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Q & A’s on Binary Economics

(Adapted and updated from a 2000 document by Richard Stutsman, WorldWorks Symposium™.  CESJ update, 2014.)

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Binary Economics is the systems theory underlying a new socio-economic paradigm. This conceptual framework challenges some basic premises that are taught by all conventional schools of economics — whether capitalist, socialist or Keynesian. These premises shape the way most of us (including economists, academics and politicians) believe the economy works, whether at the macro-level of a nation or the micro-level of a business enterprise.

We are all immersed in the current “system” and its assumptions.  The following Questions and Answers on the subject of binary economics offer a way to help us to reconsider some of these assumptions that may be limiting our ability to solve systemic economic problems. The very act of questioning can help us to understand how binary economics might be the revolutionary next step needed to catapult mankind into an era of universal economic prosperity.

For more detail be sure to check out the links on the CESJ website on binary economics, as well as recommended writings and books. There are also links to several other recommended binary economics sites.

Why is this economic system called “binary” economics?

“Binary” means “consisting of two parts”. Binary economics, a concept developed in the 1950s by the late lawyer-economist Louis Kelso, holds that there are two fundamental components to the production of economic goods and services and its consequent income: (1) The human component (labor), and (2) the non-human component (capital). Classical economic theory, on the other hand, regards all production and income to be derived from, or attributed to, labor whose productivity is enhanced by capital. This is an important distinction.

What is the distinction between the two binary components of production?

Labor income (wages, salaries, benefits, etc.) is what we get paid as employees of a business. Capital income is derived from productive capital investments. Most people earn most of their income from their labor. But in a binary economic system workers and other non-owning citizens would gradually accumulate more and more capital, mainly in the form of corporate shares, and begin earning dividends from their capital. By retirement age they would be able to live comfortably on their capital income alone.

What exactly do you mean by “capital”?

Capital is any source of production or output other than human labor. A mule, which can carry many times the weight or do many times the work of a human, is a capital asset for the owner of the mule. Tools and machinery are capital. Farmland is capital. Mining and logging rights are capital. Patents and other forms of intellectual property are capital. The productive assets of a corporation are capital.

Is money capital?

Money is only a symbol, a measure and store of value, and a means of exchange. It can take many forms (including currency and bills of exchange) but it essentially is anything that can be used in the settlement of a debt. By itself money is not considered capital, according to binary economic theory. However, it can easily be converted to capital through the purchasing of capital assets.

Is education capital?

Education enhances the value of a person’s labor. In that sense it is an “investment” one can make. But it is not considered to be capital from the viewpoint of binary economics. (There is no such thing in binary economics, for example, as “human capital,” which would be an oxymoron or referring to a slave.) One’s educational background cannot be transferred or sold as can capital assets; a person’s education or enhanced skills cannot be separated from the person.

Doesn’t capital act to increase the productivity of the workers’ labor?

Current economic theory assumes that capital doesn’t do the producing — that labor does all the producing. It asserts that capital merely increases worker productivity and therefore the market value of labor. In fact we have plenty of evidence that this is not the case.

For example, elevators used to require human operators; today there are no elevator operators. Under conventional concepts of “productivity” (measuring the amount of output per unit of labor input), the “productivity” of the now non-existent elevator operator is infinite. Under binary economics, the “productiveness” of labor is 0% and that of capital is now 100%.

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Absent collective bargaining and minimum wage laws, the incomes distributed to human labor in a competitive free market would drastically shrink relative to the incomes distributed to the owners of capital (land, structures, equipment, computers, robotics, management systems, etc.) now producing the vast bulk of marketable goods and services.

While it is true that the market value of highly educated workers (such as those who can rapidly create intellectual property such as software) is fairly high, workers at all levels (from factory line workers, to bank tellers, to middle managers, to sports writers, lawyers, doctors, and engineers) are finding their labor being rapidly replaced by advanced technology.

How can you say labor isn’t worth much when steel, auto, and electrical workers make upwards of $45 per hour?

