Binary Economics
Encyclopedia
Binary economics is a heterodox
theory of economics
that endorses both private property
and a free market
but proposes significant reforms to the banking system
. 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. These loans are intended to: halve infrastructure
improvement costs, reduce business startup costs, and widen stock
ownership.
Binary economics is a minority discipline, hard to place on the left-right spectrum. It has variously been characterized as an extreme right-wing ideology and as extremely left-wing by its critics. The ‘binary
’ (in ‘binary economics’) means ‘composed of two’ because it suffices to view the physical factors of production
as being but two (labour and capital
which includes land
) and only two ways of genuinely earning a living − by labour and by productive capital ownership. Humans are usually considered as owning their labour, but not necessarily the other productive factor – capital.
Binary economics is partly based on belief that society has an absolute duty to ensure that all humans have good health, housing, education and an independent income, as well as a responsibility to protect the environment for its own sake. The interest-free loans proposed by binary economics are compatible with the traditional opposition of the Abrahamic religions
to usury
.
Proponents of binary economics claim that their system contains no expropriation
of wealth, and much less redistribution
will be necessary. They argue that it cannot cause inflation
and is of particular importance as more of the physical contribution to production is automated. and that the Binary economics paradigm is particularly helpful in addressing the issue of why developing countries
languish. Advocates contend that implementing their system will lessen national debt and encourage national unity. They believe binary economics could create a stable economy.
reference in opposition to communism
.
Kelso also wrote The New Capitalists in 1961; then Kelso teamed up with political scientist Patricia Hetter Kelso to explain how capital instruments provide an increasing percentage of the wealth and why capital is narrowly owned in the modern industrial economy. Their analysis predicts that widely distributed capital ownership will create a more balanced economy. This is at the heart of the binary claim to create an efficiency which creates justice and vice versa.
Kelso and Hetter then proposed new binary share holdings which (with exception for research, maintenance and depreciation
) would pay out their full capital earnings, be capable of being insured and, if loss occurred, would occasion no recourse to the new binary owners.
(ESOPs) are compatible with some of the principles of binary economics. These stem originally from Louis Kelso & Patricia Hetter Kelso (1967)Two-Factor Theory: The Economics of Reality; the founding of Kelso & Company
in 1970; and then from conversations in the early 1970s between Louis Kelso, Norman Kurland (Center for Economic and Social Justice), Senator Russell Long of Louisiana (Chairman, USA Senate Finance Committee, 1966 - 1981) and Senator Mike Gravel
of Alaska. There are about 11,500 ESOPs in the USA today covering 11 million employees in closely held companies.
which is not a direct analysis of physical reality: rather it is the calculation of a ratio or rate of total output divided by unit of input (though usually having separate labour & capital goods input-components, e.g. Cobb-Douglas
). In contrast, the binary analysis of productiveness (see section below) attempts to give accurate credit to the physical contributions of both labour and capital goods to production, attempting to answer a fundamental economic question - Who or what physically creates the wealth?
Another contrast is that, in evidence-based economics, interest
(as distinct from administration cost) is practically always necessary; in Binary Economics theory it isn't (certainly where the development and spreading of productive capacity is concerned). Conventional economics accounts for the observed time value of money
, whereas binary economics does not.
Binary economics also rejects conventional financial savings doctrine (that there must be financial savings prior to investment) - no financial saving is necessary if money can be created out of nothing. The theory asserts that what matters is whether the newly-created money is interest-free, whether it can be repaid, whether there is effective collateral
and whether it goes towards the development and spreading of various forms of productive (and the associated consuming) capacity.
Very fundamentally, binary economics rejects the claim of conventional economics that it promotes a ‘free market
’ which is free, fair and efficient. (e.g., as an interpretation of the classical First Fundamental Theorem of Welfare Economics).
The two economics differ on the subject of democracy
. Conventional economics upholds the periodic political vote. Binary economics does the same but claims to deepen democracy by arguing that productive capital would be more widely distributed too. In binary economics freedom is only truly achieved if all individuals are able to acquire an independent economic base.
Proponents of binary economics are dissatisfied with fractional reserve banking, arguing that it "creates new money out of nothing". The supply of interest-free loans would place in circumstances of a move (over time) towards banks maintaining reserves equal to 100% of their deposits; in practice, the large-scale interest-free lending desired by binary economics is incompatible with the widespread reduction in money supply that would be caused by increased reserve requirements.
After 1949 central bank loans were a major factor in the Taiwanese Land to the Tiller program which spread land ownership from the few to the many. This was done without causing inflation and was an overall binary solution because, in various ways the money went into the spreading of both productive and consuming capacity. (One way was by financing the buyout with industrial bonds, thus giving capital to small industries to provide things for the newly empowered farmers to purchase.)
