A critique of binary economics written by Professor Timothy D. Terrell of the Ludwig von Mises Institute on March 18, 2016:
Binary economics is a theory of economic growth that places emphasis upon the distribution of capital, rather than the quantity of capital or the productivity of labor. Its roots are found in the late 1950s, in the work of Louis Kelso, originator of the Employee Stock Option Plan. Regarded as a paradigm shift by its proponents, binary economics maintains that capital is productive independent of the labor input, and that most economic growth occurs as a result of capital accumulation, exclusive of increases in the knowledge or skills of humans. As binary economists Robert Ashford and Rodney Shakespeare explain,
[Binary analysis] says that while humans undoubtedly make contribution to the growth, the capital assets such as machines and technological processes are making an even bigger, ever-increasing, contribution…. So, from a binary perspective, growth is primarily a function of increasing capital productiveness rather than increasing labor productivity. (“Binary Economics: The New Paradigm,” Ashford and Shakespeare 1999, p. 7)
Those who rely exclusively on their labor input as a means to earn income are therefore consigned to increasing poverty, since labor productivity is shrinking in importance relative to capital productivity.
For full article see http://mises.org/daily/2085
Response to Professor Timothy Terrell from Norm Kurland:
Dear Mr. Browne,
Thank you for your invitation to reply to Professor Timothy Terrell’s critique to binary economics that was published by Lew Rockwell’s von Mises Institute. Let this be an opening response for the benefit of all members of the von Mises Institute. We will later give a more detailed response when time permits.
I happen to share most of the values of the libertarian movement (i.e. the market system and free and open movement of wealth and people for determining just prices, just wages and just profits; limiting the economic power of the state; and preservation of private property in the means of production). So did Louis Kelso, who added the missing ingredient in libertarian philosophy and the neo-classical economics I studied at the University of Chicago — that is, equality of access to the social means (especially productive credit) for every individual to acquire and enjoy the rights, powers and responsibilities associated with private ownership of capital. What most attracted me to Kelso over 45 years ago was that he and Mortimer Adler (who renounced his socialist leanings when he discovered Kelso) in The Capitalist Manifesto (1958) added a triad of market-based principles of economic justice that was missing in von Mises writings and the neo-classical paradigm of economics in the law and economics program at the University of Chicago. Just as lifting unjust barriers to the vote was a key to full democratic participation in the political process, lifting unjust barriers to equal ownership opportunities is the key to full democratic participation in the economic process. Unfortunately, in those years I’ve concluded that most libertarians seem indifferent or blind to these barriers to ownership participation, just as those who were comfortable with the unjust system that excluded blacks and women from the political process were before “one-person, one-vote” changed the pre-existing political paradigm. Having been directly involved in the early 1960s in the movement that lifted voting barriers, I came to recognize that full ownership participation was an even more critical pillar of a free and just society than access to the political ballot. To understand the cultural significance of the Kelso paradigm, I hope all libertarians will take the time to read Kelso’s books (downloadable free at http://www.kelsoinstitute.org) and the platform of the American Revolutionary Party at http://www.americanrevolutionaryparty.us/partyplatform.htm. They offer a practical strategy for delivering economic justice that is so far missing from libertarian ideology.
Based on these preliminary comments on the Kelsonian “big picture” that is attracting increasing support around the world –what those of us in the Center for Economics call the Just Third Way — I can now respond to your request.
Unfortunately, Professor Timothy Terrell has produced an extremely unscholarly critique of Kelso’s binary theory of economics. His opening paragraph is a “cluster of errors” that colors his lengthy attack on binary economics. As I will point out in bold from his first paragraph, Professor Terrell has distorted the meaning of key words and concepts that have been carefully defined by the main proponents of binary economics. Here’s how he opens his attack:
“Binary economics is a theory of economic growth that places emphasis upon the distribution of capital, rather than the quantity of capital or the productivity of labor. Its roots are found in the late 1950s, in the work of Louis Kelso, originator of the Employee Stock Option Plan. Regarded as a paradigm shift by its proponents, binary economics maintains that capital is productive independent of the labor input, and that most economic growth occurs as a result of capital accumulation, exclusive of increases in the knowledge or skills of humans.”
To assist Professor Terrell in understanding the paradigm shift to binary economics, he and the readers of his review can find a useful definition of terms in the glossary at http://www.cesj.org/definitions/glossary.html and in our book Capital Homesteading for Every Citizen, which is downloadable free at http://www.cesj.org.
