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Democratic Capitalism vs. Binary Economics

Keith Wilde

Courtesy: Journal of Socio-Economics; 2001, Vol. 30 Issue 2, p99, 20p 
Online Courtesy: AccessMyLibrary

Capitalism needs democracy as a counterweight because the capitalist system by itself shows no tendency toward equilibrium.... Financial markets are inherently unstable ... George Soros, 1998

Soros' arguments in support of this thesis are compelling.[1] They are an urgent reminder that maintenance of civilization requires vigilance and concerted effort. Soros fears that "political developments triggered by the financial crisis may eventually sweep away the global capitalist system itself. It has happened before." Marx and Engels gave a very good analysis of the capitalist system 150 years ago, says Soros--"better in some ways than the equilibrium theory of classical economics." We believe that the financial innovation created by Louis Kelso and expounded with Mortimer Adler in The Capitalist Manifesto[2] (with details in The New Capitalists) may be the best available instrument for preserving the open society that is essential to a stable and democratic capitalism.

1. Problem

The innovation has not been applied with the universality envisaged by Adler and Kelso. Even more surprising is that economic and political analysts appear to have made very little response to a technique which has major implications for their domains of interest. Why has it not been more widely discussed in the social disciplines?

2. Hypothesis

The communications strategy developed by Kelso and his closest allies does not address the relevant disciplinary communities in a language or at a point of entry that engages their stream of discourse. When Kelsonian meets economist they talk past each other, because they have not really met on the same playing field. A brilliant innovation in economic policy, backed up by expertise in financial and legal principles, has been side-tracked by promoting it as an innovation in economic theory.

3. Note on sources

Our principal motivation in preparing this paper was curiosity: why has the Kelso solution not attracted more prominence in its forty years of life? In particular, why have we not encountered it more directly in our work as economic policy analysts?[3] Our interest was engaged by the efforts of Robert Ashford to bring Kelso's ideas into academic circulation through his role as a professor of law and an advocate of socio-economics in jurisprudence. Ashford's conference presentations, written works and personal communications are the focus of our attention.[4] This seems appropriate because Ashford has made it clear on a number of occasions that his first objective is to be a faithful expositor of Kelso's core position. Furthermore, we have witnessed the apparent approval of his efforts and interpretation among others who were close acquaintances of Louis Kelso. Thus, by following Ashford's lead we expect to minimize our chances of misinterpreting Kelso, as well to participate in building a bridge between his writings and a wider community in the social disciplines.

4. Expansion of our hypothesis

Kelso misconceived the position of his innovation within "the great conversation"[5] of political economy. The conjecture is reflected in our title: democratic capitalism is descriptive of a particular style of political economy; binary economics, on the other hand, suggests a method of analysis. One of Ashford's titles promises a description of Kelso's binary economy, from which we would expect a description of life and work if his policy prescriptions were applied. In other words, a work of political economy. On opening the text, however, we find primarily an exposition of binary economics. Kelso proposed a new way of doing economics, therefore, as well as a new species of financial instruments and a renewed vision of the political economic ideal. These innovations in technique and policy prescription are premised in a particular theory about the economy. There are four distinguishable aspects, therefore, to what Ashford calls binary economics--theory, technique, analytics and policy prescription. We have found it possible and useful to focus on each of these separately, and conclude that they are not woven into a tight web of mutual interdependence. That is, the technique and the policy prescription do not depend for their efficacy or desirability on the truthfulness or rationale of the theory and analytics. Even more important, application of the technique and policy prescription has probably been held back because of being embedded in the theory and analytical approach.

5. Importance of the financial innovation

The concentration of wealth ownership in the US and other western industrialized economies, to say nothing of those recently industrialized, has been well documented.[6] The threat of an ever broadening income disparity between the rich and the rest may represent a threat to the future of democracy itself as a larger and larger proportion of the electorate feels futility in their search for public policy representing the needs of the citizenry as a whole. Indeed the growing disparity of incomes and the exclusion from society it represents may be compared to the civil rights movement. As with the civil rights movement, the motive may be more powerful than simply sympathizing with the plight of a particular group in society. It may involve the political and social integrity of the country as a whole. Citizens who do not participate and "buy in" are doing something else.

This may appear to be not an immediate likelihood, given publicly touted record low unemployment rates and burgeoning consumerism (on credit).[7] However, there exists a disturbing set of observations with regard to the coincidence of increasing wealth concentration and economic depression. [Batra, Galbraith] Should economic recession occur in the context of record household debt levels, the issue may attain more immediacy with the public. Although now unfashionable, Marx also has poignant observations on the genesis of decline in capitalist society.

As consolidation and concentration proceed, the next thing to be expropriated is the capitalist who is exploiting many laborers. "One capitalist kills many." The process is described succinctly by Weldon:

    The enforced competition among capitalists is revealed by 
    success or failure in reducing costs. For those who fail
    there is bankruptcy or forced sale, and the transfer of 
    assets to those who succeed. Capitalism grows as measured by
    output, by productivity, by the number of employed workers,
    by the size of the reserve army, but it contains all the
    same a `constantly diminishing number of the magnates of
    capital' and a working class `disciplined, united, organized
    by the very mechanism of the process of capitalist
    production itself.' In brief, within the boundaries of a
    capitalistic nation-state the ranks of the capitalists are
    thinned by virtue of market forces, and the coherence of
    workers is steadily increased. `Bourgeois economy' becomes a
    system that is capitalistic only in name, for competition
    has virtually disappeared and the organization of a
    socialist state is already in place.[8]

This recent analysis by a political economist is remarkably similar in tone to a warning in 1958 that America was headed toward complete socialism, that is, to State capitalism.