It is proposed that all large corporations should have to pay out all their earnings all the time (with exception of reserves for maintenance, depreciation, repair and research). Large corporations will then have the option of obtaining interest-free loans on condition that they help to spread ownership. Medium-sized corporations (which would not be subject to the full pay out provision) will be able to have interest-free loans if they spread ownership.
Conventional productivity, generally labour productivity, is the ratio of labor as input to the overall output.
In contrast, binary productiveness is the percentage of total physical input that labor and capital each contributes to the output. Capital contributes an increasing physical percentage as even Marx understood. Consider the example of a man digging a hole. Using his hands this takes him four hours. But, by using a form of capital − a shovel − he can dig the hole in one hour or dig four holes in the same amount of time it took him to dig one hole with his hands. The physical productiveness of the human labor is 25% while the physical productiveness of the capital shovel is 75%.
A criticism of the hole and shovel example has been made by Timothy D. Terrell summarizing a critique given by Timothy Roth. The criticism states that: a) somebody invented the shovel; b) the shovel cannot be independent. Roth argues that someone with human capital had to invent the shovel before it could be used, so the presence of the shovel is not independent of human capital. Also, Roth notes the presumption that the human hole digger has no role in the productiveness of the shovel.
However, binary economics states that the fact that somebody invented the shovel has nothing to do with its present use for digging a hole and the shovel is viewed as an independent contributor which co-operates with the man just as the man co-operates with the shovel. Moreover, just as two humans can co-operate, so the man and the shovel co-operate to dig the hole and produce far more holes than either the man or shovel could do by themselves.
) on death if the estate devolves in such a way as to spread capital estates to more individuals. If it does not do so, binary economics proposes a graduated tax.
Heterodox economics
"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes assert that it has little or no influence on the vast majority of academic economists in the English speaking world. "Mainstream...
theory of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
that endorses both private property
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
and a free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
but proposes significant reforms to the banking system
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
. 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
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
to promote the spread of employee-owned firms. These loans are intended to: halve infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
improvement costs, reduce business startup costs, and widen stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
ownership.
Binary economics is a minority discipline, hard to place on the left-right spectrum. It has variously been characterized as an extreme right-wing ideology and as extremely left-wing by its critics. The ‘binary
Binary
- Mathematics :* Binary numeral system, a representation for numbers using only two digits * Binary function, a function in mathematics that takes two arguments- Computing :* Binary file, composed of something other than human-readable text...
’ (in ‘binary economics’) means ‘composed of two’ because it suffices to view the physical factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
as being but two (labour and capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
which includes land
Land (economics)
In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...
) and only two ways of genuinely earning a living − by labour and by productive capital ownership. Humans are usually considered as owning their labour, but not necessarily the other productive factor – capital.
Binary economics is partly based on belief that society has an absolute duty to ensure that all humans have good health, housing, education and an independent income, as well as a responsibility to protect the environment for its own sake. The interest-free loans proposed by binary economics are compatible with the traditional opposition of the Abrahamic religions
Abrahamic religions
Abrahamic religions are the monotheistic faiths emphasizing and tracing their common origin to Abraham or recognizing a spiritual tradition identified with him...
to usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
.
Proponents of binary economics claim that their system contains no expropriation
Expropriation
Expropriation is the politically motivated and forceful confiscation and redistribution of private property outside the common law. Unlike eminent domain or laws regulating the foreign investment, expropriation takes place outside the common law and may be used to denote an armed robbery by...
of wealth, and much less redistribution
Redistribution
-Economics:* Redistribution in relation to non-market economic exchange* Redistribution , redistribution of income, property and/or wealth* Redistributive change, theory of economic justice in U.S...
will be necessary. They argue that it cannot cause inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
and is of particular importance as more of the physical contribution to production is automated. and that the Binary economics paradigm is particularly helpful in addressing the issue of why developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
languish. Advocates contend that implementing their system will lessen national debt and encourage national unity. They believe binary economics could create a stable economy.
Background
Binary Economics was proposed by American lawyer Louis Kelso in his book The Capitalist Manifesto (1958). The title of the book is best viewed as a thing of its time, being a Cold WarCold War
The Cold War was the continuing state from roughly 1946 to 1991 of political conflict, military tension, proxy wars, and economic competition between the Communist World—primarily the Soviet Union and its satellite states and allies—and the powers of the Western world, primarily the United States...
reference in opposition to communism
Communism
Communism is a social, political and economic ideology that aims at the establishment of a classless, moneyless, revolutionary and stateless socialist society structured upon common ownership of the means of production...
.
Kelso also wrote The New Capitalists in 1961; then Kelso teamed up with political scientist Patricia Hetter Kelso to explain how capital instruments provide an increasing percentage of the wealth and why capital is narrowly owned in the modern industrial economy. Their analysis predicts that widely distributed capital ownership will create a more balanced economy. This is at the heart of the binary claim to create an efficiency which creates justice and vice versa.