Take away progressive income taxation, minimum wage laws, the legally sanctioned power of unions to collectively bargain, the military industrial complex and the wars that justify it, the GI bill, food stamps, welfare, subsidized housing, etc., and how much do you think these workers would be making? How much do factory workers in Mexico, Guatemala, Haiti, China, Vietnam, and Bangladesh make? These are the workers who now manufacture our cars, appliances, and clothing. And their wages range from about twenty cents to a dollar per hour. They can barely feed, clothe, and shelter themselves, with every member of the household over six years of age working 16 hours a day, seven days a week. A pair of $70 shoes costs less than 25 cents in labor.

You see, the vast majority of the “work” that goes into manufacturing cars, appliances, and clothing is done by capital in the form of machinery and software, not labor. In the U.S. the owners of that capital have been forced to share the earnings of their capital with their workers in the form of higher wages and redistributive taxes. That is not true in the Third World countries whose workers we now hire at the true market value of their labor. The actual value of labor in U.S. manufacturing is about 1/100th the value of capital, because workers do only about 1/100 of the actual work, with capital doing the rest. And since most workers do not own any of the capital — not so much as the equivalent of a mule or a plow or a spinning wheel — they would in market terms “earn” only about 1/100 of the income produced by the sale of the manufactured product.

Don’t the wealthy use their capital earnings (or past savings) to purchase or create more businesses and  hire more workers — and therefore spread the wealth?

OK, so the capital owners earn the lion’s share of the proceeds from the sale of the manufactured product. Those very wealthy stockholders whose income from their investments far exceeds their need, desire, or ability to spend it all on consumer goods, do in fact often purchase additional capital with their excess income. That this “spreads the wealth” is the assertion of “trickle-down” economics. In fact, binary economics recognizes that tying the growth in the economy (and acquisition of productive capital) to the use of “past savings”, and reinvestment of their unconsumed income by the rich, merely accelerates the widening gap between the “haves” and “have-nots.”

Adam Smith realized, even before the advent of corporate capitalism, that the purpose of production is consumption. In order for supply and demand to be in balance, producers (both the workers and the capital owners) must consume what they produce or, as is more often the case, exchange their productions for the productions of others, in order to consume all the goods and services produced. Otherwise, what is not consumed (due to insufficient demand/customers with money) results in excess supply (market gluts).

Doesn’t everybody have an equal chance to own capital and become affluent?

Unfortunately not. Most of us spend virtually all of our income on our daily needs and have little or nothing to spare with which to purchase capital. The wealthy owner of capital can easily purchase more shares of stock with his capital earnings, and big businesses can finance new capital acquisitions using their current assets as collateral. The average person has no collateral other than his home and therefore has practically no opportunity to purchase a significant amount of capital assets. The result is that only those who already own lots of capital can acquire more, while the rest of us remain dependent on our labor for income.

Currently about 50 percent of all capital assets in the U.S. are owned by one percent of the population. Most of the income derived from that 50 percent of assets will not and cannot be spent on consumer goods or on the output of those same capital assets. A wealthy person can utilize and enjoy only so many villas, cars, appliances, and cruises. Therefore, that income is largely reinvested in new capital, increasing the supply of consumer goods without increasing demand, or it is used to repurchase existing assets, inflating the cost of assets. (Could this be why stock prices have been soaring recently?)

Is there a term for the capital that is created by reinvesting the earnings of capital?

Yes. Louis Kelso called this “morbid capital”. Morbid capital is capital whose output cannot be purchased by anybody because of insufficient demand (widely distributed purchasing power), or whose income is not used by its owners to purchase goods and services that have been produced (i.e., for consumption), but is reinvested in more capital.

What are the consequences of national or global excess accumulation of morbid capital?

The result may be another “Great Depression,” like the one that occurred during the late 1800s and 1930s. If any one thing can be said to be the cause of economic disparity and strife, not to mention depressions, it’s the mega-concentration of morbid capital in the hands a tiny fraction of the population.

Fueling that concentration is the gross misuse of money and credit. Consumer debt is forcing more people into wage slavery, debt slavery and welfare slavery. Mushrooming government debt is bankrupting communities, cities and nations. Government-debt-backed money created by central banks like the Federal Reserve is being pumped into the stock market to fuel speculation (thereby enriching a few hedge fund managers), rather than for financing broadly owned private sector growth that could distribute mass purchasing power.