    Though it is fashionable today to believe that we are
    advancing toward a sound capitalism, an understanding of the
    principles of capitalism will reveal that we are retreating
    from it and, instead, advancing toward a socialist state.
    Never before has society marched more joyously into ambush
    by the very forces it implacably opposes but does not
    recognize. We are faced with the spectacle of a nation
    sincerely seeking democracy and economic justice through
    means which it fails to recognize as destructive of both.

So wrote Kelso and Adler in The Capitalist Manifesto.[9]

6. Effectiveness of the financial techniques is not in doubt

The principle which makes them effective was amply demonstrated in the leveraged buy-out phenomenon of the 1980s, and the translation of Kelso's democratizing innovation into enabling legislation led to the creation of thousands of employee stock ownership plans in the United States. The momentum of application is likely to be augmented noticeably by the 1998 publication on two continents of The Ownership Solution by Jeff Gates.[10] The array of international endorsements displayed by his publishers ranges over financiers, industrialists, labor spokesmen, senators, prime ministers, development specialists, religious leaders and scholars--including even a distinguished economist. The argument of the book is based squarely, and with attribution, on the financial techniques developed by Louis Kelso. The potential for effectiveness of the techniques is not in doubt, therefore, and the potential social, political and economic benefits are readily conceivable. Their application to public policy should be a subject for widespread debate in scholarly and popular press.

7. Details and explanation of the financial technique

Operational details have been explained very adequately in many places, by Kelso himself, other of his allies including Ashford, and in Gates' recent book. The technique is based on the counterintuitive but amply demonstrated principle that in a world of banking and finance, major investments can be undertaken even if there is no accumulated pool of savings to borrow from. Even though students in economics are all taken through a demonstration that banks can create money out of nothing but a fantasy of profits to come, the principle is not second nature to us either, unless specialized in a field that is closely linked to money and finance.[11] The idea is becoming more commonplace, however, as word circulates (with indignation) that banks are no longer required to maintain reserves with central banks (for Canada, replaced by capital ratios monitored by BIS). Widespread ignorance of the principle has made it easier for those intent on becoming and remaining wealthy to restrict its application to themselves. Kelso's big contribution was to show how it can be applied democratically. We can imagine that many of his peers would have resented this as a betrayal of trade secrets, but that is not an issue that would agitate economists.

It is worth noting that in order to accept the financial techniques as legitimate--as opposed to legerdemain, we resorted to finding a bridge from ideas that were already familiar to us. That is, we looked for an explanation in the literature of economics--and found it. Economists are inclined to think in terms of Robinson Crusoe and the allocation of real resources: it consequently takes a modest effort to grasp the concept that investment can precede saving unless one has paid special attention to finance.[12] This encourages us to suspect that our failure to get the picture more quickly from either Kelso's or Ashford's exposition may have something to do with presentation. And by that we mean the conceptual structure in which it is embedded. There are some indications that Kelso would prefer that we come to understand the power of his prescription through his own concept of the economy rather than through standard economics. If true, this could be a source of bewilderment or of aggravation to economists, helping to explain their disinterest. Allowance must nevertheless be made for the possibility that Keiso's concept does subsume the standard explanation. Given the potential for beneficial application of his ownership techniques, relevant specialist communities have an implicit duty to resolve this issue.

8. Evaluation in terms of political economy is favorable

We list only a few points which imply that broader application of the Kelso financial techniques and the integration of its consequences into political economy is both desirable and timely:

All of these positive implications of democratized capital ownership exist on grounds that are explainable and justifiable in terms of pre-existing economic thought. Kelso envisaged a better political and economic system. His proposed changes to the structure of laws and institutions would improve the welfare of "mankind in the ordinary business of life; ... that part of individual and social action which is most closely associated with the attainment and with the use of the material requisites of well-being." These famous lines which open Marshall's Principles definitely situate Kelso's contribution within a context which calls for an economic evaluation.

When the prescription is subjected to review from the economic perspective, very little that is objectionable turns up. Consider that:

The arguments that seem most likely to be thrown up against the policy prescription are not really economic in nature. The ones we have heard:

This is a political argument, and many will espouse democratic capitalism for precisely this reason. Purely economic arguments against it are hard to imagine.

We can think of one consequence that some people will find a bit melancholy: It would force people even further into abstraction to take care of their personal affairs. Most people might prefer to simply go to work on a straightforward job and take home a paycheck. Under universal capitalism, everyone must return to "husbandry"--this time over a portfolio of paper assets. This is an inevitable consequence of the trajectory of technological "progress" over recent centuries, however, and economists are not perceived as opponents of progress. (Some of the most cogent critics of technology viewed as progress have nevertheless been economists, notably E.J. Mishan.)

To consolidate briefly, therefore, the financial technique is accepted as a given by economists. It is a contribution from outside the domain of expertise for most of them, although they do find its efficacy to be embraced by a rationale which they understand and accept. Furthermore, the policy prescription is not offensive to the general purpose of economic reasoning, and is in fact likely to receive a favorable evaluation from most individual economists. Why then, is Kelso acknowledged to have had generally prickly encounters with economists, and why have they not taken him seriously enough to deliver a measured refutation if they disagree?[14]

9. The ownership issue

The most important response to this question from economists is that their discipline doesn't really address ownership issues directly. Noneconomists typically find this odd, on their assumption that economics is the "science of wealth." Its truthfulness is underscored, nevertheless, by the fact that although systems of national accounting pay careful attention to income, employment and productive capacity, there is no mandated gathering of individual data on wealth and no national statistics describing its magnitude and distribution. This is recognized as a detect and disadvantage by analysts of social security systems, but one that we must work around, nonetheless. Kelso was obviously one of those who found it odd that economists ignore the property factor when they are gauging the nature and causes of wealth and well-being. It seems that his answer to this question is quite different from the way most economists see it, and in that difference we begin to understand the sense of bewilderment that an economist feels on encountering binary economics:

