Louis Orth Kelso (; December 4, 1913 – February 17, 1991) was a political economist, corporate and financial lawyer, author, lecturer and

merchant bank A merchant bank is historically a bank dealing in commercial loans and investment. In modern British usage it is the same as an investment bank. Merchant banks were the first modern banks and evolved from medieval merchants who traded in commodi ...

er who is chiefly remembered today as the inventor and pioneer of the

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, Em ...

(ESOP), invented to enable working people without savings to buy stock in their employer company and pay for it out of its future dividend yield.

Biography

He was born on December 4, 1913 in

Denver, Colorado Denver () is a consolidated city and county, the capital, and most populous city of the U.S. state of Colorado. Its population was 715,522 at the 2020 census, a 19.22% increase since 2010. It is the 19th-most populous city in the Unit ...

. Kelso began to think seriously about

economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

in 1931, during the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

. He was determined to launch his own investigation into the cause of a phenomenon no one was able to explain to his satisfaction. This quest took him to the

University of Colorado at Boulder The University of Colorado Boulder (CU Boulder, CU, or Colorado) is a public research university in Boulder, Colorado. Founded in 1876, five months before Colorado became a state, it is the flagship university of the University of Colorado sys ...

, where in 1937 he was graduated with a B.S. degree in business administration and finance; he went on to law school in Boulder, receiving a J.D. in 1938. He then joined a

Denver Denver () is a consolidated city and county, the capital, and most populous city of the U.S. state of Colorado. Its population was 715,522 at the 2020 census, a 19.22% increase since 2010. It is the 19th-most populous city in the Unit ...

law firm, Pershing, Bosworth, Dick & Dawson from 1938 to 1942. Then came

Pearl Harbor Pearl Harbor is an American lagoon harbor on the island of Oahu, Hawaii, west of Honolulu. It was often visited by the Naval fleet of the United States, before it was acquired from the Hawaiian Kingdom by the U.S. with the signing of the Re ...

. Kelso was commissioned in the U.S. Naval Service, and assigned to intelligence duty first in

San Francisco San Francisco (; Spanish language, Spanish for "Francis of Assisi, Saint Francis"), officially the City and County of San Francisco, is the commercial, financial, and cultural center of Northern California. The city proper is the List of Ca ...

and then in the

Canal Zone The Panama Canal Zone ( es, Zona del Canal de Panamá), also simply known as the Canal Zone, was an unincorporated territory of the United States, located in the Isthmus of Panama, that existed from 1903 to 1979. It was located within the terri ...

. Working tropical hours, Kelso used his free afternoons to work on his seminal manuscript, ''The Fallacy of Full Employment''. With the war over, the completed manuscript in his footlocker, the Navy sent him back to civilian life in 1946. But 1946 was also the year the

Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of a ...

passed the Full Employment Act. This legislation, still in force, defines economic policy in the United States 170 years after the official birth of the

Industrial Revolution The Industrial Revolution was the transition to new manufacturing processes in Great Britain, continental Europe, and the United States, that occurred during the period from around 1760 to about 1820–1840. This transition included going f ...

as the right to a job. Kelso concluded that the time for his ideas had not yet come. He then taught

constitutional law Constitutional law is a body of law which defines the role, powers, and structure of different entities within a State (polity), state, namely, the executive (government), executive, the parliament or legislature, and the judiciary; as well as th ...

. He then moved to

San Francisco, California San Francisco (; Spanish for " Saint Francis"), officially the City and County of San Francisco, is the commercial, financial, and cultural center of Northern California. The city proper is the fourth most populous in California and 17th ...

. There he became a

law partner A partner in a law firm, accounting firm, consulting firm, or financial firm is a highly ranked position, traditionally indicating co-ownership of a partnership in which the partners were entitled to a share of the profits as "equity partners". ...

with Kelso, Cotton, Seligman & Ray. He died on February 17, 1991 at the

Pacific Medical Center The Pacific Tower, formerly the Pacific Medical Center, is a 16-story building at 1200 12th Avenue South on Beacon Hill in Seattle, Washington, United States. It was completed in 1932 and opened the following year as a U.S. Publ ...

