Binary Economics: The New Paradigm (Book Review)

by Robert Ashford and Rodney Shakespeare, (University Press of America, Lanham, Maryland, 1999, 464 pp., hardback and paper)

Reviewed by Norman G. Kurland*, President, Center for Economic and Social Justice, Washington, D.C., April 20, 1999

In 1965, when I first heard of the late Louis Kelso’s revolutionary solution to the problem of world poverty, I thought, “Of course! Why didn’t I think of that?”

Upon reading Binary Economics: The New Paradigm by law professor Robert Ashford and the British writer-scholar Rodney Shakespeare” thirty-four years after committing my life to implementing the Kelsonian paradigm” another thought came to me: “Why didn’t I write that?”

If anyone deserves a Nobel Prize for Economics, Ashford and Shakespeare do for their original, scholarly and persuasive case in support of Kelso’s binary theory of economics. Many other writers on “worker ownership,” “broad-based capital ownership,” and “participatory economics” have trivialized and marginalized Louis Kelso as “the inventor of the ESOP” and as merely another advocate of “the ownership solution” to the flaws of global capitalism. (One notable exception is William Greider, who gives an undistorted description of Kelso’s paradigm in his 1997 best-seller One World, Ready or Not: The Manic Logic of Global Capitalism.)

Ashford and Shakespeare are to be congratulated for recognizing Kelso as a major contributor to economic theory and the architect of a unified and comprehensive system of economics. Kelso’s system combines the elegance of classical market theory with classical moral philosophy and the highest spiritual values. They point 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. Louis Kelso and the authors of Binary Economics, however, show that because of institutional barriers to broad-based ownership, most people can only expect to legitimate their incomes from 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.

The authors assiduously trace how unsound theory has led to unsound economic policies and laws. This in turn explains why neither Wall Street capitalism nor the many versions of socialism can ever achieve economic or social justice. Workers and others remain excluded from all the rights, powers and privileges enjoyed by members of the “capital ownership club” that runs the world. Ashford and Shakespeare argue that so-called “free market” policies alone cannot achieve sustainable growth and explain why the wealth gap continues to widen dangerously between nations and between the rich and poor within all nations. They point to “the real Third Way,” a system beyond capitalism and socialism that provides every person, as a fundamental right of citizenship, with equal access to capital credit and other “social goods” needed to become owners of capital. Their new paradigm provides:

  • “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.”

For traditional economists, Ashford and Shakespeare offer clear definitions and examples of the Kelsonian concepts of “productiveness”, “binary growth”, and “binary property rights”. They 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.

Few unbiased people would disagree with the authors that the so-called “free market” would be better termed the “un-free market” because of the exclusionary, mainly financial, barriers inherent in the capitalist model. As they point out, a free and open market will not and cannot work under conditions where (1) workers have only their labor to sell in a free global marketplace, (2) ownership of productive capital globally is concentrated into the hands of a small ownership class, (3) the productive efforts and labor incomes of propertyless workers remain threatened globally by labor-displacing technology (including advanced management systems) and by workers willing to accept lower wages, and (4) exclusionary barriers (e.g., the collateralization barrier, central bank discount window barriers for lenders of capital credit to workers and other capital-deprived citizens, tax system barriers, etc.) remain in our laws and institutions. These conditions shaping our basic social institutions perpetuate monopoly ownership and preclude workers from enjoying equal ownership and profit sharing opportunities in the future.

Following Kelso, Ashford and Shakespeare show how a free and open market system can overcome these four negative and exclusionary conditions and be modified in ways that reconnect workers to the productive process through a more participatory ownership and profit sharing system. Free markets can be restored and Say’s Law of Markets rejected for different reasons both by Marx and Keynes’can indeed be made to work, but only within the binary growth paradigm.

The strength of this readable book is its sharp focus on economic theory. The book touches only lightly on the moral and political dimensions of binary economics. For a deeper discussion on those issues, the reader should turn directly to Kelso’s writings and to the compendium of articles (including one by Kelso and another by Ashford) presented in the book, Curing World Poverty: The New Role of Property, John H. Miller, ed., published in 1994 by Social Justice Review (St. Louis) and the Center for Economic and Social Justice (Washington, D.C.).