To further refine our hypothesis, therefore: What if Kelso presumed that economists' neglect of the ownership factor was due to a defect in their concept of what an economy is and of how to evaluate it whereas the real reason has more to do with the political context in which economists work and a preoccupation with methodological effectiveness? Not every economist finds the exclusion of ownership issues to be desirable, but all will recognize its role as a kind of taboo in the evolution of their methods. (There are also practical or technical problems, stemming from the difference between economics and political economy, and these bear on the concept of "an economy".) To put the distinction we are suggesting in stark terms for purposes of exploration and possible refutation we could not improve on the following statement by George Soros:

    There is a prevailing belief that economic affairs are
    subject to irresistible natural laws comparable to the laws
    of physics. This belief is false.... [A]ll theories about
    economic, political, and financial arrangements are
    qualitatively different from the laws of natural
    science.[15]

We explain economists' lack of attention to ownership as political and methodological, therefore, but interpret Kelso and Ashford as taking the view that there is a foundational inadequacy in the concept of the phenomenon (the economy) that is to be analyzed and evaluated. Ashford makes it clear that the claim to novelty (the new paradigm) does include an altered theoretical structure for economics, one that supersedes the old ones and contains the seed of a much better political economy. Along with this there is a suggestion that this new economy will be a better one than we can get by simply applying the democratizing financial technique and thinking about it in terms of conventional economic rationale. That is, if we understood better the true nature of capital in the economy and applied the "binary ownership principle" we would unlock the door to a world of abundance and leisure that has heretofore been inconceivable. In other words, our engineering is weak because our physics is faulty.

In setting up this distinction we are much more confident of the case we can make for the economists' perspective than the one we are attributing to Kelsonians, for the obvious reason of our formation in economics. It is the best explanation we can devise, however, from the evidence at hand as we prepared the paper. We have a growing sense that the situation is best communicated metaphorically: Think of a ball game in Yankee Stadium where the starting line-up for the home team has just been introduced. Then, to a fanfare of trumpets, the Green Bay Packers charge out of the opposing dugout in full armor. To paraphrase Casey Stengel, "Does anybody here know what game we're playing!" Ashford seems to be saying "My game is economics, and if you don't like your runners being tackled when rounding second base, quit swinging bats in the face of my pass receivers!"

We may be setting up a straw man in our interpretation of other peoples' minds. If it is taken apart in rebuttal, we will at least have taken some steps toward clarity in a subject we believe to be sufficiently important to warrant the collective mental effort.

10. The Kelsonian concept of grand design

To continue, then, with some indications that the Kelsonian concept of the economy is on a parallel to the natural sciences: We are encouraged to think about the policy prescription in terms of "binary economics" rather than conventional economics. We are not offered a bridge to get from familiar economics discourse to the new vision. Instead, we are invited to start over with a new mental model. In place of Robinson Crusoe and Friday, we are offered a man and his donkey. A logical edifice is erected from this foundation, and once it is in place we are expected to evaluate the policy innovation from that perspective. At the outset, Kelso's implicit stance was "the policy prescription will work because my analysis says so." Retrospectively, his position (via Ashford) could be characterized as "my policy prescription obviously does work; ergo, my analytic approach must be superior to those of the economics profession, because they did not come up with the solution." We have seen and heard hints among the converted that Kelso's techniques and political economic design cannot be adequately understood and appreciated by approaching it through other avenues of economic reasoning, that it requires schooling in the fundamental principles of binary economics. Even if no more substantial than rumor, this notion would explain the disinclination of many economists to take a serious look.

Setting up a new and better theory entails a demonstration of contrasts to the old one, in content as well as in performance. This carries with it some risk of characterizing the old one inaccurately. We are wary of a straw man when we hear talk of "paradigm shift" in the same breath as "neoclassical economics." It brings up an image of Thomas Kuhn explaining revolutionary developments in the natural sciences, and suggests an aspiration for a theory of the economy on a parallel with Newtonian celestial mechanics. And it is consistent with the notion that economic theory must be reconstructed from a different founding concept--the man and his donkey.

The aspiration for a new theoretical structure among proponents of Kelso's ideas is manifested in a review of The Ownership Solution published in the Economic Justice Monitor.[ 16] Although she approved his exposition of the financial technique and his arguments for application of the policy prescription, the author regretted Gates' failure to develop a unified theory incorporating the Kelsonian design principles of ( 1) the rights of private property, ( 2) the free market as the most democratic means for determining economic value, ( 3) the limited economic role of the state, and ( 4) expanded capital ownership as a fundamental human right. If this lament can be attributed even in part to the influence of Kelso himself, it amplifies the scope and import of our hypothesis. In point form:

Note that we are not attributing this argument to Ashford. Unpublished writings and oral communications, however, suggest that the Kelsonian legacy may be permissive of this general concept of economy. And if that oral tradition permits even a hint that Kelsonians fail to understand the difference between normative and positive statements, it is sufficient to explain the silent treatment of binary economics in social science discourse.

What Ashford does say[17] is that

    The three key paradigm-altering concepts of binary economics
    are: "productiveness," which is conceptually distinct from
    productivity; the binary private property right; and the
    concept of binary growth. Taken together, I believe these
    concepts establish the binary approach as a paradigm
    distinct from all other economic approaches and, more
    broadly, as a genuinely new idea in the history of human
    thought.

In reacting to this statement the first thing an economist has to cope with is the concept of paradigm. And the first thing that comes to mind is Soros' rejection of the physics analogy. Ashford's statement does not necessarily implicate that concept, however. It does attribute (by implication) paradigm status to standard economics, which seems unexceptionable on our understanding of paradigm. To call binary economics a paradigm, however, is to beg the question. That Ashford proposes to alter the paradigm of economics is clear enough, but what he offers is conjecture, theory, an alternative conceptual model which he would like to see become the paradigm.

