Wednesday, July 27, 2011

A History of Binary Economics . . . Sort Of

For a while now we've been struggling with developing an adequate encyclopedia article for binary economics. We've been warming up and cutting our teeth on entries for Mesa Verde's encyclopedias of the Great Depression (the second one in the 1930s, not the first one in the 1890s) and the upcoming Politics in the American West, and we had contributed a couple of entries to the Encyclopedia of Catholic Social Thought (although they messed up a few facts on Father Ferree in the editing), so we're starting to figure out how to put these things together.

Binary economics is a bit tougher than these other subjects, though. Particularly we have to work on trying to condense about five thousand years of history into a couple of short paragraphs as one section of a possible entry . . . and make it understandable to people locked into the slavery of past savings paradigm. It ain't easy, but here's what we've got so far. Is it complete, even as a history? Hardly, but we've got to start somewhere.

* * * * * * * *

The first step in any history, of course, is to define what the heck you're talking about. Many people have either never heard of "binary economics," or have a distorted or partial understanding of what it's all about. So, to begin . . . .

Binary economics is a "post-scarcity" theory developed by lawyer-economist Louis O. Kelso in the 1950s and presented primarily in two collaborations with the Aristotelian philosopher Mortimer J. Adler, The Capitalist Manifesto (1958) and The New Capitalists (1961). The term "binary economics" comes from the fact that Kelso divided the factors of production into two all-inclusive categories: the human, "labor," and the non-human, "capital." "Labor" includes all human activity. "Capital" or "things" includes all forms of productive assets whether preexisting in nature, "land," or created by human action, "productive capital" as traditionally understood, as distinct from "financial capital," i.e., "money," "credit" and other means for engaging in market-based economic transactions.

Binary economics thus limits the components to productive inputs and to distributed income to two: (1) that generated by human labor, and (2) that generated by capital. Binary economics rejects terms like "human capital" and "human resources" as oxymorons and dehumanizing to most of humanity. The central tenet of binary economics is that, through the property (or ownership) principle, these two "independent variables" in the economic equation can link marketable outputs from the labor-capital mix directly to incomes distributed according to market-quantified values of all "labor" and all "capital" inputs.

Of course, as far as most people are concerned, "Kelso" and "binary economics" relates exclusively to "worker ownership," and they think Kelso's work began and ended with the ESOP. Some even think that Kelso first invented the ESOP, and then came up with binary economics to explain it. (No, it was the other way around — Kelso developed the theory, then invented the ESOP to apply the theory.)

Of course, that's only the smallest tip of a very large iceberg, as (perhaps) this extremely brief history of some of the background that led to binary economics will reveal.

The expanded ownership movement has a long history, including the "vine and fig tree" injunctions in the Bible, the Gracchi Brothers in the late Roman Republic, the Byzantine "Farmer's Law" of the 6th century, and Abraham Lincoln's Homestead Act of 1862. Commentators such as John Locke, George Mason, William Cobbett, Daniel Webster, and Benjamin Watkins Leigh recognized the political necessity of widespread ownership. What inhibited widespread direct ownership of capital was the perceived necessity of either cutting consumption in order to accumulate sufficient money savings to invest, or coerced redistribution of what already belonged to others.

The economic necessity of widespread ownership was treated by Charles Morrison, whose 1854 Essay on the Relations Between Labour and Capital was instrumental in reform of the Law of Partnership in Great Britain and the extension of limited liability to all corporations. This lowering of an institutional barrier removed one serious obstacle to worker ownership and participatory management. Morrison's contention was that because wages were being forced down as a result of a growing population, workers could not depend on wages alone for an adequate income. Workers must, therefore, become owners in order to share in profits. While based on the discredited "wage fund doctrine" and Morrison did not take into account the displacement of labor from the production process by advancing technology, his conclusion appears to be valid. The problem was that Morrison assumed as a matter of course that worker ownership would have to be limited to higher wage workers, as these were the only ones who could afford to cut consumption and accumulate money savings.

At the same time that ownership of both landed and the new industrial and commercial capital was becoming concentrated — its nascence satirized in Sir Thomas More's Utopia when his "narrator" Raphael Hythloday (whose name signifies "Lying Traveler Who Tells Outrageous Stories") claimed that, as a result of clearing small tenants and owners off the land, "'The increase of pasture,' said I, 'by which your sheep, which are naturally mild, and easily kept in order, may be said now to devour men and unpeople, not only villages, but towns'." — financial institutions were re-evolving to meet the needs of the expanding commercial and industrial economy.

By the late 17th century mercantile (commercial) banking was sufficiently well-established to require the formation of central banking and, later, clearinghouses to facilitate the discounting, rediscounting, and transfer and redemption of bills and notes. It became possible to finance new capital formation and commercial enterprises by drawing a bill and pledging repayment out of the present value of future marketable goods and services to be produced, instead of cutting consumption and accumulating money savings to finance the capital. As a result, existing accumulations of savings could be used as collateral instead of direct investment in new capital, and the actual capital formation financed without using existing savings.