Development of ESOPs

Kelso created the ESOP in 1956 to enable the employees of a closely held newspaper chain to buy out its retiring owners. Two years later Kelso and his co-author, the philosopher

Mortimer J. Adler Mortimer Jerome Adler (December 28, 1902 – June 28, 2001) was an American philosopher, educator, encyclopedist, and popular author. As a philosopher he worked within the Aristotelian and Thomistic traditions. He lived for long stretches in N ...

, explained the macro-economic theory on which the ESOP is based in ''

The Capitalist Manifesto ''The Capitalist Manifesto'' is a 1958 book by Louis O. Kelso, a lawyer-economist and Employee Stock Ownership Plan (ESOP) inventor, and Mortimer J. Adler, a neo-Thomist philosopher. Kelso and Adler detail the three principles of economic justice, ...

'' (Random House, 1958). In ''

The New Capitalists The “New Capitalists” is a term used by Stephen Davis, Jon Lukomnik and David Pitt-Watson in a book of the same title. It describes the increasing ownership of companies by collective investment schemes representing millions of savers. The mill ...

'' (Random House, 1961), the two authors present Kelso's financial tools for democratizing capital ownership in a private property, market economy. These ideas were further elaborated and refined in ''Two-Factor Theory: The Economics of Reality'' (Random House, 1967) and ''Democracy and Economic Power: Extending the ESOP Revolution Through Binary Economics'' (1986, Ballinger Publishing Company, Cambridge, Massachusetts; reprinted 1991, University Press of America, Lanham, Maryland), both co-authored by Patricia Hetter Kelso, his collaborator since 1963. Kelso's next financing innovation, the Consumer Stock Ownership Plan (CSOP), in 1958 enabled a consortium of farmers in the Central Valley to finance and start up an

anhydrous ammonia Ammonia is an inorganic compound of nitrogen and hydrogen with the formula . A stable binary hydride, and the simplest pnictogen hydride, ammonia is a colourless gas with a distinct pungent smell. Biologically, it is a common nitrogenous wast ...

fertilizer plant. Despite fierce opposition from the major oil companies who dominated the industry, Valley Nitrogen Producers was a resounding success. Substantial dividends first paid for the stock and then drastically reduced fertilizer costs for the farmer-shareholders. Kelso regarded the ESOP and CSOP as pragmatic proof that his revolutionary revision of

classical economic Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...

theory, and the financial techniques he derived from this new perspective, were sound and workable in the economic and business world. Kelso gained that worldly knowledge from his work as a corporate and financial lawyer, and later as senior partner in the law firm he founded. He was further motivated by his conviction that lawyers had a special responsibility to maintain and improve society's institutions in the light of its democratic values. He further believed that the business corporation was society's greatest social invention and that its executives had a

fiduciary responsibility A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...

in exercising its vast power. Kelso long believed that he had not originated a new economic theory but only discovered a vital fact that the classical economists had somehow overlooked. This fact was the key to understanding why the

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 ...

free market economy A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ar ...

was notoriously unstable, pursuing a roller coaster course of exhilarating highs and terrifying descents into economic and financial collapse. This missing fact, which Kelso had uncovered over years of intensive reading, research and thought, drastically modifies the classical paradigm which has dominated formal economics since

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...

. It concerns the effect of technological change on the distributive dynamics of a private property, free market economy. Technological change, Kelso concluded, makes tools, machines, structures and processes ever more productive while leaving human productivity largely unchanged. The result is that primary distribution through the free market economy (whose distributive principle is "to each according to his production") delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contributions through labor. Differential productiveness over time concentrates market-sourced income in the hands of those who will not recycle it back through the market as payment for consumer goods and services. They already have most of what they want and need, so they invest their excess in new productive power. This is the source of the distributional bottleneck which makes the private property, free market economy ever more dysfunctional. The symptoms of dysfunction are

capital concentration Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form o ...

and inadequate

consumer demand In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...