This imprecise usage of paradigm raises a warning sign in the minds of economists, most of whom have spent at least part of their education or careers wrestling over the nature, legitimacy and effectiveness of their conceptual apparatus and derivative hypotheses. And it raises a question about paradigm shift as process. Strictly speaking, it is a social phenomenon, a change in intellectual fashion. There are hints in Ashford's informal writings[18] that he conceives of paradigm shift in terms of a moment of illumination in which one suddenly perceives familiar details in a new pattern--after the fashion of illustrations in gestalt psychology. A paradigm is a social standard, however, not an individual experience. Conversion experiences may contribute to the alteration of such standards, but they are incidental to what happens in a change of paradigm, strictly defined. For even as used by Thomas Kuhn in the work which seems to have unleashed a regrettable loosening of the concept, paradigm implies the exemplar of a carefully defined and widely accepted concept. It is the model that is supposed to come to mind when the concept is brought up in discourse.

How then, might Kelso's kind of analysis become the paradigm for economists? The possibilities can be divided into two classes: from outside the community of existing economists or through them. A possibility of the external variety is that Kelsoism becomes the ideology of a political party which rises to dominance and thenceforth cuts off funding and comfort to teachers and practitioners of conventional economics. That might happen if a lot of people become "binary economists" without ever learning to play "baseball." It is even conceivable that some "Pharisees" might become "Disciples of Christ" via conversion experience on a trip to Damascus. It seems unlikely that this scenario could evolve without attracting the notice of "worldly philosophers" and their politically potent paymasters, however. The rising ideology is therefore virtually certain to confront arguments from conventional economics. A more likely prospect for paradigm change is therefore to attract practicing economists who look upon the policy prescription with favor and are consequently willing to give careful consideration to its analytic foundations. Under that scenario there is at least the possibility of establishing a community of sympathetic economists within the larger bounds of social science. Since that is the route obviously chosen by Ashford, we will evaluate key elements in binary economics in the best way we know how. A useful place to begin seems to be an expansion of our view on why ownership has not had a central place in economic theory and analysis.

11. How is it that ownership is not a focus of attention in conventional economics?

Property issues do arise in political economy, and they were an important feature in that literature well into the early decades of this century. The inequities addressed by Marx and Henry George lived on in the analyses of Veblen, for example, and the tradition was carded on in the Wisconsin-centered land and institutional economics by such as Commons and Ely. The institutionalist tradition died with its major practitioners, however, seemingly a victim of the Bolshevik and Keynesian revolutions. It is widely understood that explicit public discussion of ownership issues by intellectuals in America after the 1920s evoked a lively sense of danger among the propertied class. It is hardly surprising that they supported instead the Keynesian focus on growth in the abstract, to assure everyone an adequate income through employment. We can imagine the shift in hiring criteria for economists and the consequent change in the training of new ones. Starting (we're guessing) in the 1930s, economists who interested themselves in capital accumulation and property ownership tended to find that they were identified (not unjustly), as Marxian in orientation.

During that period, however, the "marginalist revolution" was establishing itself as the standard. Political economy faded from favor and economics became the norm. The emphasis in this neo-classical approach was measurement, especially the calculation of optimal results from given conditions. The distribution of property is normally one of those conditions. It is legal and political in nature, rather than quantitative, and is difficult to represent in economic calculus other than as a flow of revenues. The object in economics work is to get more from less. This focus on efficiency makes it more akin to engineering than to science. The policy orientation to economics work is the general welfare, which is taken to mean an increase in the total output or enjoyment (presumably two sides of the same coin) of desirable goods and services. The distribution of collective well-being is a moral and political issue, and economists are frequently prevented by the conditions of their working environment from making policy recommendations of that kind. They may be engaged from time to time in empirical investigation of distribution, but they have no authority as scientists, moral arbiters or political decision-makers to issue any definitive statements on what it ought to be. The right to do so simply is not part of their function in the classical concept of a liberal democratic society. (And it is not very sate in any society.) There is no major doctrinal statement that we are aware of to disavow ownership as a topic in economics. As mainstream economists have concentrated on developing techniques to identify efficiency in resource allocation and to thereby promote high-valued growth in the abstract, they have progressively neglected property as an ideological subject in the domain of political and legal philosophers.

This is not to say that economists should ignore ownership, or that property distribution could not be evaluated as an issue of efficiency in promoting the general welfare. We believe it can be shown that the work of economists has often suffered, even systematically, for not paying closer attention to property distribution.[19] Indeed, a major attraction of the Kelso policy prescription to economists is that it promises an increase in general welfare as a consequence of more equitable distribution, but with a hint that legitimate political objections are likely to be minor. The political reality is that economists are not often asked how to efficiently achieve equality in wealth distribution! The context of our work is always to try getting something for nothing--that is, to improve things generally without upsetting anyone individually. The question for binary economics, therefore, does it deliver on this basis?

12. The binary critique has a vanishing target

Fashions notwithstanding, there are always some economists who are interested in the distribution of ownership rights. Kelso was not alone among them in recognizing concentration of wealth as a causal and aggravating factor in the Great Depression. Many of them also shared his desire to avoid the Marxist solution--and therefore the Marxian analysis. But when Kelso called for a capitalist revolution in the late fifties economists appear to have paid little attention. Instead of recognizing that economists are looking for efficiency within the confines of an existing political and legal framework, Kelso appears to have wanted them to debate the merits of an alternative system. When they were unprepared for this, Kelso seems to have inferred that they were avoiding ownership because of a detect in their theory of the economy, which he may have conceived along the lines of what Soros calls a false belief. Instead of promoting and defending his prescription for political economy, therefore, Kelso appears to have concentrated on what he conceived to be a detect in the way economists pursue efficiency analysis within the existing legal and political structure. This is the difference of perception and intent we suggest as a sufficient key to understanding the lack of interaction between Kelsonians and standard economists. It suggests an outright disagreement over the nature and conduct of economic analysis which appears never to have been clarified, let alone debated.

