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Binary economics, also known as two-factor economics, is a theory of economics that endorses both
private property Private property is a legal designation for the ownership of property by non-governmental legal entities. Private property is distinguishable from public property and personal property, which is owned by a state entity, and from collective or c ...
and a
free market In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ...
but proposes significant reforms to the
banking system A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Becaus ...
. According to theories first proposed by Louis Kelso, widespread use of
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
-issued interest-free loans to fund employee-owned firms can finance economic growth whilst widening stock ownership in a way which binary economists believe will be non-inflationary. The term "binary" derived from its heterodox treatment of labor and capital (but not in the sense of
binary opposition A binary opposition (also binary system) is a pair of related terms or concepts that are opposite in meaning. Binary opposition is the system of language and/or thought by which two theoretical opposites are strictly defined and set off against one ...
).Rodney Shakespeare (2007) ''The Modern Universal Paradigm''. Kelso claimed that in a truly free market wages would tend to fall over time, with all the benefits of technological progress accruing to capital owners.


Overview

Binary economics rejects the claim that
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
alone promotes a '
free market In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ...
' which is free, fair and efficient. (e.g., as an interpretation of the classical First Fundamental Theorem of Welfare Economics). Binary economists believe freedom is only truly achieved if all individuals are able to acquire an independent economic base from capital holdings, and that the distribution of ownership rights can "deepen democracy". Binary economics argues financial savings prior to investment are not required on the basis that the present money supply is mostly created credit anyway. It argues that newly minted money invested on behalf of those ''without access'' to existing cash savings or collateral can be adequately repaid through the returns on those investments, which need not be inflationary if the economy is operating below capacity. The theory asserts that what matters is whether the newly created money is interest-free, whether it can be repaid, whether there is effective collateral and whether it goes towards the development and spreading of various forms of productive (and the associated consuming) capacity. Another contrast is that, in evidence-based economics, interest (as distinct from administration cost) is practically always necessary; in Binary Economics theory it isn't (not in relation to the development and spreading of productive capacity). Conventional economics accounts for the observed time value of money, whereas binary economics does not.


Background

The theory behind Binary Economics was proposed by American lawyer Louis Kelso and philosopher
Mortimer Adler Mortimer () is an English surname, and occasionally a given name. Norman origins The surname Mortimer has a Norman origin, deriving from the village of Mortemer, Seine-Maritime, Normandy. A Norman castle existed at Mortemer from an early point; ...
in their book ''The Capitalist Manifesto'' (1958). The book's title could be seen as a Cold War reference in opposition to communism. Kelso and Adler elaborated on their proposals in ''The New Capitalists'' in 1961. Then Kelso worked with political scientist Patricia Hetter Kelso to further explain how capital instruments provide an increasing percentage of the wealth and why capital is narrowly owned in the modern industrial economy. Their analysis predicted that widely distributed capital ownership will create a more balanced economy. Kelso and Hetter proposed new "binary" share holdings which would pay out full net earnings as dividends (with exceptions for research, maintenance and depreciation). These could be obtained on credit by those not possessing savings, with a government-backed insurance scheme to protect the shareholder in the event of loss. Kelso's writings were not well received by academic economists. Milton Friedman said of ''The Capitalist Manifesto'' "the book's economics was bad ... the interpretation of history, ludicrous; and the policy recommended, dangerous" and recalls a debate where even the moderator
Clark Kerr Clark Kerr (May 17, 1911 – December 1, 2003) was an American professor of economics and academic administrator. He was the first chancellor of the University of California, Berkeley, and twelfth president of the University of California. Bi ...
"lost his cool as a moderator and attacked elso's argumentsvigorously". Paul Samuelson, another Nobel Memorial Prize in Economic Sciences winner, told the U.S. Congress that Kelso's theories were a "cranky fad" not accepted by mainstream economists, but Kelso's ideas on promoting wider capital ownership nevertheless significantly influenced the passing of legislation promoting employee ownership.D'Art, Darryl (1992) ''Economic democracy and financial participation: a comparative study'', Routledge p.96