The "universal collateralization requirement" still restricted ownership of most new capital to the already wealthy. The settlement of America provided a means whereby propertyless people could acquire capital, usually land, but the land frontier was considered "closed" by the 1890s, at which time the Panic of 1893 and the following Great Depression (1893-1898) made it clear that both the wage system and the financial system embodied serious weaknesses that tended to undermine the economy, and thus the political stability of the United States. This led to the rise of the "Welfare State."

The analysis of Goetz Briefs is useful in understanding the rise of the Welfare State. In The Proletariat: A Challenge to Western Civilization (1937), Briefs's contention was that the operation of laissez faire capitalism stripped workers of ownership, making them dependents of their employers. To try to maintain the status quo, the Welfare State came into being, forcing the great mass of people into a condition of wage slavery and dependency on the State. At the same time, redistribution of existing wealth and manipulation of the currency gradually undermined the economy and eroded standards of living as the State tried to make up for the loss of the value of labor in competition with advancing technology, causing the disappearance of both liberty and property.

Louis Kelso's unique contribution to economics was to bring together two seemingly disparate schools of thought in economics and finance: the school that adhered to Say's Law of Markets and the real bills doctrine, but ignored the importance of private property, and the school that insisted on the importance of widespread ownership of capital, but had no effective recommendation on how to finance new ownership, other than by cutting consumption and accumulating savings, or redistributing existing wealth.

Some authorities are of the opinion that Kelso first invented the Employee Stock Ownership Plan (ESOP) and then developed a theory to explain it. Kelso, however, first developed the theory, and then invented the ESOP to apply the theory. The first ESOP was installed in 1956 for Peninsula Newspapers in Monterey, California. Between 1956 and 1973 there were a couple dozen ESOPs implemented in the United States.

In 1973, as a result of a meeting between Senator Russell Long of Louisiana, Louis Kelso, and Kelso's Washington Counsel, Norman G. Kurland, the process was begun that eventually led to the initial enabling legislation for the ESOP. As a result of various tax benefits attached to implementing an ESOP, more than 10,000 companies employing more than 10 million workers have ESOPs.

The "expanded ownership revolution," as Kelso termed it, continues today through the efforts of the Kelso Institute to educate the public about Kelso's work, and the Center for Economic and Social Justice (CESJ) with its proposed "Capital Homestead Act" that embodies reforms of the tax and financial systems to extend widespread direct ownership of capital financed with "pure credit" and collateralized with capital credit insurance and reinsurance instead of existing accumulations of savings to all citizens of a country.



jpritikin said...

Nice introduction.

Michael D. Greaney said...

Thanks. It's at least a start. We got an e-mail pointing out that it didn't give enough credit to Kelso, which is true. My excuse is that, 1) I was giving a history of what led up to Kelso, and 2) it was late and I was getting tired, and just wanted to get the post up. The latter was probably more significant than the former.

Jake said...

Sorry for this late post, but within the paradigm of binary economics, I've got two questions:

1) What comparison can be made between ESOPs and the Meidner Plan in terms of strengths and weaknesses?

"It called for an annual 20 percent tax on major company profits to be paid in the form of stock to eight regional mutual funds. Worker, consumer, and government representatives controlled the funds, and as their proportion of stock ownership grew, these groups were collectively entitled to representation on company boards. If fully carried out, this experiment would have rendered effective control over profitable firms in Sweden to the worker and public organizations. But the Social Democrats made little effort to educate the public about it or win popular support for it. For eight years Sweden's corporate class railed against it constantly."

Generally, it is an increase of real social savings and investment by first means of mandatory and significant redistributions of annual business profits, by private enterprises with more workers than a defined threshold, as non-tradable and superior voting shares to be held by geographically organised worker funds.

2) What's the position on land re. private ownership, public ownership, universal rental tenure, and land value taxation (as opposed to property taxes)?


Michael D. Greaney said...

If I understand the Meidner Plan correctly, it fails to correct the biggest flaw in the ESOP, which is that the ownership through an ESOP is "beneficial ownership," not "direct ownership," relying on what the law gives and how much of it the trustees want to pass through to the worker-owners, rather than the natural right to private property and the rights of ownership. The Meidner Plan appears to vest ownership in a collective, rather than directly in the workers who then control on their own account instead of by others for their benefit. Both Hilaire Belloc and Goetz Briefs believed that this sort of thing was essentially an exchange of individual sovereignty for material security, and contrary to the dignity of the human person.

We believe that the best arrangement for private ownership of land and other limited forms of capital is to avoid State or government ownership in all its forms, and vest ownership of land, natural resources and infrastructure in a private corporation called a "Citizens Land Bank," in which every citizen and permanent resident of the area covered by the CLB would receive a single no-cost, non-transferable, fully voting and participating lifetime share. Individuals and companies could then lease the land from the CLB, with the benefit of the leasehold payments flowing to the shareholders of the CLB, not shipped out of region. This would get around the problem associated with State ownership as in, e.g., Henry George's "single tax" proposal that would vest the State with effective ownership by imposing a 100% tax on all income derived from land use.