Binary economists contend that the real problem is not, as cynics suggest, an evil conspiracy of a governing elite or those who work on their behalf. Rather, the real problem is the system controlling access to money, credit, and capital ownership. Once the flaws in any system created by humans are discovered, binary economists argue, that system can be corrected as citizens become more enlightened and demand new solutions.
Kelso's binary economic system combines the elegance of classical market theory with classical moral philosophy and the highest spiritual values. He points out precisely where Adam Smith, Karl Marx, and John Maynard Keynes fell short theoretically by not recognizing the increasing productiveness of capital as the main source of economic growth and the most logical source of widespread income distribution. This conceptual omission by Smith, Marx, and Keynes is embedded in all conventional schools of economic thought, from left to right. Consequently, economic theorists have been led down the path where few of them can ever make accurate predictions about the future or offer sound, long-range solutions to meet the dangers of economic globalization.
Binary economics states that in a genuinely free market economy, people should be able to contribute to and gain their incomes from the economic process, based on both their labor and their capital inputs. Most neo-classical and Keynesian economists would dismiss this postulate as absurd, asserting that this condition exists already under capitalism.
Because of artificial institutional barriers to broad-based ownership under current economic policies, however, most people can only expect to legitimate their incomes through their labor alone. Consequently the market system breaks down, as government is forced to interfere with the market mechanism and redistribute incomes to non-owning working people and the unemployed.
As pointed out by Robert Ashford and Rodney Shakespeare in their book Binary Economics: The New Paradigm, Kelso's theory offers,
• A new understanding of the relationship between humans and things as they work together to produce goods and services;Ashford and Shakespeare offer clear definitions and examples of the Kelsonian concepts of "productiveness," "binary growth," and "binary property rights." They also address the fundamental flaw in today's dominant economic paradigms: an unrealistic, inefficient and blind reliance on "labor productivity" to justify mass redistributions of purchasing power.
• A new explanation for industrial growth, poverty and affluence; and
• A new strategy for achieving general affluence for all people on free market principles.
Because of these blind spots in traditional economic theories, all existing systems are structured to concentrate economic power, spawning corruption, crime, exploitation and dehumanization of workers, and endemic poverty and powerlessness in our "global village." If we believe in democracy and empowering every person with rights and responsibilities to contribute to peace through justice in the world, then clearly something new is needed.
In its practical applications, the operation of binary economics can possibly best be illustrated by how the ESOP, the "Employee Stock Ownership Plan" — definitely not to be confused with stock option plans which require participants to put up their own money — works. The ESOP is not perfect by any means (no human creation can claim that), but it is at present the only means available that transcends the problem of how workers without savings and who are unable to cut consumption in order to save can acquire ownership of a significant stake of capital. Thus, we should look at the ESOP in this discussion not as an ideal solution, but as a way of understanding how the principles of binary economics can be applied in the "real world" of what Reverend Heinrich Pesch, S.J., Ph.D., called Volkswirtschaft, that is, how ordinary people carry out the business of daily life (not, as one translator mistakenly put it, the national economy, tacitly rejecting the whole idea of free will and personal sovereignty).
Unfortunately, Father Pesch's work has been obscured by those whom Joseph Schumpeter described in his History of Economic Analysis (1954) as Marxists and liberals. Schumpeter then made his own mistake by claiming that Father Pesch's "solidarism" is consistent with the fascist "corporate state" model presumably outlined in Pope Pius XI's encyclical, Quadragesimo Anno (1931). (On the contrary — Pius XI used "corporation" in the sense used by Thomas Hobbes in Leviathan, 1651, not in fascist Italy in the 1920s and 1930s.)
In current law, an ESOP is a qualified "defined contribution plan." This means that, whatever a participant's "vested balance" (percentage of ownership) happens to be when he or she qualifies for a distribution, that amount is paid out to him or her. This is in contrast to a "defined benefit plan," by means of which a company can make promises that it might not be able to make good on. A defined contribution plan can only pay out what is actually in the plan, and thus is inherently much less risky than a defined benefit plan that may or may not be fully funded.
As the ESOP was designed to operate, workers purchase shares in the company that employs them by borrowing money through the ESOP trust. Typically, the company itself guarantees the loan, for it is ultimately responsible for making the debt service payments. The ESOP purchases company shares with the proceeds of the loan, and places the shares in a suspense account. Each year the company makes a tax deductible "contribution" (actually a share of profits) in cash to the ESOP. This cash is used to make payments of principal and interest on the loan.
As the loan payments are made each year, a pro rata number of shares are released from suspense and allocated to the accounts of active participants. When the acquisition loan has been paid in full, the company continues to make cash contributions to the ESOP. This cash is invested in a diversified portfolio of assets and allows the ESOP to build up a liquidity pool to repurchase shares from participants who terminate employment with the company and incur any required break in service, that is, a period of time that must elapse between when a participant terminates employment and when he or she can receive a distribution of the value of the cash and company shares in his or her account.
ESOPs can also repay the acquisition loan or pass through profits to participants by means of dividends that are tax deductible at the corporate level. This is, at present, the only way within a C-corporation to eliminate the "double taxation" on corporate dividends. Note, however, that (as with an S-Corp), dividends are fully taxable at the individual level, that is, to the recipient.
Mentioning the S-Corp brings in another possible way of benefiting workers. An S-Corp, if it is 100% owned by the workers through an ESOP, pays no corporate taxes at the federal level, as well as in most states. This is because an S-Corp is, essentially, a partnership with limited liability, and is taxed once, as if it were an extension of its owner(s). An ESOP, because it is a "qualified retirement trust," does not pay taxes. Corporate income from an S-Corp ESOP is only taxable as income to the recipients when those recipients receive dividends or a distribution of benefits from the ESOP. This makes a company with a 100% S-Corp ESOP much more profitable, and thus more financially viable — which directly benefits the workers.
These principles and the way an ESOP operates can be applied to other vehicles as well, such as a number of pioneering strategies that the Center for Economic and Social Justice has worked out, beginning with Capital Homesteading, but including such innovative proposals as the "Doctors' Plan for Universal Health Care," The "Homeowners' Equity Corporation," the Community Investment Corporation, the Abraham Federation, and so on.
We will start to examine the financing aspect of expanded ownership in a well-structured economy in the next posting in this series — that is, where the money comes from to finance capital formation.