Aims and programme

The aim of binary economics is to ensure that all individuals receive income from their own independent capital estate, using interest-free loans issued by a
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
to promote the spread of employee-owned firms. These loans are intended to: halve infrastructure improvement costs, reduce business startup costs, and widen stock ownership. Binary economics is not mainstream and does not fit easy into the left–right spectrum. It has variously been characterized as an extreme right-wing ideology and as extremely left-wing by its critics. The '
binary Binary may refer to: Science and technology Mathematics * Binary number, a representation of numbers using only two digits (0 and 1) * Binary function, a function that takes two arguments * Binary operation, a mathematical operation that ta ...
' (in 'binary economics') means 'composed of two' because it suffices to view the physical factors of production as being but two ( labour and
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...
(which includes
land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various islan ...
). It recognises only two ways of genuinely earning a living − by labour and by productive capital ownership. In its theory humans own their labour, but also productive capital. Binary economics is partly based on belief that society has an absolute duty to ensure that all humans have good health, housing, education and an independent income, as well as a responsibility to protect the environment for its own sake. The interest-free loans proposed by binary economics are compatible with the traditional opposition of the
Abrahamic religions The Abrahamic religions are a group of religions centered around worship of the God of Abraham. Abraham, a Hebrew patriarch, is extensively mentioned throughout Abrahamic religious scriptures such as the Bible and the Quran. Jewish traditio ...
to
usury Usury () is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is ch ...
.Rodney Shakespeare & Peter Challen (2002) ''Seven Steps to Justice''. Proponents of binary economics claim that their system contains no expropriation of wealth, and much less redistribution will be necessary. They argue that it cannot cause inflation and is of particular importance as more of the physical contribution to production is
automated Automation describes a wide range of technologies that reduce human intervention in processes, namely by predetermining decision criteria, subprocess relationships, and related actions, as well as embodying those predeterminations in machines ...
. and that the Binary economics paradigm is particularly helpful in addressing the issue of why
developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agree ...
languish. Advocates contend that implementing their system will lessen national debt and encourage national unity. They believe binary economics could create a stable economy.


Productiveness vs. productivity

Binary productiveness is distinctly different from the conventional economic concept of productivity. Binary productiveness attempts to quantify the proportion of output contributed by total labor input and total capital input respectively, Adding capital inputs to a production process increases labor productivity, but binary economic theory argues that it decreases ''labor productiveness'' (i.e. the proportion of the total output with the support of both labor and capital that the labor inputs could have produced alone). For example, if the invention of a shovel allows a laborer to dig a hole in quarter of the time it would take him without the spade, binary economists would consider 75% of the "productiveness" to come from the shovel and only 25% from the laborer. Roth criticised the shovel example on the basis that the shovel is not a factor of production independent of human capital because somebody invented it, and the shovel cannot act independently: the physical productiveness of the shovel before labour is added to it is zero. Kelso used the concept of productiveness to support his theory of distributive justice, arguing that as capital increasingly substitutes for labor: "workers can legitimately claim from their aggregate labor only a decreasing percentage of total output", implying they would need to acquire capital holdings to maintain their level of income. In ''The Capitalist Manifesto'', Kelso boldly asserted:
"It is, if anything an underestimation rather than an exaggeration to say that the aggregate physical contribution to the production of the wealth of the workers in the United States today accounts for less than 10 percent of the wealth produced, and that the contribution by the owners of capital instruments, through their physical instruments, accounts in physical terms for more than 90 percent of the wealth produced" Kelso, Louis (1958) ''The Capitalist Manifesto'', Random House, p.53
Whilst the increased importance of capital as a factor of production following the Industrial Revolution has long been accepted even by those believing economic value derives from labour such as Marx, Kelso's figures suggesting that value was created almost entirely by capital were dismissed by academic economists like Paul Samuelson. Samuelson asserted that Kelso's had not used any econometric analysis to arrive at his figures, which completely contradicted economists' empirical findings on the contribution of labour. ''The Capitalist Manifesto'' did not provide detailed calculations to support Kelso's claim, although a footnote suggested that it was based on a simple comparison with 1850s labour productivity figures.


