Binary Economics in a Nutshell

By Norman G. Kurland, September 2008

Many other writers on “worker ownership,” “broad-based capital ownership,” and “participatory economics” have trivialized and marginalized Louis Kelso as merely “the inventor of the ESOP” and as just another advocate of “the ownership solution” to the flaws of global capitalism. (One notable exception is William Greider, who gives a generally accurate description of Kelso’s paradigm in his 1997 best-seller One World, Ready or Not: The Manic Logic of Global Capitalism.)

A more careful examination, however, reveals an elegant system of interconnected principles that bridges classical, Keynesian and other schools of economics. Furthermore, Kelso offers a new “post-scarcity” paradigm for analyzing and correcting structural economic defects that foster such seemingly intractable problems as global poverty, environmental destruction and the widening gap between the haves and have-nots.

In Kelso’s system “binary” means “consisting of two parts.” Kelso divides the factors of production into two all-inclusive, physically interdependent and market-quantifiable categories — the human (which he calls “labor”) and the non-human (which he calls “capital”). The central tenet of binary economics is that, through the property (or ownership) principle, these two “independent variables” can link marketable outputs from the labor-capital mix directly to incomes distributed according to market-quantified values of all “labor” and all “capital” inputs.

Some critics have argued that things such as land or entrepreneurship should be recognized as distinct productive categories. This, however, misses a key point of Kelso’s “ownership economics” — namely, that there are only two modes by which a person can legitimately contribute to production and thereby be entitled to a commensurate distribution: (1) through his own human inputs (“labor” of whatever form), or (2) through his own non-human inputs (“capital” of whatever form).

Binary economics attributes most of the increases in the labor-capital mix of the modern world to capital assets in the form of ever-improving technologies, structures and system designs, and far less to any increased productiveness of human labor. Classical economic theory, on the other hand, regards all output and earnings derived from capital enhancements as if they were produced by “increased labor productivity,” thus rationalizing higher and higher pay for less and less human effort.

Binary economics holds that broad-based affluence and economic freedom, as opposed to financial insecurity and economic dependency for the many, would be made possible through the widespread ownership of constantly improved capital assets, including system changes, that are added to produce more and more consumable goods with less and less human input and resources.

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 by connecting every person through private ownership of property in ever-advancing technologies, institutional systems and structures.

Professor Robert Ashford was the first to identify three concepts within binary economics that set it apart fundamentally from all preceding economic approaches: “binary productiveness,” “the binary property right,” and “binary growth.” In their book Binary Economics: The New Paradigm, Robert Ashford and Rodney Shakespeare describe these three distinguishing concepts as follows:

  1. Binary productiveness. This 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.
  2. The binary property right. This refers to the right of every person to acquire, on market principles, private (individual and joint) ownership of wealth-creating capital assets.
  3. Binary growth. This 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.

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 is based on four pillars of a truly free and just global marketplace:

  1. effective means for democratizing ownership of capital, including universal access to money and capital credit for financing growth and transfers of productive assets
  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 promote justice by eliminating 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 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 a fully empowered 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, with capital contributions compensated by the residuals (in the form of “profits” and “rentals”) from the sales of marketable goods and services.
  3. Social Justice, the feedback principle that balances and restores participative and distributive justice within a market-based economic system to counter monopoly tendencies. It places a personal responsibility on every member of a group or institution to organize with others to correct defective or unjust institutions that deny equal opportunity to participate or that violate the principle of distributive justice. This principle was referred to by Louis Kelso and Mortimer Adler as the “principle of limitation,” referring to the limitation on the exercise of private property rights such that they may not be used to harm the person or property of another, or to harm the general welfare of society.

Some of the Problems That Binary Economics Addresses

William Greider and the other serious observers of economic globalization make a persuasive case that all of us live in a global marketplace that seems to be heading out of control. These observers suggest that mainstream economists cannot agree on how to address such problems as the increasing income insecurity of most workers in globalized markets due to what Greider calls “wage arbitrage” (i.e., outsourcing and shifting of jobs to cheaper labor markets) and how to overcome the widening gap in capital ownership and economic power between a small elite of capital owners and financiers and virtually 99% of the rest of humanity.

Binary economists contend that the real problem is not, as cynics suggest, an evil conspiracy of a governing elite or those who work on their behalf. Rather, the real problem is the system controlling access to money, credit and capital ownership. Once the flaws in any system created by humans are discovered, binary economists argue, that system can be corrected as citizens become more enlightened and demand new solutions.

Kelso’s binary economic system combines the elegance of classical market theory with classical moral philosophy and the highest spiritual values. He points out precisely where Adam Smith, Karl Marx, and John Maynard Keynes fell short theoretically by not recognizing the increasing productiveness of capital as the main source of economic growth and the most logical source of widespread income distribution. This conceptual omission by Smith, Marx and Keynes is embedded in all conventional schools of economic thought, from left to right. Consequently, economic theorists have been led down the path where few of them can ever make accurate predictions about the future or offer sound, long-range solutions to meet the dangers of economic globalization.

Binary economics states that in a genuinely free market economy, people should be able to contribute to and gain their incomes from the economic process, based on both their labor and their capital inputs. Most neo-classical and Keynesian economists would dismiss this postulate as absurd, asserting that this condition exists already under capitalism.

Because of artificial institutional barriers to broad-based ownership under current economic policies, however, most people can only expect to legitimate their incomes through their labor alone. Consequently the market system breaks down, as government is forced to interfere with the market mechanism and redistribute incomes to non-owning working people and the unemployed.

As pointed out by Robert Ashford and Rodney Shakespeare in their book Binary Economics: The New Paradigm, Kelso’s theory offered:

  • “a new understanding of the relationship between humans and things as they work together to produce goods and services”;
  • “a new explanation for industrial growth, poverty and affluence”; and
  •  ”a new strategy for achieving general affluence for all people on free market principles.”

Ashford and Shakespeare offer clear definitions and examples of the Kelsonian concepts of “productiveness”, “binary growth”, and “binary property rights”. They also address the fundamental flaw in today’s dominant economic paradigms: an unrealistic, inefficient and blind reliance on “labor productivity” to justify mass redistributions of purchasing power.

Because of these blind spots in traditional economic theories, all existing systems are structured to concentrate economic power, spawning corruption, crime, exploitation and dehumanization of workers, and endemic poverty and powerlessness in our “global village.” If we believe in democracy and empowering every person with rights and responsibilities to contribute to peace through justice in the world, then clearly something new is needed.