, the effects of which translate into

poverty Poverty is the state of having few material possessions or little income. Poverty can have diverse social, economic, and political causes and effects. When evaluating poverty in ...

and economic insecurity for the majority of people who depend entirely on wage income and cannot survive more than a week or two without a paycheck. And since, as Adam Smith laid down, economic demand begins with the consumer and consumer purchasing power, the production side of the economy is under-nourished and hobbled. All of Kelso's financing tools and economic proposals are designed to correct the imbalance between production and consumption ''at its source'', in conformity with the private property/free market principles identified by Smith and his followers. In a biographical summary written for the National Center for Employee Ownership in 1988, Kelso described "the area in which first I alone, and then, beginning about 25 years ago, Patricia and I, have made our contribution to the world of economics and corporate (and other) finance. The Kelso contribution lies partly in the area of macro-economic discovery, and partly in practical ways to implement and make good use of those discoveries in human affairs." Although going along with

Random House Random House is an American book publisher and the largest general-interest paperback publisher in the world. The company has several independently managed subsidiaries around the world. It is part of Penguin Random House, which is owned by Germ ...

's cold-war title, ''The Capitalist Manifesto'', Kelso and Adler believed that ''capitalist'' was not the right term. But they could not come up with a better one. In their book they had called Kelso's new concept the theory of capitalism. Later Kelso and Hetter, wrestling with the same semantic problem, came up with the term ''universal capitalism''. Not until after their last book was already in print did Kelso discover the term they had been searching for all along: ''

binary economics Binary economics, also known as two-factor economics, is a theory of economics that endorses both private property and a free market but proposes significant reforms to the bank, banking system. According to theories first proposed by Louis Kelso ...

''.

Kelso & Company

In 1971, Louis Kelso founded Kelso Bangert & Company as a

that would be both an advisor and investor in

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...

involving

s. The firm, which would later come to be known as

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 i ...

, would transition toward

private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...

investments in the late 1970s and would raise its first

private equity fund A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity ...

in 1980. Today Kelso & Company is a $10 billion

private equity firm A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leve ...

and was among the 50 largest private equity firms globally.

Quotes

Publications

* ''The distributive dynamics of capitalism'' by Louis O Kelso, self-published; 2nd edition (1956) * ''The Capitalist Manifesto'', by Louis O. Kelso and Mortimer J. Adler, Random House, New York: 1958; reprinted Greenwood Press, Westport, Connecticut: 1975. Also published in French, Spanish, Greek and Japanese. Available in PDF format from The Kelso Institute. * ''The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings'', by Louis O. Kelso and Mortimer J. Adler, Random House, New York: 1961; reprinted Greenwood Press, Westport, Connecticut: 1975. Also published in Japanese. Available in PDF format from The Kelso Institute. * ''Two-Factor Theory: The Economics of Reality'', by Louis O. Kelso and Patricia Hetter, Random House, New York: 1967; paperback edition, Vintage Books: 1968. (Originally published under the title ''How to Turn 80 Million Workers into Capitalists on Borrowed Money''.) Also published in Spanish and German. * ''Democracy and Economic Power: Extending the ESOP Revolution Through Binary Economics'', by Louis O. Kelso and Patricia Hetter Kelso, Ballinger Publishing Co., Cambridge, Massachusetts: 1986; reprinted by University Press of America, Lanham, Maryland: 1991. Also available in Russian and Chinese.