As pointed out in introductory paragraphs, Ashford does not distinguish clearly between economics and political economy, but the distinction is central to our evaluation. We define political economy as the disciplined approach to a normative aspiration for life, liberty and the pursuit of happiness through good government.[20] Economics, on the other hand, is a tool box of concepts, techniques, devices and sometimes peculiar notions which are used in the hands of more or less skilled practitioners to answer factual questions and test hypotheses which bear on elements of the normative aspiration.[21]

Political economy is not science, and just because economists try to be scientific in the conduct of their research does not mean that they expect to "discover" a system that is going to manifest the timeless (eternal) regularities of Newtonian celestial mechanics.[22] Many may experience the "aha" sensation when realization dawns that modem finance enables investment to precede saving, but few economists among this number will find that it gives them reason to put down their tools. They will have a new concept of what is possible and desirable, leading to different policy prescriptions, and they will have new questions to research in support of these new policy options, but their assumptions of human behavior, optimization rationale, instruments of empirical research, statistical inference and mathematical model construction are not likely to be altered significantly as a consequence. Many may be relieved to know that capital ownership can be universalized much more conveniently than they ever expected, but this doesn't mean that the realms of society, politics, technology, and money-mediated exchange are suddenly going to look totally different to them. They may become promoters of the Kelso public policy prescriptions and participate in his vision of what it could do to improve the world, all without finding that it makes much difference to the tools of their trade. It does not seem that paradigm shift as used by Thomas Kuhn to describe the process of revolutions in science applies cleanly to either economics or political economy as we define and describe them. If we are reasonably normal economists, then, the language of shifting paradigms is likely to be one source of mis-communication.

We have not experienced economics as a comprehensive, internally consistent concept of the whole. Indeed, what whole? Rather, there are theories that attempt an explanation of some phenomena that are widely accepted as "economic" in nature, or as bearing on issues of political economy. There is no grand, overarching, precisely-bounded concept of "the economy" comparable to celestial mechanics, for the features of an economy do not stay put for long enough. Economic engineering has to be done on the basis of modest theories which incorporate recognized regularities in human behavior and motivation--usually as reflected through the intermediation of money. Economics work is mostly empiricism, guided by these modest theories. The popular notion that there is "an economy" which is subject to precise regulation by intelligent and well-motivated managers (if ever there were) is a fairly recent phenomenon, and is synonymous or simultaneous with government commitment to address income distribution as an unemployment problem. Governments and politicians encourage such thinking as they try to placate voters who are dissatisfied with their share of the collective output. It is this policy and this popular conception of "the economy" which are appropriate targets for Kelso's critique.

What is popularly conceived as "the economy" is the result of human motivations and powers acting against barriers put in place by political means and held in place by regulators, police and courts. It is constantly being destabilized by the shifting ability of persons and groups to gain advantage either by fair means or foul. We can't study it on the assumption that its rules will mostly remain the same. Applied economics is primarily a matter of guessing "what would happen if" certain policy instruments were applied, given a very basic concept of motivation. These activities really don't require a cosmic theory of what "the economy" is in the abstract sense. We accept that there are fashions in economic thinking, and there may be an occasional "Aha" experience, but unifying theories do not seem to supersede each other in the way they do in the natural sciences.

It is true that some twentieth century economists aspired to have an economic science comparable to physics, and at the height of enthusiasm for Keynesian management of inflation and unemployment there was a tendency to crow that the business cycle had been defeated. That period of confidence was short-lived, however, and we are not inclined to see much resemblance of economics to classical mechanics. Mathematicians are still interested in the idea of mapping socio-economic behavior and reducing it to a calculus. That is a highly arcane and specialized discourse, but if a physics-like economics is what expositors like Ashford have in mind, a better-prepared audience is likely to be found among mathematicians who take economics as their substrate.

Instead of grand theories, economists mostly make modest working hypotheses and then try to check them out by constructing models through which they can be tested, or at least applied. Most models built by economists do not meet the same kind of standard of regularity as is expected of theories in natural science. We infer, however, that Kelso and Ashford believe that such a theory can be constructed, and turn next to examine its key components.

13. The economic rationale of Kelso's affluent and democratic economy

As already noted, Ashford identifies three key elements of binary economics: productiveness, binary growth, and the binary property right. We treat them here in that order.

13.1. "Productiveness"

In establishing the distinctiveness of "productiveness" from productivity, the argument is made that productivity, as conceived by conventional economics, relates usually to labor productivity. From this, the argument is made that all income cannot be ascribed to labor and that the "productiveness" of capital has been overlooked. An example is given of the person digging holes in the earth, with each hole in a pretool age requiring 4 hr of labor, but only one hour after the invention of the shovel. The worker now produces only one fourth as much productive input per hole while the shovel (the capital) produces three quarters of the productive input. In a private property market system, it is argued, the extra income produced by the shovel belongs to the owner. Thus, as capital production replaces and vastly supplements labor productiveness, its claim (i.e., the claim of its owners) on aggregate output increases. This analysis is presented as evidence that Adam Smith and his followers in the economics world completely overlooked the role of capital in establishing the labor theory of value. Further examples are provided of the steam shovel vastly increasing its claim on the productiveness of hole digging, the donkey, and eventually the truck, hauling much more than a person and, finally, the automated elevator completely eradicating the need for any elevator attendants at all. "Indeed, the wonderful thing about private property in capital is that it enables people to earn without personally laboring. The shame about our present private property, in binary terms, is that this wonderful property is needlessly restricted to a few."

