“Two economists envision a scary — and scarily realistic — future where the working population expands slower and slower, and jobless recoveries are the only recoveries we know”
The problem is that fewer and fewer people, regardless of shrinking or expanding population growth, are participating in the industrial-technological shift to non-human means of producing products and services. Without private, individual ownership property rights in productive capital formation, the vast majority or 99 percent are left with securing a job to earn money. And the jobs are exponentially becoming scarcer and scarcer, particularly good paying jobs, which are generally skilled or specialized. “The United States got rich off of young workers” is a falicy. The rich got rich off of owning productive capital. Since the Industrial Revolution there has been an ever-accelerating shift to productive capital––which reflects tectonic shifts in the technologies of production. Up until the close of the nineteenth century, the United States remained a working democracy, with the production of products and services dependent on labor worker input. When the American Industrial Revolution began and subsequent technological advance amplified the productive power of non-human capital, plutocratic finance channeled its ownership into fewer and fewer hands, as we continue to witness today with government by the wealthy evidenced at all levels.
The price of labor is artificially elevated by government through minimum wage legislation, overtime laws, and collective bargaining legislation or by government employment and government subsidization of private employment solely to increase consumer income.
Binary economist Louis Kelso asserted: “The government continues to discharge its responsibility for the health and prosperity of the economy through coerced trickle-down; in other words, through redistribution achieved by the rigging of labor prices, by taxation to support redistribution and job “creation,” or subsidization by inflation and by all kinds of welfare, open and concealed.”
Such transfers from capital worker owners through coerced means to the non-working, under-employed, old and sick does not have to be “the necessary price of a wealthy modern society.”
In a democratic growth economy, based on Kelso’s binary economics, the ownership of capital would be spread more broadly as the economy grows, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate wealth. Instead, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader, also benefiting the traditionally disenfranchised poor and working and middle class. Thus, productive capital income would be distributed more broadly and the demand for products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth.
The problem is with the “system.” The system does not fully facilitate connecting the majority of citizens, who have unsatisfied needs and wants, to the productive capital assets enabling productive efficiency and economic growth. It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being, or continue to face growing dependency on “welfare” in one form or another.
Stacy 3 Reply: “The problem? Actually the “system” enables everyone who wants to gain access to productive capital ownership. It’s called the New York Stock Exchange or the NASDAQ. While progressives of both parties have enabled their cronies to make big bucks at the expense of taxpayers, the VAST majority of rich people (1) worked really hard at something people were willing to pay for, and (2) voraciously saved and invested. Either/Or will not work…it has to be both. If you follow this formula over many years, you will probably be rich when you get old.
But hardly anyone does that. Most people who make a little dough want to spend twice as much as soon as they get it. Progressives of both parties get their votes by demonizing the the most productive citizens. And worse, they offer all kinds of incentives for people to engage in the most self-destructive behavior you can think of. So yes, over time compounding does lead to concentration of wealth. But the problem is not the “system”, but that so many decline to participate in it.”
What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security––those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.
Thus, as binary economist Louis Kelso asserted: “The problem with conventional financing techniques is that they address only the productive power of enterprise and the enhancement of the earning power of the rich minority. Sustaining or increasing the earning power of the majority of consumers who are dependent entirely upon the earnings of their labor, or upon welfare, is left to government or governmentally assisted redistribution of income and to chance.”
Unfortunately, pursuing democratic capitalism has been frustrated by the systemic concentration of economic power and exclusionary access to future capital credit to the advantage of the wealthiest Americans. The so-called 1 percent rulers of corporations have rigged the financial system to enable this already rich ownership class to systematically further enrich themselves as capital formation occurs and technological industrialization spreads throughout the world, leaving behind the 99 percent to depend on income redistribution through make work “full employment” policies, government boondoggles, excessive military build-up and dependence on arms production and sales, and social welfare programs due to the lack of an alternative to full employment and the growing economic helplessness and dependency. The unsatisfied needs and wants of society are not in that 1 percent or for that matter the 5 percent; those people are not the ones who are hurting.
Once the national economic policy bases policy decisions on two-factor binary economics, productive capital acquisition would take place through commercially insured capital credit, resulting in a quiet revolution in which economic plutocracy will transform to economic democracy.