Kelso and Hetter then proposed new binary share holdings which (with exception for research, maintenance and depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
) would pay out their full capital earnings, be capable of being insured and, if loss occurred, would occasion no recourse to the new binary owners.
Employee Share Ownership Plans (ESOPs) and other plans
Employee Share Ownership PlansEmployee-owned corporation
An employee share ownership plan is the practice of companies giving staff members shares in their company as part of their salary....
(ESOPs) are compatible with some of the principles of binary economics. These stem originally from Louis Kelso & Patricia Hetter Kelso (1967)Two-Factor Theory: The Economics of Reality; the founding of Kelso & Company
Kelso & Company
Kelso & Company is a private equity investment firm focusing on leveraged buyouts, recapitalizations and growth capital transactions. Kelso invests in a variety of sectors, including communication, manufacturing and restaurants....
in 1970; and then from conversations in the early 1970s between Louis Kelso, Norman Kurland (Center for Economic and Social Justice), Senator Russell Long of Louisiana (Chairman, USA Senate Finance Committee, 1966 - 1981) and Senator Mike Gravel
Mike Gravel
Maurice Robert "Mike" Gravel is a former Democratic United States Senator from Alaska, who served two terms from 1969 to 1981, and a former candidate in the 2008 presidential election....
of Alaska. There are about 11,500 ESOPs in the USA today covering 11 million employees in closely held companies.
Conventional economics compared with binary economics - areas of conflict, criticism and contrast
Conventional economics upholds productivityProductivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
which is not a direct analysis of physical reality: rather it is the calculation of a ratio or rate of total output divided by unit of input (though usually having separate labour & capital goods input-components, e.g. Cobb-Douglas
Cobb-Douglas
In economics, the Cobb–Douglas functional form of production functions is widely used to represent the relationship of an output to inputs. Similar functions were originally used by Knut Wicksell , while the Cobb-Douglas form was developed and tested against statistical evidence by Charles Cobb and...
). In contrast, the binary analysis of productiveness (see section below) attempts to give accurate credit to the physical contributions of both labour and capital goods to production, attempting to answer a fundamental economic question - Who or what physically creates the wealth?
Another contrast is that, in evidence-based economics, interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
(as distinct from administration cost) is practically always necessary; in Binary Economics theory it isn't (certainly where the development and spreading of productive capacity is concerned). Conventional economics accounts for the observed time value of money
Time value of money
The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. The time value of money is the central concept in finance theory....
, whereas binary economics does not.
Binary economics also rejects conventional financial savings doctrine (that there must be financial savings prior to investment) - no financial saving is necessary if money can be created out of nothing. The theory asserts that what matters is whether the newly-created money is interest-free, whether it can be repaid, whether there is effective collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
and whether it goes towards the development and spreading of various forms of productive (and the associated consuming) capacity.
Very fundamentally, binary economics rejects the claim of conventional economics that it promotes a ‘free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
’ which is free, fair and efficient. (e.g., as an interpretation of the classical First Fundamental Theorem of Welfare Economics).
The two economics differ on the subject of democracy
Democracy
Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...
. Conventional economics upholds the periodic political vote. Binary economics does the same but claims to deepen democracy by arguing that productive capital would be more widely distributed too. In binary economics freedom is only truly achieved if all individuals are able to acquire an independent economic base.
Uses of central bank-issued interest-free loans
Binary economics proposes that central bank-issued interest-free loans should be administered by the banking system for the development and spreading of productive (and the associated consuming) capacity, particularly new capacity, as well as for environmental and public capital. While no interest would be charged, there would be an administrative cost as well as collateralization or capital credit insurance.Proponents of binary economics are dissatisfied with fractional reserve banking, arguing that it "creates new money out of nothing". The supply of interest-free loans would place in circumstances of a move (over time) towards banks maintaining reserves equal to 100% of their deposits; in practice, the large-scale interest-free lending desired by binary economics is incompatible with the widespread reduction in money supply that would be caused by increased reserve requirements.
Public capital investment
Interest-free loans for public capital have been successfully used in Canada, New Zealand and Guernsey. Malaysia is today believed to be experimenting with them.After 1949 central bank loans were a major factor in the Taiwanese Land to the Tiller program which spread land ownership from the few to the many. This was done without causing inflation and was an overall binary solution because, in various ways the money went into the spreading of both productive and consuming capacity. (One way was by financing the buyout with industrial bonds, thus giving capital to small industries to provide things for the newly empowered farmers to purchase.)