Other writings by Louis O. Kelso

* Karl Marx: The Almost Capitalist, ''American Bar Association Journal, March, 1957

* Corporate Benevolence or Welfare Redistribution?, ''The Business Lawyer, January, 1960. * Labor's Great Mistake: The Struggle for the Toil State, ''American Bar Association Journal, February, 1960. * Welfare State - American Style, Challenge, ''The Magazine of Economic Affairs'', New York University, October, 1963. * The Case for the 100% Dividend Payout, ''Trends'' (published by Georgeson & Co.), New York, December, 1963. * Poverty and Profits, by Hostetler, Kelso, Long, Oates, the Editors, ''Harvard Business Review, September–October, 1964. * Beyond Full Employment, ''Title News'' (the Journal of the American Land Title Association), November, 1964. * Cooperatives and the Economic Power to Consume, ''The Cooperative Accountant'' (published by the National Society of Accountants for Cooperatives), Winter, 1964. * Why Not Featherbedding?, ''Challenge'', September–October 1966. (Reprinted in ''American Controversy: Readings and Rhetoric'', by Paul K. Dempsey and Ronald E. McFarland, Scott, Foresman and Company, Glenview, Illinois: 1968.) * The Economic Foundation of Freedom, ''The American Prospect: Insights into Our Next 100 Years'', Houghton Mifflin Company, Boston: 1977. * Labor's Untapped Wealth: An Address by Louis Kelso, ''Air Line Pilot'', October, 1984.

Other writings by Louis O. Kelso (with Patricia Hetter Kelso)

* Uprooting World Poverty: A Job for Business, ''Business Horizons'', Fall, 1964. (Reprinted in ''Mercurio'', Anno VIII, No. 8, Rome, Italy, August, 1965; Far Eastern Economic Review, Vol. L, No. 1, Hong Kong, October, 1965. Winner of the First Place 1964 McKinsey Award for Significant Business Writing.) * Poverty's Other Exit, ''North Dakota Law Review'', January, 1965. * Equality of Economic Opportunity Through Capital Ownership, Social Policies for America in the Seventies, edited by Robert Theobald, Doubleday & Co., New York: 1968. (Excerpts from this essay reprinted in ''Current'', April, 1968.) * Reparations and the Churches, ''Business Horizons'', December, 1969. * Invisible Violence of Corporate Finance, ''The Washington Pos''t, June 18, 1972. * Man Without Property, ''Business and Society Review'', Summer, 1972. * Corporate Social Responsibility Without Corporate Suicide, ''Challenge'', July–August, 1973. * Employee Stock Ownership Plan, ''Business & Government Insider Newsletter'', July 30, August 6 and August 13, 1973. * Employee Stock Ownership Plans: A Micro-Application of Macro-Economic Theory, ''The American University Law Review'', Spring, 1977. * The Greatest Financial Planning Tool of All ... Could ESOP Save General Motors?, ''The Financial Planner'', November, 1981. * Sychophantasy in Economics: A Review of

George Gilder George Franklin Gilder (; born November 29, 1939) is an American investor, author, economist, and co-founder of the Discovery Institute. His 1981 book, '' Wealth and Poverty'', advanced a case for supply-side economics and capitalism during the ...

's Wealth and Poverty, The Great Ideas Today, Encyclopædia Britannica, Inc., Chicago: 1982. * The Right to Be Productive, ''The Financial Planner'', August and September, 1982. * Tax Reform Is Not the Answer, ''Chief Executive'', Spring, 1983. * How We Can Achieve Lifetime Employment, ''Chief Executive'', Autumn, 1983. * Damning Binary Economics With Faint Praise, ''Workplace Democracy'', Summer, 1987. * Leveraged Buyouts Good and Bad, ''Management Review'', November, 1987. * The Great Savings Snafu, Business and ''Society Review'', Winter, 1988. * Why Owner-Workers Are Winners, ''The New York Times'', January 29, 1989. * Why I Invented the ESOP LBO, ''Leaders'', October/November/December, 1989. * Don't Meddle With ESOPs, ''The Journal of Commerce'', October 2, 1989. * Looking in a Marxist Mirror, ''The Journal of Commerce'', January 11, 1991.

References

External links

Kelso & Company
{{DEFAULTSORT:Kelso, Louis O. 1913 births 1991 deaths People from Denver People from San Francisco University of Colorado Boulder alumni Economists from California 20th-century American lawyers Private equity and venture capital investors 20th-century American economists Economists from Colorado