Although elements of binary economics can be found elsewhere (e.g., Pope Leo XIII’s Rerum Novarum 1891; the Distributism of G.K. Chesterton and Hilaire Belloc; Harold Moulton (1935) The Formation of Capital; and Ibn Ashur (1946) Maqasid al Shari’ah al Islamiya, the first clear formulation of the subject was in 1958.
This was done by Louis Kelso (lawyer and economist, 1913-1991) and Mortimer Adler (the American Aristotelian philosopher, 1902-2001) in their unhappily titled, but momentous, book The Capitalist Manifesto (1958) which can be downloaded from www.kelsoinstitute.org The book’s title is a Cold War nomenclature in opposition to communism, but the book’s thinking can only be truly understood as being outside all left-wing and right-wing economics and politics — which is demonstrated by the attacks which were made.
Binary economics is outside both left-wing and right-wing paradigms
Thus, on the left, Soviet Pravda saw the book as “ramblings based on thinking along a dead end of history” — which was an egregious misstatement because communism was soon to collapse and binary economics is today increasingly seen as the most modern economics of all.
Meanwhile, on the right, Milton Friedman was nonplussed and could only conclude that binary economics must be “Marxism stood on its head”.
Very obviously, extreme left saw binary economics as extreme right; and extreme right saw it as extreme left.
And equally obviously, the puzzlement and confusion of Pravda and Friedman only served to confirm that binary economics is outside both left-wing and right-wing paradigms, and cannot be comprehended from within those two paradigms.
More ground-breaking books
Kelso and Adler (and, later, Patricia Hetter Kelso) were to continue to write ground-breaking books explaining how capital instruments provide an increasing percentage of the wealth and, crucially, how and why capital is narrowly owned in the modern industrial economy.
Their analysis then has an important consequence easily understood by market theorists — if what increasingly produces a larger percentage of the wealth (productive capital) is narrowly owned, then a properly balanced economy (implementing Say’s Theorem (Law) that producers and consumers must be the same people) cannot come into being unless, on true free market and private property principles, productive capital becomes much more widely owned. This is at the heart of the binary claim to create an efficiency which creates justice and vice versa.
In the UK in 1976 Rodney Shakespeare and Wilf Proudfoot wrote The Two-Factor Nation.
Implementation of Say’s Theorem (Law)
Kelso and Hetter gave practical form to their thinking and proposed new binary share holdings which (with exception for research, maintenance and depreciation) would pay out their full capital earnings, be capable of being insured and, if loss occurred, would occasion no recourse to the new binary owners.
N.B. Because of the full payout provision the binary holdings might well pay out more than five to nine times what is typically paid out today.
Thus what was being proposed was a new widespread capital ownership and associated individual incomes which can be possessed by anybody in the population irrespective of whether or not that person is in a conventional job or not. The practical result would be a balancing of balancing supply and demand — with producers and consumers being the same people and supply and demand balancing each other — as required by Say’s Theorem (Law).
(The usual phrase is ‘Say’s Law’. But a scientific Law is something which results from the observation of reality. Today, however, supply and demand do not balance each other. Thus Say’s Theorem is a statement of the ideal situation but it cannot be a Law because it is not what happens in practice.)
Meaning of ‘binary’
The word ‘binary’ (in ‘binary economics’) sometimes perplexes people. It means ‘composed of two’ because it suffices to view the factors in production as being but two (labor and capital) and thus there are only two ways of genuinely earning a living — by labor and/or by the ownership of productive capital. In viewing the two factors it can also be observed that humans own their own labor but they do not necessarily own the other factor — capital. There is much helpful information at www.kelsoinstitute.org from which the text of The New Capitalists (Kelso & Adler, 1961) can be downloaded.
Employee Stock Ownership Plans (ESOPs)
Very often the first acquaintance people have with binary economics comes through today’s Employee Stock Ownership Plans (ESOPs). These stem 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), Jeff Gates (author of The Ownership Solution), Dr Shann Turnbull of Australia, Senator Russell Long of Louisiana (Chairman, USA Senate Finance Committee, 1966 – 1981) and Senator Mike Gravel of Alaska.