Here are the “cluster of errors” in Terrells’s first paragraph:
1. The most glaring and obvious error of Terrell to most sophisticated readers is that Kelso invented the Employee Stock Ownership Plan, not a stock option plan. (http://www.cesj.org/definitions/glossary.html#Anchor-Employee-38762). Kelso’s tool is designed and has been applied in over 10,000 U.S. companies to finance investment by employees in new or existing stock in their company on non-recourse credit repayable with future profits. Employee stock options are tools to induce speculation in outstanding securities in the Wall Street gambling casino. Terrell’s mislabeling reveals his commitment to the Wall Street paradigm of monopoly capitalism.
2. Here’s our definition of binary economics to help the reader understand how Terrell clouds the binary economic paradigm:
Binary Economics. The “post-scarcity” theory developed by lawyer-economist Louis O. Kelso in the 1950s. “Binary” means “consisting of two parts.” [Emphasis added for the benefit of Professor Terrell] Kelso divided the factors of production into two all-inclusive categories — the human (“labor”), and the non-human (“capital”). The central tenet of binary economics is that there are two components to productive output and to income: (1) that generated by human labor, and (2) that generated by capital. Classical economic theory, on the other hand, regards all output and income to be derived from labor whose productivity is enhanced by capital.
In contrast to traditional schools of economics which assume that scarcity is inevitable, binary economics views shared abundance — sustainable economic growth and the equitable distribution of future wealth and income throughout society — as achievable. Binary economics holds that broad-based affluence and economic freedom, as opposed to financial insecurity and economic dependency for the many, is made possible through the widespread ownership of constantly improved capital instruments and social institutions to produce more and more consumable goods with less and less input and resources.
Binary economists Robert Ashford and Rodney Shakespeare identify three distinguishing concepts within binary theory — binary productiveness, the binary property right, and binary growth. These components interact and reinforce one another, allowing for maximum rates of sustainable growth within a modern, globalized economy.
Binary economics recognizes a natural synergy, as opposed to an unavoidable trade-off, between economic justice and efficiency within a global free marketplace. Rejecting pure laissez-faire assumptions, binary economics holds that a truly free and just global market requires (1) effective broad-based ownership of capital, (2) the restoration of and universalized access to the full rights of private property, (3) limited economic power of the state (whose main role should be to eliminate special privileges, monopolies and other barriers to equal participation) and (4) free and open markets for determining just wages, just prices, and just profits.
The market theory of binary economics is underpinned by three interrelated principles of economic justice:
1. Participative justice, the input principle which demands as a fundamental human right, equal opportunity for every person to contribute to the production of society’s marketable wealth both as a worker and as an owner of productive assets.
2. Distributive justice, the outtake principle which holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or “just wage”) for each particular type of human contribution to the production of marketable wealth. This principle dictates that the contribution of capital should be compensated by the “just profit” generated by the project or enterprise. (Profit is determined by the market-based rental value of contributed capital assets, or by the gross revenues resulting from market-determined “just prices” less the market-based cost of the factors of production, including labor.)
3. Harmony, the feedback principle that balances and restores participation and distribution within the economic system. This principle was referred to by Louis Kelso and Mortimer Adler as the “principle of limitation” and by others as “social justice,” as it calls for the restructuring of the economic system to restore participative and distributive justice.
Binary Growth. Within binary theory, this concept holds that economies grow steadily larger as private capital acquisition is distributed more broadly among the population on market principles. This concept also focuses on the importance of unleashing the unutilized or underutilized capacity of all economic systems to produce in greater abundance.
Binary Productiveness. This concept states that while humans contribute to economic growth through all forms of labor, capital assets such as machines and technological processes are making an even bigger, ever-increasing contribution to overall output, in relation to that contributed by human labor.
Binary Property Right. This concept refers to the right of every person to acquire, on market principles, private (individual and joint) ownership of wealth-creating capital assets.
3. Binary economics is based not on the quantity of capital, as asserted by Terrell. Rather it is based on connecting people through the institution of private property to the quality or productiveness of capital assets. As technology evolves, as visionaries like Bucky Fuller in “Utopia or Oblivion” and Ray Kurzweil in “The Age of The Spiritual Machine,” civilization continues to develop “tools” that produce more and more with less and less human energy. Kelso’s binary economics offer principles and logic of a system that would connect all humans to become owners of those tools, while respecting, in fact enhancing, property rights of existing owners.
