The "Proprietary Fund" was an application of the principles of binary economics. Binary economics is a school of economics that puts the dignity of the human person and the needs of the individual at the center of economic activity. Binary economics is based on the three principles of economic justice presented in two books by Louis Kelso and Mortimer Adler, The Capitalist Manifesto (New York: Random House, 1958) and The New Capitalists (New York: Random House, 1961). The three principles of economic justice are 1) Distribution, 2) Participation, and 3) Harmony or "social justice." (The Capitalist Manifesto, op. cit., 66-86.)
The "Principle of Distribution" is that, just as the creation of new money must be tied directly through the institution of private property to the present value of existing and future marketable goods and services, everyone who participates in the production of wealth should receive a share of the production proportionate to the value of his or her input to production. (Ibid., 67.) This is simply the application of the requirements of "distributive justice" as defined by Aristotle (The Nichomachean Ethics, V.vi) and Thomas Aquinas (Summa Theologica, IIa IIae q. 61 a.2). The consistency of binary economics with Aristotelian and Thomist philosophy is due to Adler, considered the greatest American Aristotelian of the 20th Century. Adler specifically credited Kelso with the revolutionary breakthrough that provided the theoretical basis for binary economics. (The Capitalist Manifesto, op. cit., ix.)
The "Principle of Participation" is that everyone has a "natural right" to life, which necessarily means that everyone has a right to maintain and preserve his or her life by all legitimate means — especially the right to obtain subsistence by participating in the production of wealth, individually or in free association with others. A "natural right" is a right that human beings have simply because they are human, and which necessarily defines them as "persons."
In other words, "natural rights" define us as human beings, "natural persons," and we cannot be considered fully human or human at all if our natural rights are not secured and protected. The most important of the natural rights include (but are not limited to) life, liberty (free association), access to the means of acquiring and possessing private property (especially in the means of production), and the acquisition and development of virtue (the "pursuit of happiness") (Aristotle, Ethics, op. cit., I.ii). Pursuing happiness — acquiring and developing virtue — requires power, and the most effective, even necessary means of empowerment is direct private ownership of the means of production. (Aristotle, The Politics, I.iv.) Acquiring and developing virtue is important because virtue, from vir, "man," signifies "human-ness." By acquiring and developing virtue we become more fully human.
The "Principle of Harmony" is that when our institutions become distorted or ineffective to the point that they no longer assist us in acquiring and developing virtue, we must organize, restructure our institutions, and bring these institutions back into reasonable conformity with the demands of the natural law. Kelso and Adler called this the "Principle of Limitation." (Ibid., 68.) This is because when one individual or a small group monopolizes ownership of the means of production, as in classic capitalism or socialism, the system must be reformed so that the amount of additional wealth that the monopolists can acquire is limited. In this way others can have equal opportunity to acquire and possess private property in the means of production. This conforms to the "laws and characteristics of social justice." (Vide William J. Ferree, Introduction to Social Justice. Arlington, Virginia: Center for Economic and Social Justice, 1997.)
There is, of course, much more to this. What we have here, however, is enough to understand the principles underlying the proposal for the Proprietary Fund for Puerto Rico. Interested readers may want to go to Chapter 5 of The Capitalist Manifesto (op. cit., 52-86) for a more in-depth treatment of the subject.
The Proprietary Fund
On June 8, 1972, Senator Fred R. Harris of Oklahoma had certain previously published comments by Nobel Laureate Dr. Paul Samuelson inserted into the Congressional Record. This was in support then-Governor Luis Antonio Ferré of Puerto Rico's proposal to create the Proprietary Fund that would assist the people of Puerto Rico in becoming owners of corporate equity.
Senator Harris did not suffer from the illusion that Dr. Samuelson supported expanded ownership or the ideas of Louis Kelso. No, Senator Harris believed that Dr. Samuelson, while he failed to state any specifics, did raise some "hard points" that Louis Kelso should be prepared to answer. As the Senator commented,
The Ferré proposal soon gave rise to an exchange of views between noted economist Paul Samuelson and Kelso. Although the exchange is perhaps more polemical than a real examination of the problem would require, it is instructive.On reading Dr. Samuelson's remarks after the passage of nearly four decades and the repeated failure of the Keynesian economics to which the Nobel Laureate devoted his entire career, the objective reader is struck by one thing, as was, apparently, Senator Harris. Whether or not one happens to be an economic "insider," there appears to be a profound lack of substance in Samuelson's arguments. As seems to have been habitual with Dr. Samuelson, he relied exclusively on appeals to authority, elitism, and innuendo.