Although estimates vary, there may be about 7,000 ESOPs in the USA today covering up to 20,000,000 employees. As binary economics predicts, studies have shown efficiency improvements as an effect of employee ownership and involvement — binary techniques for this are called Justice Based Management. The legal entity which acts for the employees and oversees the capital acquisition and distribution of profits, is the ESOP trust.
BUT present ESOPs are NOT true binary ESOPs
Present ESOPS are not true binary ESOPs. The true binary ESOP can be only for employees but it can also go much wider as a capital credit device which institutionalizes the basic binary property right:-
- for all individuals to acquire productive capital
- to pay for the capital out of its pre-tax earnings
- to have the capital insured
- to receive full payout of earnings
- to have the use of interest-free loan money to finance the capital administered by the banking system (which may charge only a reasonable administration cost).
Today the above five aspects of the binary property right are missing from ESOPs because the original binary concept has been implemented for the purposes of the old paradigm rather than the new binary one.
As a result, present ESOPs, whilst having virtue, are nowhere near capable of fulfilling the true binary purpose of being a mechanism potentially capable, over time, of enabling anybody in society (woman, man, child) to become the holder of a substantial capital estate. In particular, they do not have the use of interest-free loans from the national bank and so are good intentioned but weak.
Rather similarly, the commendable Cleveland Model is unable to fulfill its true purpose unless it has access to national bank interest-free loans.
Other binary Plans
It should be noted that the ESOP is only one of several techniques — e.g., Individual Share Ownership Plan, Consumer Share Ownership Plan, General Share Ownership Plan, Mutual Share Ownership Plan — which can be used to broaden capital ownership but all the techniques have at their heart the use of central bank-issued interest-free loans for the creation and spreading of productive capacity.
Without those loans the primary defect in the present ESOP legislation will remain in that it requires poor and working people to acquire capital primarily with the present earnings of labor rather than primarily with the future earnings of capital.
In the diagram below the state central bank (6) creates interest-free money and lends it to the local bank (3) which will lend it to the constituent trust (2) IF the main binary principles (wide ownership, ability to repay, collateral or insurance substitute (4) (5) and full pay-out) are forwarded. The trust lends to the corporation/company in exchange for new full pay-out shares which will vest in the new binary owners (constituents of the trust) in due course.
19. Louis Kelso & Mortimer Adler (1958) The Capitalist Manifesto.
20. Louis Kelso & Mortimer Adler (1958) op. cit.
21. Robert Ashford & Rodney Shakespeare (1999) op. cit.
22. Time magazine, June 29, 1970.
23. Robert Ashford & Rodney Shakespeare (1999) op. cit.
24. Louis Kelso & Mortimer Adler (1961) The New Capitalists.
25. Louis Kelso & Patricia Hetter (1967) Two-Factor Theory.
Louis Kelso & Patricia Hetter Kelso (1986 & 1991) Democracy and Economic Power – Extending the ESOP Revolution through Binary Economics.
26. Norman Kurland (1972/2002) A New Look at Prices and Money − The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation.
27. Norman Kurland, Dawn Brohawn & Michael Greaney (2004) op. cit.
Louis Kelso & Patricia Hetter (1967) op. cit.
Louis Kelso & Patricia Hetter Kelso (1986 & 1991) op. cit.
28. Louis Kelso & Patricia Hetter Kelso (1986 & 1991) op. cit.
29. Louis Kelso & Patricia Hetter (1967) op. cit.
Robert Ashford & Rodney Shakespeare (1999) op. cit.
Norman Kurland, Dawn Brohawn & Michael Greaney (2004) op. cit.
30. Louis Kelso & Patricia Hetter Kelso (1986 & 1991) op. cit.
31. Robert Ashford & Rodney Shakespeare (1999) op. cit.
32. Louis Kelso & Patricia Hetter Kelso (1986 & 1991) op. cit.
33. Jerry Gauche, General Stock Ownership Corporations: Another Step in Broadening Capital Ownership (30 American University Review, 1981).
Jerry Gauche Binary Modes for the Privatisation of Public Assets (The Journal of Socio-Economics. Vol. 27, 1998).
34. Louis Kelso & Patricia Hetter Kelso (1986 & 1991) op. cit.
35. Louis Kelso & Patricia Hetter Kelso (1986 & 1991) op. cit.
36. Robert Ashford & Rodney Shakespeare (1999) op. cit.
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