Just for fun the other day, we asked AI why mainstream economists reject Binary Economics, and it came up with nine reasons, some of which are not so good, and others which are terrible. In this series we will look at the reasons and see if there are any responses, or if the reason is even valid.
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| Louis O. Kelso |
To begin, the AI informed us that,
Louis Kelso's Binary Economics, while influential in certain circles, particularly for its role in the development of Employee Stock Ownership Plans (ESOPs), is not widely recognized by mainstream economists as a robust economic theory for several reasons, rooted in both its theoretical framework and its reception within academic economics. Below, I outline the key factors contributing to this lack of recognition, drawing on available information and critical analysis:
1. **Lack of Empirical and Econometric Support**:
- Mainstream economics heavily emphasizes empirical validation through econometric analysis. Kelso's Binary Economics, as noted by critics like Paul Samuelson, lacks rigorous econometric backing. For instance, Samuelson pointed out that Kelso's claims in The Capitalist Manifesto (1958) were not supported by detailed calculations or data, relying instead on simplistic comparisons, such as with 1850s labor productivity figures. This absence of quantitative evidence makes it difficult for economists to take the theory seriously within a discipline that prioritizes data-driven conclusions.
- Kelso's assertion that capital is increasingly productive relative to labor, while intuitive in an industrial context, was not substantiated with the kind of statistical analysis that economists expect. This contrasts with neoclassical or Keynesian models, which are grounded in mathematical frameworks and testable hypotheses.
For today, let’s take these two claims, that there is no empirical validation through econometric analysis and Kelso’s concept of productiveness is not substantiated with the kind of statistical analysis economists expect.
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| Paul Samuelson |
The same problem underlies both criticisms. Samuelson and other mainstream economists applied their own assumptions to a framework that is based on different assumptions, viz., where mainstream economics asserts that only labor is productive and capital only enhances labor, Kelso claimed that both labor and capital are productive and productive in the same way.
Consequently, trying to compare any econometric analysis, rigorous or otherwise, based on one set of assumptions to a system based on another set of assumptions entirely is comparing apples and oranges. The comparison is meaningless. Mainstream econometric analysis assumes that all production is due to labor, and therefore any claim that production is due to both capital and labor is automatically rejected without being considered; the “experts” already “know” that all production is due to labor. The case was closed before it was opened.
Thomas Jefferson
It's like people who (for example) reject anything else because they already believe it cannot happen. Thomas Jefferson, for example, was informed once that a Yale University professor had observed a meteorite fall to Earth and had obtained it. Jefferson rejected the claim immediately, because he declared he would sooner believe a Yale professor would lie than that a stone would fall from the heavens.
Yes, common sense was on Jefferson’s side . . . but he rejected the claim, even of a Yale professor, without examining the evidence, which he really should have done. True, a claim may be outrageous, and contrary to common sense, but to dismiss the claim without giving it serious consideration?
Yet that is precisely what mainstream economists have been doing with respect to Binary Economics. They reject logical argument in favor of empirical evidence . . . and then refuse to examine the empirical evidence! The data collected to support mainstream economic theory should, if Binary Economics is valid, support Binary Economics, but of course will not if the assumptions of Binary Economics are not even considered. If the mainstream economists are serious about refuting Binary Economics, then they should be willing to construct an econometric model using Kelso’s assumptions, feed the data into it, and see which comes closer to reality.
Louis O. Kelso
, , , because, frankly, the data do not support mainstream economics! If they did, why would the global economy still be in a mess nearly a century after “mainstream economics” has held sway over the world? Rejecting Binary Economics because it “contrasts with neoclassical or Keynesian models, which are grounded in mathematical frameworks and testable hypotheses” is fatuous in the extreme, because neither the neoclassical nor the Keynesian models “are grounded in mathematical frameworks and testable hypotheses.”
The mathematical framework in both is the Quantity Theory of Money equation which is used to test hypotheses . . . and it has never been able to do so. Instead, economists and politicians insist on trying to make a mathematical contradiction and impossibility work and keep wondering why it doesn’t.
The idea is that the amount of money in an economy, M, times the average rate each unit of money is spent in a year, V, equals the price level, P, times the number of transactions, Q:
M x V = P x Q
The game is to guess how much money must be supplied to have the desired number of transactions and price level. Guessing too much money results in inflation and an overheated economy. Guessing too little results in deflation and economic stagnation or decline. The problem gets more complicated because people tend to spend money faster when there is more of it around and the price level rises, thereby increasing the average rate at which each unit of money is spent in a year.
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| Mainstream Economics |
Manipulating the quantity of money to achieve desired results sounds reasonable until we take a closer look at things. The error is this: You cannot solve for two or more unknown variables with one equation. Algebra doesn’t work that way.
As used by most economists today, however, the single Quantity Theory of Money equation has three unknown variables. Consequently, manipulating the quantity of money changes how fast money is spent (V), the price level (P) and the number of transactions (Q). It is impossible to say how increasing or decreasing the quantity of money will change V, P and Q because no one has ever developed equations to show the relationships between these variables. It is anyone’s guess.
Binary Economics, on the other hand, insists that the amount of money should be determined by how fast money is spent (V), the price level (P) and the number of transactions (Q). This makes mathematical sense. If anything, then, it is mainstream economics, not Binary Economics, that lacks empirical evidence and logical consistency.
Nor is that all, as we will see in future postings.
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