In the case of Samuelson, despite hard points which Kelso must answer, we see again the unwillingness to face up to the problem of the distribution of wealth. Nowhere in Professor Samuelson's contribution is there any concern expressed over the extremes in wealth ownership on the island of Puerto Rico.
In the case of Kelso, whatever we may think of his recommendations, we have a man who at least is talking about an important problem. I am not judging his scheme one way or another. Neither man goes into sufficient detail for an outsider to judge the logical rather than the polemical face of the argument. Nevertheless, I rather feel Kelso won the exchange and for this reason. If his scheme is economically faulty as Samuelson suggests, then I agree with a point Kelso has made repeatedly, namely that the more established economists should come forward with a scheme which is not faulty. For the problem of such gross disparities in ownership is a real one. It will not go away because our more established economists ignore it. (Congressional Record — Senate, June 8, 1972, S 9053.)
For example, at one point Dr. Samuelson claimed that "it would be rash" for low-income families to become capital owners by borrowing money and repaying the acquisition loan out of the profits generated by the capital itself. Financial feasibility of this type is the first principle of corporate finance, or how the rich have always become richer.
Dr. Samuelson, however, claimed that the first principle of sound finance is not financial feasibility — that is, whether capital can pay for itself — but that "families at low income levels must not invest so heavily as more affluent families in venture equities." (Ibid.) In other words, in Dr. Samuelson's understanding of finance, the most important thing is that poor families must not be permitted to lift themselves out of poverty through access to the means of acquiring and possessing private property in the means of production.
Besides, who said anything about poor people investing in "venture equities"? The "Kelso Plan" was to provide a means whereby ordinary workers could purchase shares in the companies that employed them on credit without the use of existing accumulations of savings. Nothing was ever said about poor people putting their non-existent savings into "venture equities" in untried startup companies. Very much the contrary — Kelso's idea was that workers would be empowered to purchase on credit the tools with which they worked to gain a living income, not gamble in high risk IPOs or speculative equity issues on Wall Street.
Nor is a "first principle of sound finance that families at low income levels must not invest so heavily as more affluent families," anyway. According to financial historian Benjamin Anderson, "The first principle of commercial banking [is] to know 'the difference between a bill of exchange and a mortgage'." (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946. Indianapolis, Indiana: Liberty Fund, Inc., 1980, 233.) That is, the first principle of finance is to know the difference between a financial instrument drawn on the present value of existing and future marketable goods and services, and a financial instrument drawn on a consumer item that does not pay for itself. Others declare that the first principle of finance is that whatever capital is purchased must pay for itself out of its future earnings: "financial feasibility," or employing a "cost/benefit analysis." (Vide Sukhamoy Chakravarty, "Cost-Benefit Analysis," The New Palgrave: A Dictionary of Economics, Vol. 1. New York: W. W. Norton, 1989, 687-690.) These are, frankly, just two different ways of saying the same thing: that capital should pay for itself out of its own future earnings.
The "dangers" of low-income people purchasing the tools with which they work and by means of which they earn their incomes on credit without using existing savings do not appear to be mentioned in financial literature. Dr. Samuelson appears to have tailored the declaration out of whole cloth. The bottom line, however, is Dr. Samuelson's implicit assumption that capital formation cannot be financed except through the use of existing accumulations of savings, that is, by cutting consumption. Naturally, poor families cannot save without extreme hardship. This assumption (disproved by Dr. Harold G. Moulton in his landmark treatise, The Formation of Capital. Washington, DC: The Brookings Institution, 1935) pervaded Dr. Samuelson's testimony.