While it is true that this element of "binary analysis" does not appear in the literature of standard economics, that fact alone is not sufficient evidence that the notion has been overlooked by economists. Its absence from the literature is also consistent with the proposition that reasoning of the "productiveness" variety has been contemplated but then rejected due to its inconsistency with some awkward observations that follow from efforts to analyze the behavior of actors in a market system. Taking explicit account of this behavior in the well developed branch of economics called the theory of the firm, economists encounter constraints to the potential for material abundance and comfortable leisure. The theory embraces information, production functions and competition within a market environment of many buyers and sellers. When holes are dug with bare hands, the production function is defined by the input of a two-handed laborer. With the invention of the shovel, the production function changes. It now involves one quarter as many units of labor per hole and the intermediate input of new technology in the form of a shovel used by that labor. The shovel, which results in a quadrupling of the number of holes dug with a unit of labor, is the capital of the new production function. It was purchased from the merchant who assembled the shovel from a blade forged by the blacksmith and a handle from a turner who, in turn, purchased the steel from a smelter involving miners, charcoal makers and a man and his donkey to transport it along with the lumber from the sawyer and the woodsman. The cost of the new capital in the form of the shovel includes the labor of all those people involved. In a competitive market the cost of the shovel would include only the labor costs of those involved.[23] The capital cost of the shovel to the hole digger and to all other hole diggers would therefore be limited to the labor costs of those involved in its production. Thus the labor theory of value. Unfortunately in this environment of competitive markets, the hole digger can extract little more than his labor value plus the amortized value of the labor cost of the shovel over the course of its useful life. Likewise for the steam shovel, the donkey and the elevator. Each can only be sold for the value of its labor inputs and each will only return its amortized labor value over the course of its useful life in a competitive market environment of many buyers and sellers and perfect information. Poof. The magic of capital is gone.

But it's only gone in the competitive environment. And here is where the Kelso financial proposal for broadening the capital ownership base of the economy becomes appealing and applicable--but without the unnecessary trappings of a paradigm shift to the new binary theory. The Kelso proposal to allow a broadening of the capital ownership base is relevant because there are economic rents to be captured, largely because there is not perfect competition but rather a concerted effort by owners of capital to limit competition.[24] This is accomplished through legal means such as the adoption of new technology ahead of competitors. An example is the use by Wal-Mart of computers to install just-in-time inventory control, direct purchases from manufacturers, and the use of semitrailer trucks to eliminate wholesalers and their warehouses from the supply chain. It is also accomplished through allegedly illegal restrictive trade practices involving the "bundling" of products with another product which enjoys a near monopoly position in the market, thereby restricting the availability of competitive products. Here, of course, we're thinking about the Federal case against Microsoft. There are presumably a range of competitive advantages between these two, many accomplished through the leveraged buy-out of competitors, or purchase and acquisition activity as it's known on Wall Street. On the labor side there are, of course, labor unions which restrict competition in the labor market, and in many intermediate markets from agricultural products to medical services there are practices which restrict competition, some implemented by government. The point is that it is a lack of competition which allows owners of capital to extract economic rents in addition to the labor value of the product they are selling. The reality of imperfect knowledge, restricted competition and the existence of economic rents are explicitly recognized in conventional economic theory as elements of real world behavior.

A further relevant point involves the interpretation of productivity as distinct from "productiveness." The popular press and political spokespersons do generally mean output per employed person when referring to labor productivity in public discussion. And medical commentators generally do mean cardiac arrest when referring to heart disease. But, in reality, practitioners are more specific with terminology among colleagues. Thus when economists talk about labor productivity they mean that contribution to output made by labor in the production function. When estimating productivity they deal with total factor productivity, that is, the contribution from each factor of production in the production function. There are difficulties in making these estimates. Technologies change, labor input is variable as to skill level and conversions have to be made from physical inputs to the dollar value of those inputs (since a production function is a recipe of physical inputs per unit of output) often within the context of changing prices and differing scales of production. The theory is there and the empirical estimates are attempted in a complex world. The point is that the use of the term "productiveness" when referring to the contribution of capital is not only superfluous on the grounds that the contribution is already accounted for in conventional practice but that the contribution seems vastly overestimated in value terms in the "binary theory" as result of completely overlooking the role of competition in a market economy.

13.2. Binary growth

In discussing binary growth the author assumes a situation where capital is already broadly distributed and is yielding income. "By reason of their higher marginal spending rate, more of the additional income earned by the new capitalists (who have many unsatisfied consumer needs and wants) will be spent on consumption than if the income had been earned by existing capitalists (who have few, if any, such needs and wants). This broad-based incremental consumption will fuel a demand for greater investment, and therefore a larger economy, than would be financially feasible if capital had been traditionally financed."

There is no argument with this logic. Indeed it is a classic statement of the accelerator principle of textbook macroeconomics for the last forty years. A higher marginal propensity to consume and a higher velocity of circulation of the money supply will result in faster growth. This is consistent with our description of economic analysis as the pursuit of enhanced welfare via growth and efficiency, rather than by direct redistribution. It is therefore quite acceptable within economic orthodoxy, and it is not a theoretical novelty. The policy proposal of broadening capital ownership is sufficiently appealing on grounds of standard analysis that no resort to altered concepts of production is needed to give it moral and political justification.

13.3. The binary private property right

    It is not possible to understand the full significance of
    the binary property right until the entire binary approach
    and its critique of conventional market economics has been
    set forth ... The binary property right is essentially the
    right to acquire capital on market principles, to pay for
    that capital out of pretax income, and then to receive the
    full net income earned by that capital so long as it remains
    productive. This is one important property right presently
    used by rich people to get richer, and it is a right that is
    equally essential to the rest of the people.