Stacy3 Reply: “I don’t get how people still embrace Kelso’s thesis with all its inconsistencies and omissions. ESOPs were a pretty good idea, but how could so many of his other ideas be proven more wrong? Although his notion that asset-based financing favored the rich was somewhat accurate from the post-FDR period through the 1970s, it certainly did not describe previous periods in American history. And since his death in 1991, debt securitization, private equity, and venture capital have reduced traditional bank financing to a small and marginally profitable source of investment capital. But innovation can absolutely get financed, and the evidence abounds in industries as diverse as technology, retail, manufacturing…the list goes on.
Yet his notion that inequality is a systemic problem independent of behavior has inspired some of the most destructive policies anyone could dream of. The housing debacle resulted primarily from government policies and bank regulations which promoted low-cost home financing for the very folks Kelso wanted to empower. And rather than enrich them, these ill-conceived policies have condemned millions to povery!
With regard to the “1% rulers of corporations”, you should consider that many of today’s leading corporations had not even been started when Kelso wrote his seminal work. Similarly, almost none of the richest Americans were even rich when I was a kid in the ’70s. Rigged? Sure progressives of both parties have enriched their cronies at the expense of taxpayers. But the vast majority of the rich earned their money by innovation, hard work, and saving and investing their gains. These are behavioral characteristics which harness the power of compound returns over time. Progressive policies which discourage these characteristics or worse, incentivize less productive behavior simply exacerbate inequality and erode general prosperity.”
New capital formation financing is “savings-based,” and that will not broaden ownership to the degree necessary to connect the 99 percent majority to the earning power of fully-paid out dividends, which would provide the consumer engine of today and tomorrow. Both retained earnings and debt financing, used to finance virtually 98 percent of new capital formation growth, only enhance the ownership holding value of the existing corporate ownership class and do nothing to create new owners. Thus, the rich get richer systematically and capital ownership concentration is furthered, facilitated by financing further productive capital acquisition out of the earnings of existing productive capital.
In place of retained earnings and debt financing, the government should require business corporations to issue and sell full-voting, full-dividend payout stock to more people to underwrite new productive capital formation, with the purpose of providing opportunity for new owners, both employees of corporations and non-employees, to participate in a growing economy. Of course, there needs to be a financial mechanism put in place that will guarantee loan risks; otherwise banks and lending institutions will not make the loans, and the system will continue to limit access to capital acquisition to those who already own capital—the rich. This is because “poor” people have no security or collateral, or sufficient income to pledge against the loan as security, and/or are disqualified on the grounds of either unproven unreliability or proven unreliability.
Housing for households is a consumer-based, not a productive capital-based asset that requires a source of income to pay for, unless used to rent to people, in which the housing unit generates income. Louis Kelso advocates capital credit used to finance new productive capital investment and growth. No one is knocking the idea of earning money “by innovation, hard work, and saving and investing their gains.” The reality is economic asceticism based on “savings” will not work for the 99 percent who struggle from pay check to pay check to survive, that is if they are fortunate to still have a job. Our leaders and financial institutions need to be purged of the savings mystique, which prevents thinking about the economy in physical terms as a system. Understanding Kelso’s two-factor financing techniques and commercially insured capital credit would be important first steps in that direction.
As Kelso has acknowledged: “Of course, some financial geniuses are able to parlay modest savings squeezed from labor income into large capital fortunes. This has been possible in every age. But rules that work for geniuses do not work for consumers in general, nor the economy as a whole. Geniuses are, and always have been in very short supply. Behind the phenomenon of the ‘self-made man’ is a less obvious and more significant fact. The business genius tightens his belt only in the first stage of his quest for real capital riches. Not thrift but his ability to finance capital acquition out of the wages of his capital is the secret of almost all of his impressive fortune.
“The logic of democratic commercially insured capital credit financing eliminates institutional limits on the availability of capital credit, which mythical except when based upon shortages of the physical ingredients necessary to production and consumption of goods and services. As costs are minimized through more efficient methods of finance, financing itself becomes increasingly more feasible. Rising incomes in the pockets of consumers who have the need and desire to improve their material standard of living expands market demand for goods and services and thereby triggers increased production.”
