Binary economics
Binary economics, also known as two-factor economics, is a proposed economics theory by Louis O. Kelso that suggests policy makers endorse a continued use of both private property and a free market but should also seek significant reforms to the banking system as a means of producing fairer economic growth.
Kelso principally theorized with this model that widespread use of central bank-issued, interest-free loans to fund employee-owned firms could simultaneously finance economic growth and widen ownership interests in company shares. In a 1977 seminar on Policies for Capital Diffusion through Expanded Equity Ownership, Lawrence Klein concluded expansion of credit under the plan would be non-inflationary "if the funds made available flow into investments that raise national productivity." The term "binary" in his case is derived from a perceived heterodox treatment of labor and capital. Kelso claimed that with advancing technology capital becomes more important than physical labor and if income distribution is determined by market forces, owners will become richer while labor will find it more difficult to survive. He favored spreading capital ownership rather than redistributive policies.
Overview
Rodney Shakespeare argues that all individuals can be economically productive, whereas conventional economics focuses on paying jobs.According to Kelso's theory, prior financial savings are unnecessary for investment, as the existing money supply primarily consists of created credit. 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. Kelso's theory combines private property and free markets with interest-free credit to create "new capitalists" through broad capital distribution.
Shakespeare claims that bank lending always involves the creation of money as new interest-bearing debt.
Background
The theory behind Binary Economics was proposed by American lawyer Louis Kelso and philosopher Mortimer Adler in their book The [Capitalist Manifesto (Kelso and Adler book)|The Capitalist Manifesto (1958)]. The authors compared their work to The Communist Manifesto.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" shareholdings which would pay out full net earnings as dividends. 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.
Academic reception and criticism
Binary economics is foundationally distinct from mainstream economics and has been widely rejected by mainstream economists.Academic criticism
Milton Friedman dismissed The Capitalist Manifesto, stating "the book's economics was bad ... the interpretation of history, ludicrous; and the policy recommended, dangerous." He recalled a debate where the moderator Clark Kerr "lost his cool as a moderator and attacked vigorously". 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.Theoretical objections
Productivity analysis: Kelso's claim that capital contributes 90% of productive output and labor only 10% has been dismissed by economists for lacking empirical evidence. Samuelson asserted that Kelso had not used any econometric analysis to arrive at his figures, which completely contradicted economists' empirical findings on the contribution of labor. 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 labor productivity figures.Monetary theory: The proposal for large-scale interest-free lending conflicts with established monetary theory and the widely accepted time value of money principle. Mainstream economists argue interest rates are a useful indicator of risk and opportunity costs.
Academic standing
Binary economics is not taught in standard economics curricula and has not generated significant research in mainstream academic journals. The post-autistic approach to education calls for including binary economics and others outside the neo-classical macro-economic focus.Beliefs and aims
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 to promote the spread of employee-owned firms. According to Shakespeare, these loans are intended to: halve infrastructure improvement costs, reduce business startup costs, and widen ownership interests in company shares.Ashford evaluated that Kelso's paradigm is not mainstream and does not fit easily into the left–right spectrum. Kelso listed two factors of production in binary economics: labour and capital.
Robert Ashford cautions that binary financing might need to be restricted to economic basics such as food, clothing, shelter, healthcare, and energy, along with ecological restrictions.
Kelso rejects what he terms socialist solutions of expropriation or redistribution. James Albus proposes mandatory savings withholding to fight inflation.
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,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.
Early economists such as Ricardo and Smith had capital as a subset of the Labor Theory of Value as in their time most work was labor intensive, with only about 5% of the Agricultural Age economy based on capital, outside of land. Karl Marx copied the Labor Theory of Value, even though by his time, the Industrial Age had advanced to the point that a steam thresher was featured at the Paris World's Fair that could do the work of 30 to 40 laborers in the same year Marx's Das Kapital was published.
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:
Kelso criticizes Marx for not recognizing capital as a producer of wealth in the same sense as labor. Kelso's figures suggesting that value was created almost entirely by capital were dismissed by academic economists like Paul Samuelson.