This is where economists will draw a line in agreeing with Ashford (and presumably with Kelso). This statement is political advocacy with the strong hint of a propaganda campaign to follow. An individual economist may wish to join the advocacy, but will be hesitant to assert qua economist that his personal preference is either an irrefutable consequence of analysis or an absolute social norm. Property rights are not part of economics. The binary property right is a policy prescription. We embrace it as an important principle for political economy, but prescription is not part of analysis. By this statement, therefore Ashford does participate to a degree in the conceptual confusion identified above with the CESJ (page 8, note 16). We have endeavored, in disagreement, to be precise on the distinction we make between economics and political economy, and on why ownership is not a primary consideration in conventional economic analysis.

The property right prescription calls for legislative and regulatory changes. This is an activity that sets boundaries on exchange behavior. It defines and helps to create markets. To say that the new property right is acquired "on market principles" is therefore politically loaded language. It is subterfuge. Although not an outright lie, it is the language of propaganda, not of analysis.

The odor of propaganda is intensified by the claim that the full potential of the binary property right cannot be appreciated without a comprehensive understanding of the binary analysis. It suggests the only slightly subliminal message that "you will not be an effective propagator of the faith unless you deeply believe in the magic." This puts an unfortunately heavy burden on the magic of productiveness--which it is unlikely to sustain. But even if the growth potential is not as great as Ashford conceives it, the case for a "binary property right" is still strong, and most economists would have no conceptual objection to the provision of a legislative framework for the broadening of capital ownership.

14. Consolidating again

Our search for an explanation of missed communication between Kelso and economists has touched half a dozen possibilities.

  1. Failure to distinguish among economy (economic system), political economy, economics.
  2. Hence, failure to distinguish between analytics and political or moral values.
  3. A straw-man version of neo-classical economics.
  4. A celestial mechanics concept of "the economy".
  5. An esoteric understanding of growth power inconceivable in standard economic terms.
  6. Hence, a desire to be evaluated only by believers, in terms of the new standard.
  7. A hint that understanding requires a "road to Damascus" experience.

In combination, these elements emit an unmistakable odor of perpetual motion machine. Even if none of them is true, the fear of being tainted by the smell is sufficient to keep young economists on the make away from any connection with binary economics. And in fairness to this fastidious attitude, suppose that each of these potential black marks were rigorously expunged: what would then be left of binary economics as a distinct paradigm? The critical or irreducible element is the notion of productiveness in opposition to neoclassical productivity measurement. Close examination finds that they are conceptually difficult to set in opposition. The one is a technique for measuring. But how do you measure productiveness? With economics you can do something. But what can you do with productiveness? It seems that the doing element in binary economics is restricted to making a political argument. Standard economics is a technique and an activity of analysis, therefore, whereas binary economics is the flavor of a political campaign. That can explain why persons schooled in one or other of the two sides tend to talk past each other.

We note one further source of potential distaste for binary economics. It is especially notable in the writings of liberal political economists of the kind for which Kelso seems otherwise to have had an affinity. That is the hint of an aspiration to found a science of binary economics: In his deep exploration for the source of the totalitarian element which can surface in social thinking, Hayek[25] linked it persuasively to belief that social science can be like physics. A hundred years ago, James Bonar fingered this attitude in the precursors of Marxism:

    Political Economy ... finds out laws for a mass of
    contingencies.... [T]he particular spheres form themselves
    into groups, and have influence on other spheres.... This
    interconnection reminds ... us of the Planetary System,
    which shows to the eye only irregular movements but has its
    discoverable laws notwithstanding. (Hegel)

    [Hegel has taught us that] there is a political economy
    which possesses "absolute certainty as well as
    progressiveness".... But the old political economy of Adam
    Smith and J.B. Say is a collection of mere observations....
    (Proudhon)[26]

Frank Knight summarized the position this way:

    The idea of a natural or positive science of human conduct
    is an absurdity.... In the naive form in which scientism and
    moralism are usually preached, both are antithetical to the
    principle or ideal of freedom; they imply, and if taken
    seriously would lead to, absolute authoritarianism. (p
    260-61)

This element could conceivably have some connection to the anecdote that Milton Friedman dismissed Kelso's political economy as "Marxism stood on its head".

15. Conclusion

These awkward features aside, we believe that the emphasis on property is much needed in political economic discourse and that failure to pay attention to it has been responsible for much social mischief. An illustration of the potential improvement to economic analysis which is implied by acting on the Kelso/Ashford policy prescription (in contrast to following their economics) will be left to a subsequent paper.

As to the issue implied by our title, we are comfortable with democratic capitalism as a generic concept which carries meaning for most people. Binary economics, on the other hand, seems needlessly esoteric. We spent our youth, respectively, in Alberta and British Columbia, the only two jurisdictions in North America we are aware of to have been governed by parties identified by the equally esoteric label of Social Credit.

Although we have interviewed prominent standard bearers of the party, none of them was ever able to give a very clear explanation of what it meant as a theory of political economy--which it very definitely is.[ 27] A danger in promoting an idea like this without first having satisfactory explanations in terms of concepts already familiar is that it will suffer a similar fate to Social Credit, winning an instant reputation among business and political-economic journalists as "the new funny money party." That would be doubly unfortunate, by making the concept too easy to dismiss as discredited before it is even investigated, and as justifying its exclusion from academic conferences on the ground that it is a political rather than a scientific or professional activity.

Notes

1. The Crisis of Global Capitalism, New York: Public Affairs, 1998 (encountered since the first version of this paper was presented).

2. The Capitalist Manifesto (1958).

3. The reaction from economists and other public policy specialists has been mainly silence; Kelso's ideas have been debated hardly at all in scholarly literature.

4. Robert Ashford, "Louis Kelso's Binary Economy", The Journal of Socio-Economics, Vol. 25, No. 1, 1996, pp. 1-53.

5. The central theme in Adler's Great Books of the Western World program.

6. by Jeff Gates, as noted, also Ravi Batra, Surviving the Great Depression of 1990, Simon and Schuster, New York, 1988; J.K. Galbraith, The Great Crash, Houghton, 1954].