4. The term “productivity”, particularly when defined as “labor productivity,” has been used by conventional economists like Terrell as a way of attributing the “productiveness” of technological advances (i.e., productive capital assets) to the contributions of labor. The term “productivity” is used by politicians, labor unions, Keynesian economists and advocates of the wage slave status quo as justification for redistributing capital’s productive contributions to non-owning workers and other members of society who are unemployed or underemployed. Such redistribution, however, erodes a basic traditional right of private property, where an owner is entitled to the the market-based value of that which he contributes to the production of marketable goods and services (e.g. wages for his human inputs and/or profits for his capital inputs). One-factor (i.e., laboristic) assumptions justify artificially and coercively inflated wage rates, which inflate market prices. They also lead to mercantilist capitalist and protectionist labor interferences with free and open markets in labor rates, based on the counter-productive goal of “protecting jobs” at the expense of American consumers, all in the name of national “full employment” rather than two-factor “full ownership” policies. Binary economists agree with such recognized geniuses in the world of technology as Fuller and Kurzweil that the relative productiveness of labor has been diminishing in the labor-capital mix as creative individuals redesign our technologies. Economists like Terrell have based their notions of distributive justice on their outmoded one-factor paradigm by ignoring this trend that has been accelerating at an exponential rate since the industrial revolution took off about the time of the American Revolution. If America had adopted a Capital Homestead Act instead of the Employment Act of 1946, the minimum wage could have remained at 25 cents an hour but workers would have been receiving more adequate and secure incomes today from dividend checks and American industrial jobs would never have been lost under what best-selling author calls “wage arbitrage” to low-wage workers in China, India and elsewhere in the emerging global economy.
5. While binary economists maintain that capital is “independently productive” of labor, they have never suggested that capital can operate without labor or labor without capital. Rather, in binary economics these are the two sweeping categories of input factors to the process of wealth production. They are independent variables in the productive process where each labor (i.e. human) input and each capital (i.e., non-human) input to the labor-capital mix can and should be measured and evaluated through the market mechanism for the market-disciplined, independently determined values of their labor and their capital contributions to the price of whatever goods and services are sold in the market. Obviously, all factors of production are coordinated in well-managed enterprises in an interdependent manner, but each factor can be evaluated independently. Is that too complex for an economist like Terrell to understand? Binary economics is not inconsistent with the theory of prices of Nobel Prize-winner George Stigler that I studied at Chicago.
6. Terrell alleges that binary economics argues that “most economic growth occurs as a result of capital accumulation, exclusive of increases in the knowledge or skills of humans.” This is more evidence that Professor Terrell deserves a “goose egg” for his careless reading of binary writings. I cannot believe he has ever read my paper (he cites it in his bibliography) published by the Journal of Socio-Economics, entitled “A New Look at Prices and Money: The Kelsonian Model for Achieving Rapid Growth Without Inflation.” which is available at http://www.cesj.org/binaryeconomics/price-money.html. This paper reconciles binary economic theory with Say’s Law of Markets. Terrell has the gall to cite that article in his bibliography but never tries to refute it in his paper. How could growth occur without increases in the knowledge or skills of humans? Until robots can reproduce themselves or invent technology advances with no human control, it is absurd for anyone to assert that growth can occur exclusive of human inputs. This is a straw man created by Terrell to attack a threat to his outdated wage slave paradigm.
In closing, here’s how Arthur C. Clarke characterized the four successive stages of response by academics like Professor Terrell to any new and revolutionary innovation like binary economics:
1. It’s crazy!
2. It may be possible — so what?
3. I said it was a good idea all along.
4. I thought of it first.
The Aharonov-Bohm effect, predicted in 1959, required nearly 30 years after its 1960 demonstration by Chambers until it was begrudgingly accepted. Mayer, who discovered the modern thermodynamic notion of conservation of energy related to work, was hounded and chastised so severely that he suffered a breakdown. Years later, he was lionized for the same effort. Wegener, a German meteorologist, was made a laughing stock and his name became a pseudonym for “utter fool,” because he advanced the concept of continental drift in 1912. In the 1960s the evidence for continental drift became overwhelming, and today it is widely taught and part of the standard science curriculum. Gauss, the great mathematician, worked out nonlinear geometry but kept it firmly hidden for 30 years, because he knew that if he published it, his peers would destroy him. In the 1930s Goddard was ridiculed and called “moon-mad Goddard” because he predicted his rocketry would carry men to the moon. Years later when the Nazi fired V-1 and V-2 rockets against London, those rockets used the gyroscopic stabilization and many other features discovered and pioneered by Goddard. And as everyone knows, rocketry did indeed carry men to the moon. Science has a long and unsavory history of severely punishing innovation and new thinking. In the modern world such scientific suppression of innovation is uncalled-for, but it is still very much the rule rather than the exception.