To move toward the goal of general affluence within the new ownership paradigm, the authors advocate “a binary infrastructure” including new, practical and carefully-conceived social policies and “social tools”, such as:

  • an array of “constituency” vehicles, like ESOPs, which use tested principles of corporate finance for connecting all citizens with access to capital credit as a new and fundamental right of citizenship;
  • a tax system and corporate policies that encourage the full payout of corporate profits;
  • capital credit insurance and re-insurance as a substitute for collateral; and
  • a flexible but disciplined monetary policy which liberates future growth from the slavery of past savings (along lines described by this reviewer in his article, “The Federal Reserve Discount Window” in the Winter 1998 issue of the Journal of Employee Ownership Law and Finance, National Center for Employee Ownership).

Semantics count in trying to communicate new paradigms. In that regard I found unfortunate the authors’ rejection of the term “third way”, suggesting that there is no higher moral alternative to the institutionalized greed of capitalism and the institutionalized envy of socialism. Over 30 years ago, two officials from the Soviet Embassy who had studied the Kelsonian paradigm called it “the third alternative.” This confirmed in my mind that Kelso had indeed discovered a truly transcendent and workable “third way”, a new synthesis that combines capitalism’s ideals of a free and open global marketplace with socialism’s ideals of a just and participative society.

More troublesome is the authors’ embrace of the words “capitalist” and “capitalism” words carrying ideological baggage from the dinosaur paradigms the authors are challenging. In my opinion, the use of these terms by Kelso in The Capitalist Manifesto (his classic first book on value-based, post-scarcity economics with the philosopher Mortimer J. Adler in 1958) largely explains the difficulty of binary economists in reaching intellectuals throughout the world. Most academics, especially economists, would never open a book with those words on the cover. Fortunately, Ashford and Shakespeare chose a more appropriate title for their book.

Other minor criticisms of this book involve its superficial handling of the control and governance rights of ownership, particularly in its discussion of worker participation. There is substantial evidence that those companies that combine Kelsonian ESOPs with profit sharing, participatory management and the structured diffusion of power and accountability clearly outperform their conventionally-owned and -managed competitors.

I also have strong reservations about the use of legal trusts as the preferred vehicles for building an ownership culture for the next millennium. Under Anglo-American law, trusts were invented with the paternalistic assumption that beneficiaries (i.e., widows and orphans) were incompetents. Thus, under trust law the full participatory rights of ownership, such as voting of shares, could be denied by the legal trustee to new beneficial owners. This flies in the face of today’s trends toward greater transparency and democratic accountability in corporate affairs. In Egypt a Kelsonian team invented a more empowering mechanism–the worker shareholder association. The association vehicle could easily be extended to cover other constituency groups which Kelso and the authors of this book covered under the law of trusts.

With these minor reservations, I wholeheartedly endorse this book as required reading for all serious and open-minded students of economics. It is especially valuable for all policymakers who have not yet become, in the words of Keynes, unwitting “slaves of some defunct economist.” Ironically, in the light of binary economics, Keynes himself has become another defunct economist. When today’s “bubble economies” collapse, and they surely will because of Keynesian policies, the world will need some fresh thinking, particularly within academia. This book fills that vacuum.

About the Reviewer:

Mr. Kurland, a lawyer-economist and president of the Center for Economic and Social Justice, was Louis Kelso’s Washington-based political strategist for 11 years, following years of work in civil rights and the War on Poverty. He was described by the New York Times in January 1974 as “a one-man lobbying organization for Kelsonian ideas,” after he and Kelso persuaded Senator Russell Long to champion legislation to promote employee stock ownership plans or “ESOPs.” He has authored numerous published articles on all facets of the Kelso system of economics. Among the expanded ownership models he designed was the first ESOP in a developing country, which created a workers shareholders association for 600 workers of the Alexandria Tire Company of Egypt. Mr. Kurland was appointed by President Reagan in 1985 as deputy chairman of the bipartisan Presidential Task Force on Project Economic Justice, formed to promote Kelsonian reforms in US assistance programs to developing economies.