7. The robustness of the economic boom for the average American may be significantly overstated in terms of the effort required to make ends meet. See "The Hidden Side of the Clinton Economy," John E. Schwarz, Atlantic Monthly, October 1998.

8. "A Critique of Privatization," from On the Political Economy of Social Democracy: Selected Papers of J.C. Weldon, ed. by Allen Fenichel and Sidney H. Ingerman, McGill- Queen's University Press Montreal, 1991.

9. Random House, New York, 1958.

10. Published in 1998 by Addison-Wesley of Reading, Massachusetts, and by Penguin.

11. Joan Robinson, Economic Heresies. Basic Books, Inc., New York, 1973, provides a brief history of the origins and maturation of this idea, which was not applied by monetary and fiscal authorities in advance of the Great Depression, even if some of them understood it.

12. Affirmed by an historian of economic thought. Charles Whalen, pers. com.

13. George Soros chooses this as more accurate than laissez faire--and we like it as a stand-in for what we perceive as abuses of neoclassical economics that are properly criticized from a socio-economic or political economy perspective.

14. Since taking this oral affirmation on faith, we have encountered "ESOP Analysis and Evaluation" by David Ellerman in Chapter 6 of The Democratic Worker-Owned Firm. London: Unwin Hyman Limited (Harper Collins Academic), 1990.

15. Soros, op.cit. Gunnar Myrdal, The Political Element in the Development of Economic Theory, is a useful course correction for any who think economics is like physics.

16. Issued by the Center for Economic and Social Justice, Alexandria, Va., an organization devoted to solving social problems by application of Kelso's principles.

17. "Louis Kelso's Binary Economy," by Robert Ashford. The Journal of Socio- Economics, Volume 25, Number 1, 1996.

18. The prepublication draft of Binary Economics: The New Paradigm, by Ashford and Rodney Shakespeare was the basis for this comment. The book has subsequently been published by University Press of America, 1999 (ISBN: 0761813209).

19. A proposal for illustrating this has been accepted for the 11th annual SASE conference.

20. A favorite exposition is the presidential address of Frank H. Knight to the American Economics Association in 1950.

21. It provides the tools for the management of both production and distribution in society. Unfortunately the distributional aspects of economic activity seem to have been banished by appeal to the merits of "the free market system"--that is, market fundamentalism.

22. There have been noteworthy efforts to describe a general equilibrium model of the economy, but these have not won universal assent as the "Newtonian physics of social science".

23. Natural resources are free, even the wild antecedents of the donkey. It took generations of the patient equivalent of labor to produce the domestic beast of burden. Once completed, the genetic technology of donkey was a bequest to later generations of humans. In the hunter-gatherer economy of Eden, everything was free, and sharing would not be conflicted by a great deal of envy or greed. Like the Israelite's manna in the wilderness, it would spoil if kept anyway. Giving in to the temptation of knowledge brought property and conflict into the picture. According to Genesis, the first smart-ass to descend from Eve's curiosity was Cain, who domesticated useful food plants. Anthropologists and archaeologists appear to agree that animals came second, and sheep and cattlemen have traditionally had a hard time protecting their claim to "eminent domain" against farmers and their fences. Thus, although "the farmer and the cowman should be friends" the farmer had numbers and politics on his side, and in the language of myth, "Cain slew his brother Abel"--and fenced his sheep-loving tribesmen out of Oklahoma. It is only with the institution of property that natural resources come to have value (and as Locke observed, it is hard to justify this on ethical grounds without there being some labor involved). Property rights require power to enforce them, and the successful owner can extract rents for what would otherwise be tree. The exchange of rights to property is a tricky business, and doesn't get built into the equivalent of a "free" market without political action, law, police and justice. Otherwise, "property is theft".

24. This is why Say's Law doesn't work. If it did, all values would be an exchange of labor equivalents.

25. The Counter-Revolution of Science: Studies on the Abuse of Reason.

26. Philosophy and Political Economy (Pp. 309-10) (pp. 330-31).

27. This is not to say that no one understood it. In his Social Credit Handbook (McClelland and Stewart Limited, 1968) William Rose summarized the concepts of C.H. Douglas and assembled the statements from past and current political economists (well-known in the standard literature) which demonstrate that Douglas was not writing in a vacuum or claiming that his idea was completely new. Rose's Introduction is interesting in connection with our point above about the issue of authoritarianism. He says of Douglas that "human freedom, not monetary reform, was his fundamental concern and it has been brushed off rather impatiently by both his friends and his foes." Note the parallel to Knight, in the speech already cited: "Economic principles are simply the more general implications of the single principle of freedom, individual and social, ... in a certain sphere of activity." Rose says of Douglas that he preached as an ideal "the individual's right to select and control his own environment, and the right of a society to reach its own ends, without defining those ends. His aim, and the final aim of his monetary proposals, was to provide the individual ... with the means of achieving these goals." Returning to Knight: "Economics deals only with the apportionment of means among the provisional ends.... The general end has no good and accepted name.... Acceptance of the principle of freedom makes it superfluous to define the end, and the less that is specified about it the better." Rose made another observation that bears on the wisdom of using binary economics as the label and describing it as a new paradigm: "One of the more rewarding aspects of this undertaking has been the discovery that every part of the Douglas analysis and proposals has been verified by many economists, and that there is no principle involved which has not previously been applied successfully or violated disastrously somewhere."

~~~~~~~~

By Keith Wilde, DYNACAN Project, 360 Laurier Avenue West, Ottawa KIA OJ9 Canada

Corresponding author. Tel.: + 1-613-990-8125; fax: + 1-613-993-2120. E-mail address: kwilde@magi.com (K. Wilde).

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