factor of production independent of human capital because somebody invented it, and the shovel cannot act independently: the physical productiveness of the shovel before labour is added to it is zero. [21] [22]

Kelso used the concept of productiveness to support his theory of distributive justice, arguing that as capital increasingly substitutes for labor: "workers can legitimately claim from their aggregate labor only a decreasing percentage of total output", [23] implying they would need to acquire capital holdings to maintain their level of income. In The Capitalist Manifesto, Kelso boldly asserted:

"It is, if anything an underestimation rather than an exaggeration to say that the aggregate physical contribution to the production of the wealth of the workers in the United States today accounts for less than 10 percent of the wealth produced, and that the contribution by the owners of capital instruments, through their physical instruments, accounts in physical terms for more than 90 percent of the wealth produced" [24]

Whilst the increased importance of capital as a factor of production following the Industrial Revolution has long been accepted even by those believing economic value derives from labour such as Marx, [25] Kelso's figures suggesting that value was created almost entirely by capital were dismissed by academic economists like Paul Samuelson. [8] Samuelson asserted that Kelso's had not used any econometric analysis to arrive at his figures, which completely contradicted economists' empirical findings on the contribution of labour. The Capitalist Manifesto did not provide detailed calculations to support Kelso's claim, although a footnote [24] suggested that it was based on a simple comparison with 1850s labour productivity figures.

Employee stock ownership plan (ESOPs) and other plans

Employee stock ownership plans (ESOPs) are compatible with some of the principles of binary economics. [26] These stem originally from Louis Kelso & Patricia Hetter Kelso (1967)Two-Factor Theory: The Economics of Reality; the founding of Kelso & Company in 1970; and then from conversations in the early 1970s between Louis Kelso, Norman Kurland (Center for Economic and Social Justice), Senator Russell Long of Louisiana (Chairman, USA Senate Finance Committee, 1966–81) and Senator Mike Gravel of Alaska. There are about 11,500 ESOPs in the USA today covering 11 million employees in closely held companies.[ citation needed ]

Uses of central bank-issued interest-free loans

Binary economics proposes that central bank-issued interest-free loans should be administered by the banking system for the development and spreading of productive (and the associated consuming) capacity, particularly new capacity, as well as for environmental and public capital. While no interest would be charged, there would be an administrative cost as well as collateralization or capital credit insurance. [27]

Proponents of binary economics are dissatisfied with fractional-reserve banking, arguing that it "creates new money out of nothing". [28] The supply of interest-free loans would place in circumstances of a move (over time) towards banks maintaining reserves equal to 100% of their deposits; in practice, the large-scale interest-free lending desired by binary economics is compatible with the widespread reduction in money supply that would be caused by increased reserve requirements only if the government takes over the banks' role in credit creation.

Investments eligible for interest-free loans

Binary economics suggests that ownership of productive (and the associated consuming) capacity, particularly new capacity, could be spread by the use of central bank-issued interest-free loans. [29] Interest-free loans should be allowed for private capital investment IF such investment creates new owners of capital and is part of national policy to enable all individuals, over time, on market principles, to become owners of substantial amounts of productive, income-producing capital. [30] By using central bank-issued interest-free loans, a large corporation would get cheap money as long as new binary shareholders are created.

Related Research Articles

Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, a price system, private property and the recognition of property rights, voluntary exchange and wage labor. In a capitalist market economy, decision-making and investments are determined by owners of wealth, property, or production ability in capital and financial markets—whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.

In economics, a free market is a system in which the prices for goods and services are self-regulated by buyers and sellers negotiating in an open market. In a free market, the laws and forces of supply and demand are free from any intervention by a government or other authority, and from all forms of economic privilege, monopolies and artificial scarcities. Proponents of the concept of free market contrast it with a regulated market in which a government intervenes in supply and demand through various methods such as tariffs used to restrict trade and to protect the local economy. In an idealized free-market economy, also called a liberal market economy, prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy.

Anti-capitalism Political ideology and movement opposed to capitalism

Anti-capitalism is a political ideology and movement encompassing a variety of attitudes and ideas that oppose capitalism. In this sense, anti-capitalists are those who wish to replace capitalism with another type of economic system, usually some form of socialism.

In economics and sociology, the means of production are the physical and non-financial inputs used in the production of goods and services with economic value. These include raw materials, facilities, machinery and tools used in the production of goods and services.

Market economy Type of economic system

A market economy is an economic system in which the decisions regarding investment, production and distribution are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.

Private property Legal designation of the ownership of property by non-governmental legal entities

Private property is a legal designation for the ownership of property by non-governmental legal entities. Private property is distinguishable from public property, which is owned by a state entity, and from collective or cooperative property, which is owned by a group of non-governmental entities. The distinction between private and personal property varies depending on political philosophy, with socialist perspectives making a hard distinction between the two, while others blend the two together. As a legal concept, private property is defined and enforced by a country's political system.

