Keynes was horribly, fatally WRONG!
So where did the money come from to finance growth before the Keynesian New Deal convinced people that we need the government to flood the economy with counterfeit money, building unrepayable mountains of debt and putting the government in control of everyone’s life, liberty, and property to have economic growth?
From the commercial banking system (d’oh). It turns out that commercial (or mercantile) banks were invented to turn the present value of future capital projects into “money” to finance the projects. It works better if there is a central bank to back things up and so avoid the economic cycle, but the United States didn’t have an actual central bank during the latter half of the nineteenth century when the period of greatest growth took place. Instead, it had a quasi-central bank in the form of the National Bank System.
The National Bank System used an inelastic, debt-backed reserve currency (the National Bank Notes) and operated as savings and loans for ordinary people, typically making loans to small businessmen and farmers out of existing savings . . . which were being depleted and deflated after the Civil War. At the same time, the National Banks were also commercial banks that accepted bills of exchange from the industrialists and railroads, creating money to finance capital projects, the ownership of which was concentrated in very few hands.
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| "Sorry, Keynes, you done got it WRONG! |
Thus, most people were forced to rely on a diminishing pool of existing savings to finance their participation in the economy, while the rich were able to access unlimited future savings. This resulted in two financial panics and Great Depressions (1873-1878 and 1893-1898) when capacity far exceeded demand and the economy was saddled with an inelastic money supply.
The Great Depression of the 1930s probably would have been over in five years had it not been for the New Deal. As it was, as it dragged on, Louis Kelso began developing his ideas of combining advanced financial techniques used by the rich with the need for widespread capital ownership. For some reason, throughout history advocates of expanded ownership had always assumed that only past savings could be used to finance capital formation and acquisition, while advocates of the Banking Principle (money a social tool to facilitate transactions, not a commodity) never seemed to consider the possibility that here was a means of financing widespread capital ownership.
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| "I concur. Keynes did not conform to reality." |
Kelso put the demand for expanded capital ownership and advanced financing techniques together and found he had discovered a way to make an economy work for everyone without injustice. It’s relatively simple — once you get it out of your head that only past savings can be used to finance new capital formation.
Eventually Kelso explained his ideas in two books he co-authored with the “Great Books” philosopher Mortimer J. Adler, The Capitalist Manifesto (1958) and The New Capitalists (1961. The latter book has the significant subtitle, “A Proposal to Free Economic Growth from the Slavery of Savings.” Even more eventually, Kelso settled on “binary economics” as the name for his theory.
“Binary” means “consisting of two parts.” As in Thomistic personalism, which divides the universe into “persons” and “things” (or, in logical terms, into “persons,” which have a determinable nature, and “not persons,” which have a determinate nature), Kelso divided the factors of production into two all-inclusive categories — the human (“labor”), and the non-human (“capital”). The central tenet 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. Classical economic theory, on the other hand, regards all output and income to be derived from labor whose productivity is enhanced by capital.
In contrast to traditional schools of economics which assume that scarcity is inevitable, binary economics views shared abundance — sustainable economic growth and the equitable distribution of future wealth and income throughout society — as achievable. Binary economics holds that broad-based affluence and economic freedom, as opposed to financial insecurity and economic dependency for the many, is made possible through the widespread ownership of constantly improved capital instruments and social institutions to produce more and more consumable goods with less and less input and resources.
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| Dr. Robert H.A. Ashford |
Binary economist Robert Ashford identifies three distinguishing concepts within binary theory — binary productiveness, the binary property right, and binary growth. These components interact and reinforce one another, allowing for maximum rates of sustainable growth within a modern, globalized economy.
Binary economics recognizes a natural synergy, as opposed to an unavoidable trade-off, between economic justice and efficiency within a global free marketplace. Rejecting pure laissez-faire assumptions, binary economics holds that a truly free and just global market requires (1) effective broad-based ownership of capital, (2) the restoration of and universalized access to the full rights of private property, (3) limited economic power of the state (whose main role should be to eliminate special privileges, monopolies and other barriers to equal participation) and (4) free and open markets for determining just wages, just prices, and just profits.
The market theory of binary economics is underpinned by three interrelated principles of economic justice:
Participative justice, the input principle which demands as a fundamental human right, equal opportunity for every person to contribute to the production of society’s marketable wealth both as a worker and as an owner of productive assets.
Distributive justice, the outtake principle which holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or “just wage”) for each particular type of human contribution to the production of marketable wealth. This principle dictates that the contribution of capital should be compensated by the “just profit” generated by the project or enterprise. (Profit is determined by the market-based rental value of contributed capital assets, or by the gross revenues resulting from market-determined “just prices” less the market-based cost of the factors of production, including labor.)
Social Justice, the feedback principle that balances and restores participation and distribution within the economic system. This principle was referred to by Louis Kelso and Mortimer Adler as the “principle of limitation” and by others as “harmonic justice.” Social justice addresses each person’s access to equal opportunity within, and connection to, the economic system and its institutions. It confers a responsibility on every person to organize with others to correct unjust institutions in order to restore participative and distributive justice.
The problem now became how best to apply these theories, which will be covered in the next posting on this subject.
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