Private capital investment
Ownership of productive (and the associated consuming) capacity, particularly new capacity, can be spread by the use of central bank-issued interest-free loans. Interest-free loans should be allowed for private capital investment IF such investment creates new owners of capital and is part of national policy to enable all individuals, over time, on market principles, to become owners of substantial amounts of productive, income-producing capital. By using central bank-issued interest-free loans, a large corporation would get cheap money as long as new binary shareholders are created.It is proposed that all large corporations should have to pay out all their earnings all the time (with exception of reserves for maintenance, depreciation, repair and research). Large corporations will then have the option of obtaining interest-free loans on condition that they help to spread ownership. Medium-sized corporations (which would not be subject to the full pay out provision) will be able to have interest-free loans if they spread ownership.
Productiveness
Binary productiveness and conventional productivity are distinct concepts.Conventional productivity, generally labour productivity, is the ratio of labor as input to the overall output.
In contrast, binary productiveness is the percentage of total physical input that labor and capital each contributes to the output. Capital contributes an increasing physical percentage as even Marx understood. Consider the example of a man digging a hole. Using his hands this takes him four hours. But, by using a form of capital − a shovel − he can dig the hole in one hour or dig four holes in the same amount of time it took him to dig one hole with his hands. The physical productiveness of the human labor is 25% while the physical productiveness of the capital shovel is 75%.
A criticism of the hole and shovel example has been made by Timothy D. Terrell summarizing a critique given by Timothy Roth. The criticism states that: a) somebody invented the shovel; b) the shovel cannot be independent. Roth argues that someone with human capital had to invent the shovel before it could be used, so the presence of the shovel is not independent of human capital. Also, Roth notes the presumption that the human hole digger has no role in the productiveness of the shovel.
However, binary economics states that the fact that somebody invented the shovel has nothing to do with its present use for digging a hole and the shovel is viewed as an independent contributor which co-operates with the man just as the man co-operates with the shovel. Moreover, just as two humans can co-operate, so the man and the shovel co-operate to dig the hole and produce far more holes than either the man or shovel could do by themselves.
Estate duty
As part of binary policy to develop capital ownership for each member of the population, there is no estate duty (or Inheritance taxInheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
) on death if the estate devolves in such a way as to spread capital estates to more individuals. If it does not do so, binary economics proposes a graduated tax.
Texts
- Albus, James S.(1976) Peoples’ Capitalism - The Economics of The Robot Revolution.
- Ashford, Robert & Shakespeare, Rodney (1999) Binary Economics - the new paradigm.
- Ashford, Robert Louis Kelso’s Binary Economy (The Journal of Socio-Economics, vol. 25, 1996).
- el-Diwany, Tarek (2003) The Problem With Interest.
- Gates, Jeff (1999) The Ownership Solution.
- Gates, Jeff (2000) Democracy At Risk.
- Gauche, Jerry Binary Modes for the Privatization of Public Assets (The Journal of Socio-Economics. Vol. 27, 1998).
- Greenfield, Sidney M. Making Another World Possible: the Torah, Louis Kelso and the Problem of Poverty (paper given at conference, Columbia University, May, 2006).
- Kelso, Louis & Kelso, Patricia Hetter (1986 & 1991), Democracy and Economic Power - Extending the ESOP Revolution through Binary Economics.
- Kelso, Louis & Adler, Mortimer (1958), The Capitalist Manifesto.
- Kelso, Louis & Adler, Mortimer (1961), The New Capitalists.
- Kelso, Louis & Hetter, Patricia (1967), Two-Factor Theory: the Economics of Reality.
- Kurland, Norman A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation.
- Kurland, Norman; Brohawn, Dawn & Michael Greaney (2004) Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security.
- Miller, J.H. ed., (1994), Curing World Poverty: The New Role of Property.
- Reiners, Mark Douglas, The Binary Alternative and Future of Capitalism.
- Schmid, A. Allan,(1984), “Broadening Capital Ownership: The Credit System as a Focus of Power," in Gar Alperovitz and Roger Skurski,eds. American Economic Policy, University of Notre Dame Press.
- Shakespeare, Rodney & Challen, Peter (2002) Seven Steps to Justice.
- Shakespeare, Rodney (2007) The Modern Universal Paradigm.
- Turnbull, Shann (2001) The Use of Central Banks to Spread Ownership.
- Turnbull, Shann (1975/2000), Democratising the Wealth of Nations.
External links
- Binary Economics now
- Center for the Study of The Great Ideas
- Binary Economics In A Nutshell
- Center for Economic and Social Justice
- Binary Economics - An Overview by Professor Robert Ashford
- The Binary Alternative & The Future of Capitalism
- The Binary Economics of Louis Kelso
- http://ssrn.com/abstract=277508
- http://www.cesj.org/binaryeconomics/price-money.html
- http://cog.kent.edu/lib/TurnbullBook/TurnbullBook.htm
- Capital Democratization
- Committee on Monetary & Economic Reform