Employee stock ownership plan (ESOPs) and other plans

Employee stock ownership plan Employee stock ownership, or employee share ownership, is where a company's employees own shares in that company (or in the parent company of a group of companies). US employees typically acquire shares through a share option plan. In the UK, Emp ...
s (ESOPs) are compatible with some of the principles of binary economics. These stem originally from Louis Kelso & Patricia Hetter Kelso (1967)''Two-Factor Theory: The Economics of Reality''; the founding of
Kelso & Company Kelso & Company is an American private equity firm focusing on leveraged buyouts, recapitalizations and growth capital transactions. Kelso invests in a variety of sectors, including communication, manufacturing and restaurants. Kelso is based ...
in 1970; and then from conversations in the early 1970s between Louis Kelso, Norman Kurland ( Center for Economic and Social Justice), Senator
Russell Long Russell Billiu Long (November 3, 1918 – May 9, 2003) was an American Democratic politician and United States Senator from Louisiana from 1948 until 1987. Because of his seniority, he advanced to chairman of the Senate Finance Committee, servin ...
of Louisiana (Chairman, USA Senate Finance Committee, 1966–81) and Senator
Mike Gravel Maurice Robert "Mike" Gravel ( ; May 13, 1930 – June 26, 2021) was an American politician and writer who served as a United States Senator from Alaska from 1969 to 1981 as a member of the Democratic Party, and who later in life twice ran for ...
of Alaska. There are about 11,500 ESOPs in the USA today covering 11 million employees in closely held companies.


Uses of central bank-issued interest-free loans

Binary economics proposes that central bank-issued interest-free loans should be administered by the banking system for the development and spreading of productive (and the associated consuming) capacity, particularly new capacity, as well as for environmental and public capital. While no interest would be charged, there would be an administrative cost as well as collateralization or capital credit insurance. Proponents of binary economics are dissatisfied with fractional-reserve banking, arguing that it "creates new money out of nothing". The supply of interest-free loans would place in circumstances of a move (over time) towards banks maintaining reserves equal to 100% of their deposits; in practice, the large-scale interest-free lending desired by binary economics is compatible with the widespread reduction in money supply that would be caused by increased reserve requirements only if the government takes over the banks' role in credit creation.


Investments eligible for interest-free loans

Binary economics suggests that ownership of productive (and the associated consuming) capacity, particularly new capacity, could be spread by the use of central bank-issued interest-free loans. Interest-free loans should be allowed for private capital investment ''IF such investment creates new owners of capital and is part of national policy to enable all individuals, over time, on market principles, to become owners of substantial amounts of productive, income-producing capital''.Norman Kurland (2001) ''Saving Social Security'' at www.cesj.org. By using central bank-issued interest-free loans, a large corporation would get cheap money as long as new binary shareholders are created.


References


Sources

*Albus, James S. (1976) ''Peoples' Capitalism - The Economics of The Robot Revolution''. *Ashford, Robert & Shakespeare, Rodney (1999) ''Binary Economics - the new paradigm''. *Ashford, Robert "Louis Kelso’s Binary Economy" (''The Journal of Socio-Economics'', vol. 25, 1996). *el-Diwany, Tarek (2003) ''The Problem With Interest''. *Gates, Jeff (1999) ''The Ownership Solution''. *Gates, Jeff (2000) ''Democracy At Risk''. *Gauche, Jerry "Binary Modes for the Privatization of Public Assets" (''The Journal of Socio-Economics''. Vol. 27, 1998). *Greenfield, Sidney M. ''Making Another World Possible: the Torah, Louis Kelso and the Problem of Poverty'' (paper given at conference, Columbia University, May, 2006). *Kelso, Louis & Kelso, Patricia Hetter (1986 & 1991), ''Democracy and Economic Power - Extending the ESOP Revolution through Binary Economics''. *Kelso, Louis & Adler, Mortimer (1958), ''The Capitalist Manifesto''. *Kelso, Louis & Adler, Mortimer (1961), ''The New Capitalists''. *Kelso, Louis & Hetter, Patricia (1967), ''Two-Factor Theory: the Economics of Reality''. *Kurland, Norman ''A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation''. *Kurland, Norman; Brohawn, Dawn & Michael Greaney (2004) ''Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security''. *Miller, J.H. ed., (1994), ''Curing World Poverty: The New Role of Property''. *Reiners, Mark Douglas, ''The Binary Alternative and Future of Capitalism''. *Schmid, A. Allan,(1984), “Broadening Capital Ownership: The Credit System as a Focus of Power", in Gar Alperovitz and Roger Skurski,eds. ''American Economic Policy'', University of Notre Dame Press. *Shakespeare, Rodney & Challen, Peter (2002) ''Seven Steps to Justice''. *Shakespeare, Rodney (2007) ''The Modern Universal Paradigm''. *Turnbull, Shann (2001) ''The Use of Central Banks to Spread Ownership''. *Turnbull, Shann (1975/2000), ''Democratising the Wealth of Nations''.


External links


Binary Economics now
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