Louis O. Kelso

Louis Orth Kelso was a political economist, corporate and financial lawyer, author, lecturer and merchant banker who is chiefly remembered today as the inventor and pioneer of the employee stock ownership plan (ESOP), invented to enable working people without savings to buy stock in their employer company and pay for it out of its future dividend yield.

Economic system System of ownership, production and exchange

An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes and patterns of consumption that comprise the economic structure of a given community.

Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form of profit, rent, interest, royalties or capital gains. The aim of capital accumulation is to create new fixed and working capitals, broaden and modernize the existing ones, grow the material basis of social-cultural activities, as well as constituting the necessary resource for reserve and insurance. The process of capital accumulation forms the basis of capitalism, and is one of the defining characteristics of a capitalist economic system.

A theory of capitalism describes the essential features of capitalism and how it functions. The history of various such theories is the subject of this article.

Independent income is a stream of income received without directly exchanging labour power for it. Examples are interest on money capital, dividends earned by share ownership, rental income, etc.

Marxian class theory asserts that an individual's position within a class hierarchy is determined by their role in the production process, and argues that political and ideological consciousness is determined by class position. A class is those who share common economic interests, are conscious of those interests, and engage in collective action which advances those interests. Within Marxian class theory, the structure of the production process forms the basis of class construction.

Throughout modern history, a variety of perspectives on capitalism have evolved based on different schools of thought.

An Employee Stock Ownership Plan (ESOP) in the United States is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of IRS codes, which became a qualified retirement plan in 1974. It is one of the methods of employee participation in corporate ownership.

<i>The Capitalist Manifesto</i> 1958 book by Louis O. Kelso and Mortimer J. Adler

The Capitalist Manifesto is a 1958 book by Louis O. Kelso, a lawyer-economist and Employee Stock Ownership Plan (ESOP) inventor, and Mortimer J. Adler, a neo-Thomist philosopher. Kelso and Adler detail the three principles of economic justice, Participation, Distribution, and Limitation. These principles laid the foundation of what eventually came to be called “binary economics.” The term “binary” comes from attributing all production (participation) and just distribution of income to two factors, the human, classified as labor, and the non-human, classified as capital. In the Preface, Adler acknowledged Kelso as the originator of the theory.

The Center for Economic and Social Justice (CESJ) is a non-profit, all-volunteer educational and research institution organized under § 501(c)(3) of the United States Internal Revenue Code. The think tank is registered as a non-stock corporation in Washington, DC, and located in Arlington, Virginia, U.S.A. Founded in 1984, CESJ studies, promotes and develops programs embodying a free enterprise approach to global economic justice through expanded capital ownership. CESJ calls its approach “the Just Third Way.” The organization describes itself as politically and religiously pluralistic.

In Karl Marx's critique of political economy and subsequent Marxian analyses, the capitalist mode of production refers to the systems of organizing production and distribution within capitalist societies. Private money-making in various forms preceded the development of the capitalist mode of production as such. The capitalist mode of production proper, based on wage-labour and private ownership of the means of production and on industrial technology, began to grow rapidly in Western Europe from the Industrial Revolution, later extending to most of the world.

Socialist mode of production Marxian economy centered around use value, planning and contribution-based distribution

The socialist mode of production, also referred to as the communist mode of production, the lower-stage of communism or simply socialism as Karl Marx and Friedrich Engels used the terms communism and socialism interchangeably, is a specific historical phase of economic development and its corresponding set of social relations that emerge from capitalism in the schema of historical materialism within Marxist theory. The Marxist definition of socialism is that of an economic transition. In this transition, the sole criterion for production is use-value, therefore the law of value no longer directs economic activity. Marxist production for use is coordinated through conscious economic planning. Distribution of products is based on the principle of "to each according to his contribution". The social relations of socialism are characterized by the proletariat effectively controlling the means of production, either through cooperative enterprises or by public ownership or private artisanal tools and self-management. Surplus value goes to the working class and hence society as a whole.

Social ownership is the appropriation of the surplus product produced by the means of production by a society or community as a whole, and is the defining characteristic of a socialist economic system. It can take the form of state ownership, common ownership, employee ownership, cooperative ownership, and citizen ownership of equity. Traditionally, social ownership implied that capital and factor markets would cease to exist under the assumption that market exchanges within the production process would be made redundant if capital goods were owned and integrated by a single entity or network of entities representing society; but the articulation of models of market socialism where factor markets are utilized for allocating capital goods between socially owned enterprises broadened the definition to include autonomous entities within a market economy. Social ownership of the means of production is the common defining characteristic of all the various forms of socialism.

