Wednesday, October 10, 2012

What is "Binary Economics"?

Yesterday we posted a thumbnail sketch of Louis O. Kelso, who developed the theory of binary economics. This, of course, raises the question, "What is binary economics?" To start off with the obvious — and non — answer, binary economics is the "post-scarcity" theory developed by Kelso.

Since that doesn't really tell us anything, we need to understand that "binary" means "consisting of two parts." Kelso divided the factors of production into two all-inclusive categories — the human ("labor"), and the non-human ("capital").

The central idea of binary economics is that there are two components to productive output and to income: (1) that generated by human labor, and (2) that generated by capital.

Mainstream economic theory, as we see with Keynes (but all the economic schools of which we are aware say the same thing), regards all output and income to be derived from labor whose productivity is only enhanced by capital.

Thus, as technology continues to advance, labor is displaced from the production process, almost inevitably to the point where a worker who has only labor to sell cannot make enough money to support him- or herself or a family.

That being the case, Kelso saw the obvious solution. As he summarized it in an interview in Life magazine, "If the machine wants our job, let's buy it."

The question is, if the only source for financing new capital is existing savings, that is, if the only way to be an owner of new capital is to cut consumption and accumulate money savings, then only the people who can afford to cut consumption can own new capital. That means, to all intents and purposes, the rich.

Kelso's response was to point out that, contrary to popular belief, cutting consumption in the past is not the only way to save. You can also save by increasing production in the future.

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