Samuelson v. Kelso
Nor was this an isolated incident. Dr. Samuelson, in fact, appeared to have a special animus against Kelso — not that it ever led to Dr. Samuelson saying what, specifically, was supposed to be wrong with binary economics or expanded capital ownership. This was demonstrated a few years later when Mike Wallace of 60 Minutes interviewed Dr. Samuelson to get his comments on Kelso's ideas. Evidently Dr. Samuelson was starting to feel pressured, for he was even more dismissive of the ideas than he had been previously. The Nobel Laureate changed his reasons for rejecting the ideas, but not his negative assessment:
Mike Wallace: All right. My understanding of Kelso-ism is that it's designed to enable men who are born without capital to buy it, to pay for it out of the income it produces, to own it and thereafter to receive income from that capital. Devoutly to be wished!First, of course, Dr. Samuelson's "primary criticism" in the intervening years changed from concern for the poor workers who cannot afford to fit themselves into the false assumptions of modern economics by cutting consumption and saving, to concern over the manipulation of the tax system. This is a somewhat ambiguous position for a Keynesian to take. Second, it is difficult to see how wishing for lollipops to grow on trees for the picking has anything to do with binary economics.
Paul Samuelson: Oh, yes. And it would be nice to have lollipops grow on trees for the picking.
Mike Wallace: The only thing that you object to, really, in Kelso-ism is the fact that it uses a tax loophole to give the workers stock in the company?
Paul Samuelson: That is my primary criticism. Now, you tell me that Senator Long is interested in this. I'm distressed. I'm distressed because Senator Long is an influential Senator in connection with the closing of tax loopholes and the opening of them. ("A Piece of the Action," 60 Minutes, with CBS News Correspondent Mike Wallace, Produced by Norman Gorin, aired on March 16, 1975.)
Even more odd, Russell Long's support for the ESOP was, by this time, well known. It is hard to believe that Dr. Samuelson was unaware of Senator Long's key support for the ESOP until Mr. Wallace informed him of it on national television. Long's support ensured that Kelso's proposal had been inserted into the Employee Retirement Income Security Act of 1974 on January 1, 1974. This was more than a year before Mr. Wallace interviewed Dr. Samuelson (vide Norman G. Kurland, "Dinner at the Madison," Owners at Work, Ohio Employee Ownership Center, Kent State University, Winter, 1997-1998). The only way to understand Dr. Samuelson's position (as well as his denial of obvious and provable facts) is to realize that Dr. Samuelson was absolutely convinced that the science of finance is irrevocably wedded to dependence on existing accumulations of savings.
Samuelson on France
Nowhere was Dr. Samuelson's lack of understanding of money, credit, and banking (to say nothing of private property) more evident, however, than in his confused comments on early 18th century France. As Dr. Samuelson related in the passages Senator Harris inserted into the Congressional Record in 1972,
You cannot get something for nothing in economic life. The scandal of John Law in ancient France pretended otherwise, and led to fiasco. I fear the same in this case. If the Commonwealth guarantees bank loans to purchase Patrimony stocks, it has thereby less credit to expend in other directions of development. What advantage is there in a dollar of dividends if it slows down the growth of productivity of real wages by tens of dollars? (Statement by Paul A. Samuelson on House Bill 1708, concerning the Patrimony for the Progress of Puerto Rico, "the Proprietary Fund," Congressional Record, loc. cit.)The fractured syntax supports Kelso's otherwise uncalled-for observation that Dr. Samuelson seemed to have turned the task of writing his critique of binary economics over to one of his students. How, for example, does a scandal, even unspecified, pretend anything? What on earth did Dr. Samuelson mean by "the growth of productivity of real wages"? Those statements in this brief passage that are not incomprehensible are misleading. There is enough sly innuendo inserted to boggle the mind of anyone who has managed to free him- or herself from the disproved Keynesian dogma that only existing accumulations of savings can be used to finance capital formation. As the subtitle of The New Capitalists, the second collaboration of Louis Kelso and Mortimer Adler, puts it succinctly, "A Proposal to Free Economic Growth from the Slavery of Savings."
Who, however, was this "John Law" whose "scandal" — according to Dr. Samuelson — led to "fiasco" in "ancient France"? And what, exactly, was this scandal to which Dr. Samuelson referred, and how did it lead to fiasco?