Marxian economics Heterodox school of economic thought; concerns crisis, surplus value, class, and others

Marxian economics, or the Marxian school of economics, is a heterodox school of political economic thought. Its foundations can be traced back to the critique of classical political economy in the research by Karl Marx and Friedrich Engels. Marxian economics comprises several different theories and includes multiple schools of thought, which are sometimes opposed to each other, and in many cases Marxian analysis is used to complement or supplement other economic approaches. Because one does not necessarily have to be politically Marxist to be economically Marxian, the two adjectives coexist in usage rather than being synonymous. They share a semantic field while also allowing connotative and denotative differences.

References

  1. 1 2 Rodney Shakespeare (2007) The Modern Universal Paradigm.
  2. ↑ Roy Madron & John Jopling (2003) Gaian Democracies
  3. ↑ Michael Rowbotham (1998) The Grip of Death. James Gibb Stuart (1983) The Money Bomb.
  4. ↑ Rodney Shakespeare (2007) op. cit.
  5. ↑ "The Capitalist Manifesto" (PDF). Retrieved 2011-02-20.
  6. ↑ Louis Kelso & Patricia Hetter Kelso (1986 & 1991) Democracy and Economics Power - Extending the ESOP Revolution through Binary Economics
  7. ↑ Friedman, Milton & Friedman, Rose D. Two Lucky People: A memoir, University of Chicago Press, p.275
  8. 1 2 D'Art, Darryl (1992) Economic democracy and financial participation: a comparative study, Routledge p.96
  9. ↑ Robert Ashford & Rodney Shakespeare (1999) Binary Economics – the new paradigm
  10. ↑ Robert Ashford (1990) The Binary Economics of Louis Kelso: the Promise of Universal Capitalism (Rutgers Law Journal, vol. 22 No.1. Fall, 1990).
  11. ↑ Robert Ashford & Rodney Shakespeare (1999) op. cit;
  12. ↑ Time , June 29, 1970.
  13. ↑ Louis Kelso & Patricia Hetter Kelso (1967) Two-Factor Theory: the Economics of Reality.
  14. 1 2 Rodney Shakespeare & Peter Challen (2002) Seven Steps to Justice.
  15. ↑ Norman Kurland, Dawn Brohawn & Michael Greaney (2004)Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security.
  16. ↑ James S. Albus (1976) Peoples' Capitalism - The Economics of The Robot Revolution.
  17. ↑ Sofyan Syafri Harahap (2005), Accounting Crisis. William Christensen Search for a Universal Paradigm: Making Justice Live For All International Conference on Universal Paradigm of Socio-Scientific Reasoning, Asian University of Bangladesh, 2005.
  18. ↑ A notable lecture on this matter was given by Ing. B.J Habibie (former President, The Republic of Indonesia) at the international conference Islamic Economics and Banking in the 21st Century, Jakarta, Indonesia, November, 2005. See also Thoby Mutis (1995) Pendekatan Ekonomi Pengetahuan dalam Manajemen Kodedeterminass.
  19. ↑ Mark Douglas Reiners The Binary Alternative and the Future of Capitalism available at Center for Economic and Social Justice.
  20. ↑ Robert Ashford Louis Kelso’s Binary Economy (The Journal of Socio-Economics, vol.25, 1996).
  21. ↑ Timothy D. Terrell Binary Economics: Paradigm Shift Or Cluster of Errors? Ludwig von Mises Institute.
  22. ↑ Timothy P. Roth, (1996) A Supply-Sider’s (Sympathetic) View of Binary Economics, Journal of Socio-Economics 25 (1) pp. 58–59.
  23. ↑ Kelso, Louis (1958) The Capitalist Manifesto, Random House, p.110-11
  24. 1 2 Kelso, Louis (1958) The Capitalist Manifesto, Random House, p.53
  25. ↑ Louis Kelso Karl Marx: The Almost Capitalist (American Bar Association Journal, March, 1957).
  26. ↑ William Greider (1997) One World, Ready or Not: The Manic Logic of Global Capitalism.
  27. ↑ Norman Kurland (1998) The Federal Reserve Discount Window — www.cesj.org
  28. ↑ John Tomlinson (1993) Honest Money. Joseph Huber & James Robertson Creating New Money. Peter Selby (1997) Grace and Mortgage.
  29. ↑ Shann Turnbull (1975/2000) Democratising the Wealth of Nations and (2001) The Use of Central Banks to Spread Ownership. Jeff Gates (1999) The Ownership Solution and (2000) Democracy At Risk.
  30. ↑ Norman Kurland (2001) Saving Social Security at www.cesj.org.

Sources

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