Arthur C. Clarke, in “Space Drive: A Fantasy That Could Become Reality,” Nov./Dec. 1994, p. 38.
Milton Friedman in TIME magazine, in a pathetic attempt to marginalize binary economics, claimed Kelso “turned Marx upside down.” Binary economists agree with Friedman. “Own or Be Owned” is Kelso’s response both to Marx and to Friedman.
In Peace, only through Justice,
Norm Kurland
http://www.cesj.org
http://www.american revolutionaryparty.us
http://www.globaljusticemovement.org
Postscript:
What is clear to me is that the critics accept the current financial system’s built-in monopolistic barriers to equality of future ownership opportunities and fail to appreciate how freedom and limited government would be advanced by the lifting of those barriers under the Kelso-Adler triad of Economic Justice. Here are those principles for those who read your postings: The Three Principles of Economic Justice
Like every system, economic justice involves input, output, and feedback for restoring harmony or balance between input and output. Within the system of economic justice as defined by Louis Kelso and Mortimer Adler, there are three essential and interdependent principles: Participative Justice (the input principle), Distributive Justice (the out-take principle), and Social Justice (the feedback principle). Like the legs of a three-legged stool, if any of these principles is weakened or missing, the system of economic justice will collapse.
The Three Principles of the Kelso-Adler Theory of Economic Justice
Diagram show inputs and outputs of production
Participative Justice
“Participative Justice” describes how one makes “input” to the economic process in order to make a living. It requires equal opportunity in gaining access to private property in productive assets as well as equality of opportunity to engage in productive work. The principle of participation does not guarantee equal results, but requires that every person be guaranteed by society’s institutions the equal human right to make a productive contribution to the economy, both through one’s labor (as a worker) and through one’s productive capital (as an owner). Thus, this principle rejects monopolies, special privileges, and other exclusionary social barriers to economic self-reliance.
Distributive Justice
“Distributive Justice” defines the “output” or “out-take” rights of an economic system matched to each person’s labor and capital inputs. Through the distributional features of private property within a free and open marketplace, distributive justice becomes automatically linked to participative justice, and incomes become linked to productive contributions. The principle of distributive justice involves the sanctity of property and contracts. It turns to the free and open marketplace, not government, as the most objective and democratic means for determining the just price, the just wage, and the just profit.
Many confuse the distributive principles of justice with those of charity. Charity involves the concept “to each according to his needs,” whereas “distributive justice” is based on the idea “to each according to his contribution.” Confusing these principles leads to endless conflict and scarcity, forcing government to intervene excessively to maintain social order.
Distributive justice follows participative justice and breaks down when all persons are not given equal opportunity to acquire and enjoy the fruits of income-producing property.
Social Justice
“Social Justice” is the “feedback” principle that detects distortions of either the input or out-take principles and to make whatever corrections are needed to restore a just and balanced economic order for all. This principle is violated by unjust barriers to participation, by monopolies or by some using their property to harm or exploit others.
Economic harmony exists when Participative and Distributive Justice are operating fully for every person with a system or institution. “Economic harmonies” is defined in The Oxford English Dictionary as “Laws of social adjustment under which the self-interest of one man or group of men, if given free play, will produce results offering the maximum advantage to other men and the community as a whole.” Social Justice offers guidelines for controlling monopolies, building checks-and-balances within social institutions, and re-synchronizing distribution (outtake) with participation (input). The first two principles of economic justice flow from the eternal human search for justice in general, which automatically requires a balance between input and outtake, i.e., “to each according to what he is due.” Social Justice, on the other hand, reflects the human quest for other absolute values, including Truth, Love and Beauty, and compels people to continually repair and improve their systems for the good of every person.
It should be noted that Kelso and Adler referred to the third principle as “the principle of limitation” as a restraint on human tendencies toward greed and monopoly that lead to exclusion and exploitation of others. Given the potential synergies inherent in economic justice in today’s high technology world, CESJ feels that the concept of “social justice” is more appropriate and more-encompassing than the term “limitation” in describing the third component of economic justice. Furthermore, the harmony that results from the operation of social justice is more consistent with the truism that a society that seeks peace must first work for justice.
(For more discussion on these terms, see Chapter 5 of “The Capitalist Manifesto,” by Louis O. Kelso and Mortimer J. Adler (Random House, 1958) and Chapters 3 and 4 of “Curing World
Poverty: The New Role of Property,” John H. Miller, ed., Social Justice Review.)
