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Wednesday, October 11, 2023

Why Binary Economics?

Today’s blog posting is a selection from the book, Economic Personalism, which you can get free from the CESJ website, or from Amazon or Barnes and Noble.

In all forms of tyranny, the State or community dictates what people must do and how they must do it instead of maintaining the pólis so that people can pursue their own destinies within established parameters as they themselves see fit. When most people lack private property in capital and thus lack power, however, they often have no choice but to comply with the wishes of those who do have property, whether they are a private sector capitalist élite or a socialist bureaucracy.

Louis O. Kelso


Louis Kelso, a corporate finance lawyer and personalist economist, began seeking a solution to the problem of powerlessness and social alienation when during the Great Depression of the 1930s he saw unemployed men illegally riding freight trains in an often fruitless search for jobs. Kelso was struck by the paradox of widespread unemployment and want in a country with tremendous productive capacity. This alerted him to the fact that something was fundamentally wrong with the economic system.

After studying the problem, Kelso realized that as technology advanced, consumers had become (to use our term, not Kelso’s) alienated from the ability to produce with labor alone. At the same time, capital owners were producing far more than they could consume with the income generated by their capital.

More efficient machinery had largely displaced human labor as the predominant factor of production. As a result, owners of labor (workers) could not produce enough with their labor to exchange for what owners of capital produced with their technology.

Jean-Baptiste Say


Paradoxically, what seemed like excess aggregate supply and inadequate aggregate demand was really a problem of grossly unequal productive power and thus effective demand concentrated in too few hands. As Jean-Baptiste Say (1767-1832) concluded when explaining his “Law of Markets” (below) to the Reverend Thomas Malthus (1766-1834),

I had said, “As each of us can only purchase the productions of others with his own productions — as the value we can buy is equal to the value we can produce — the more men can produce, the more they will purchase.” Thence follows the other conclusion, which you refuse to admit: “that if certain goods remain unsold, it is because other goods are not produced, and that it is production alone which opens markets to produce.” (Jean-Baptiste Say, Letters to Malthus. London: Sherwood, Neely, and Jones, 1821, 3.)

With the value of their labor falling relative to technology as the productiveness of capital far outstripped that of labor, workers increasingly relied on union pressure and government coercion to redistribute capital ownership income to keep the economy running. The rise of the Welfare/Servile State increased the problem.

Later, in the books he co-authored with Mortimer Adler (The Capitalist Manifesto, 1958, and The New Capitalists, 1961), Kelso noted that the economic alienation he observed was only part of a much larger problem. Expanded capital ownership is important not merely for income, but as a key element in a free and just society; political democracy requires economic democracy.

Rev. Thomas Malthus


Discovering what in the economic system caused the inability of people to be productive and thus unable to generate sufficient purchasing power, however, was Kelso’s primary focus. At the heart of what he eventually called “binary economics” is the realization that capital and labor are both productive, and they are both productive (i.e., produce goods and services) in the same way. Defining labor as all human inputs to production, and capital (including land) as all non-human inputs, Kelso recognized labor and capital as two interdependent yet distinct factors of production.

Kelso’s analysis came into conflict with prevailing economic theory and political policy that recognizes only labor as productive. Mainstream economics claims that capital at best only enhances labor productivity, defining “productivity” as “output per labor hour.” This leads to the logical absurdity that labor is infinitely productive at the point where it has been completely removed from the production process, e.g., self-service elevators or automated factories.

As Kelso reasoned, when the productiveness of one factor falls relative to the other factor — as labor does relative to capital when technology advances — owners of labor must replace the decline in their labor productivity by becoming owners of capital. Similarly, if in the unlikely event capital productiveness were to fall relative to that of labor, owners of capital would have to replace the productiveness of capital with that of labor, preferably their own.

Kelso and the popes came to the same conclusion from opposite ends of the question. The popes began with the problem of social alienation and realized that reconnecting the human person to society requires the power of widespread capital ownership that would also solve the problem of the growing wealth and income gap caused by the inability to produce sufficiently. Kelso began with the problem of the growing wealth and income gap caused by the inability to produce and realized that reconnecting the human person to the process of production through expanded capital ownership would also reconnect the human person to society.

William Cobbett


Nor were the popes and Kelso the first to realize the importance of expanded capital ownership for a just society or workable economy. William Cobbett (1763-1835), the English Radical politician and journalist, insisted with Aristotle and Adler that the propertyless condition is tantamount to slavery. As he declared in his best-known work, A History of the Protestant Reformation in England and Ireland (1827),

Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave. (William Cobbett, A History of the Protestant Reformation in England and Ireland (1827), §456.)

At the other end of the political spectrum, the English investment banker Charles Morrison argued in his book, An Essay on the Relations Between Labour and Capital (1854), that propertyless wage workers must become part owners of the businesses that employed them. This would ensure that they had adequate income, whether through dividends or profit sharing.

Charles Morrison


English corporations in Morrison’s day, however, did not enjoy limited liability except by special act of Parliament. Further, any participation in management or profits was deemed “ownership” under the English law of partnerships. That made anyone who received anything other than a fixed wage jointly and severally liable for all debts of the corporation. Workers who participated in ownership could lose everything they owned and go to prison if the corporation failed to pay its debts. (Imprisonment for debt is still possible in Great Britain, although a number of reforms have been instituted, beginning with the Debtor’s Act 1869, 32 & 33 Vic., c. 62.)

Morrison’s book was instrumental in persuading Parliament to pass the Limited Liability Act 1855 (18 & 19 Vict c 133).  This made it possible for ordinary people to participate in ownership — if they could save enough to purchase shares. Most could not, even when shares were available.

Having arrived in the same place — the need for expanded capital ownership — the question for Kelso became the same one the popes had failed to address adequately: how to achieve the desired goal. Redistribution of existing capital, whether voluntarily through philanthropy (philanthropists usually ignore the need for widespread capital ownership and redistribute wealth in ways that keep people dependent) or (more likely) involuntarily through what the socialists incorrectly called distributive justice would destroy that which they were claiming to restore by keeping people dependent.

On the other hand, attempting to finance expanded capital ownership by reducing one’s consumption and accumulating savings (the specific suggestion advanced by the popes) is not merely inadequate, but impossible for most people. Not only are most people unable to save in appreciable amounts, the required diminution in mass consumption even if they could save would render new capital formation a bad investment. There is, after all, no reason to invest in additional capital when there is insufficient demand for what is already being produced.