As we saw in the previous posting on this subject, Harold Moulton solved the problem of where to get the funds to finance new capital formation without cutting consumption, but it left unanswered the question of how people are to gain consumption income if they are being replaced by advancing technology and are unable to produce.
|Louis O. Kelso|
What was very baffling was the fact that Moulton contradicted himself (or, possibly more fairly, allowed himself to be contradicted) and asserted that widespread capital ownership necessarily required redistribution of existing capital, not opening up access to newly created capital. It was not, in fact, until the work of Louis Kelso that anyone presented a viable solution to the problem of how to turn propertyless people into capital owners without redistribution. Kelso combined the growing need to expand the base of capital ownership as advancing technology displaced human labor, with sound monetary theory to finance sustainable, non-inflationary growth.
Leo XIII and Pius XI had assumed — incorrectly — that universal capital ownership must be financed using past savings. They recommended workers be paid more (via a “living” or “family” wage) to enable them to save enough to purchase capital.
Unfortunately, in addition to increasing the costs of production and raising prices for consumers, this recommendation led commentators to mistake the means for the end. They failed to realize that paying higher-than-market-valued wages was intended to serve two different purposes.
|Pope Leo XIII|
The first purpose was to address the immediate need to redistribute existing wealth in order to take care of people in the short term while a permanent solution was developed and implemented. The second purpose was to provide the financing for a program of widespread capital ownership.
Kelso’s idea was to finance widespread ownership of new capital or transfers of existing capital by expanding bank credit, just as Moulton advocated for the already wealthy. Avoiding the presumed necessity of confiscation and redistribution to achieve his goal, Kelso realized there is a feasible means to purchase new capital or transfer existing capital.
That is to purchase or form the capital on credit and repay the credit with the future profits of the capital itself. In this way ordinary people could purchase capital without redistribution, restricting consumption, or taking cuts in pay or benefits.
Shifting from past savings (by definition a monopoly of the currently wealthy) to “future savings” — repayment of credit used to purchase capital with the future profits of the capital itself — makes it possible for anyone to own capital. As Moulton had demonstrated, in the century preceding the Crash of 1929 and the Great Depression, the rich had typically financed new capital during periods of rapid growth by employing this concept of “financial feasibility” to purchase “self-liquidating” assets.
|Pope Pius XI|
Still, the major advantage the rich enjoy over propertyless people is not the ability to use their wealth to purchase new capital directly, but to use as collateral. Collateral makes bankers willing to create money for the rich with as little risk as possible.
Since the issue is managing risk, Kelso advocated using capital credit insurance and reinsurance in place of traditional forms of collateral owned by the borrower. The risk premium typically charged on all loans (except the allegedly “risk free” loans to government) could be used as the premium on an insurance policy that would pay off in the event of default, thereby taking the place of traditional forms of collateral.
Nor was Kelso’s idea simply a pragmatic application of advanced financial technology — although it is supremely practicable. It is theoretically and philosophically sound as well.
Kelso, a lawyer-economist, and Aristotelian philosopher Mortimer Adler, the “Great Books” advocate, presented the new paradigm in the two books they co-authored, The Capitalist Manifesto, and The New Capitalists. It should be noted that the titles do not accurately describe what Kelso eventually ended by calling “binary economics.” This is in recognition of the fact that the two factors of production — labor (human) and capital (non-human) — when broadly owned bring the economy system back into balance, restoring Say’s Law. In the two volumes, Kelso and Adler made a logical case for expanding the base of capital ownership and financing economic growth with future savings.
|Mortimer J. Adler|
This, as Kelso and Adler argued, would not only vest “as many as possible of the people” with capital ownership, but emancipate humanity from “the slavery of savings.” By shifting from past savings to future savings, savings would work for people, rather than people work for savings. Kelso demonstrated the feasibility of his idea with the Employee Stock Ownership Plan (ESOP).
By means of an ESOP, employees of a corporation can purchase shares of the company on credit and repay the loan out of the future pre-tax profits of the corporation. Today in the United States millions of workers have become part owners of the thousands of companies that employ them without risking their personal savings or in most cases without taking any reductions in pay or benefits.
That takes care of the workers, but what about the rest of us? We’ll look at that when we take up this subject again.