Add to this toxic mix an unprecedented displacement of labor by advanced technologies and globalization, with growing public pressure to raise minimum wages and entitlements to reverse the shrinking purchasing power of the middle class. There you have a recipe for the sort of global financial crisis and social chaos that breeds terrorism and war.

So what are the most erroneous assumptions of the existing system that are holding back balanced and sustainable growth, and the equal opportunity of every person to become an economically liberated owner of capital?

The first erroneous assumption is that jobs are the only way for most people to earn a viable income. No other school besides binary economics recognizes capital ownership as another legitimate way of distributing mass purchasing power without violating private property rights and free market principles, or increasing the economic power of the State (society’s only legitimate monopoly over coercion).

The second erroneous assumption is that you must cut consumption in order to save enough to invest in capital. Most people live paycheck to paycheck, or hand to mouth, and cannot reduce their consumption to a degree sufficient to save enough to invest in a viable level of capital ownership. The wealthy, on the other hand, produce more income through their capital than they can consume on goods and services. Thus the owners of capital are the only producers who can accumulate enough savings to invest in capital and businesses. In this way, the ownership and control over the future economy remains in the hands of a tiny fraction of the population.

Then what is the solution?

Once you understand the absolute necessity for producers to consume what is produced and how concentration of capital ownership in a high tech, globalized economy makes that impossible, then it will become obvious that the solution lies in creating new opportunities and access of every person to the means of acquiring capital ownership. Secondly, a systemic solution will involve the financing of new capital formation so that its ownership is naturally distributed more evenly throughout the population, without the need for redistribution of existing wealth.

What is needed is legislation which would guarantee a certain amount of zero-interest “pure credit” and new asset-backed money for the average person, and especially for the poor. This  would be used to purchase newly issued capital shares whose earnings would, on the average, pay off the loans within five to seven years. Once the loans are paid off, all the earnings from those shares would thereafter go to the new owners. This is the essence of CESJ’s Capital Homestead Act proposal. This program would create equal opportunities to put new capital into the average person’s hands without taking anything away from those who have accumulated any amount of capital.

Wouldn’t redistributing capital require taking capital away from those who have the lion’s share of it, and wouldn’t that be politically impossible to legislate and enforce?

No and yes. Binary economists do not advocate taking anything away from anybody. They recognize how politically unfeasible this would be. Furthermore, it would constitute a major violation of property rights, which binary economists hold sacrosanct.

With which political party or ideology is binary economics most compatible?

Hopefully all political parties will come to embrace the principles and applications of binary economics (as called for in the Capital Homestead Act) as a plank in their campaign platforms and as a basis for new legislation. However the current platforms and ideologies of both the Democratic and Republican parties are at odds with important aspects of binary economic theory. Nor have any independent parties or presidential candidates so far adopted binary economics as the framework for their prescriptions for the U.S. economy.

Republicans generally give lip service to “free market capitalism” and defend people’s right to become very wealthy without having to share that wealth through taxation or other redistributive policies. Democrats, on the other hand, want to progressively tax high earnings and wealth and favor other redistributive policies in order to subsidize the working and non-working poor. Binary economics eschews both positions. It advocates taking nothing from the wealthy and giving nothing to the poor. But at the same time, it proposes legislation which would give the poor and middle classes the opportunity that the wealthy already have to borrow money in order to purchase capital in the form of capital shares.

What would conservatives find appealing about binary economics?

Conservatives share with binary economists a belief in the importance of free and open markets, the limited economic power of government, and the sanctity of property rights. Binary economists oppose taking property away from the wealthy or from anybody in the process of expanding capital ownership to more people. Binary economists do not believe that there is anything wrong with being wealthy, provided you are able and willing to spend most of your income during your lifetime. They advocate a single-rate (non-progressive) income tax, the phasing out of Social Security and welfare subsidies (as people are able to become economically independent through their capital ownership), the abolition of minimum wage laws and estate taxes, and the full payment of all annual corporate profits as dividends to shareholders — all of these being attractive to most conservatives.

What would liberals like about binary economics?

The result of widely distributed capital ownership would spell the end of poverty and restore true democracy to our society. Corporations owned largely by their employees, customers, suppliers, and/or members of the communities in which their operations reside are much less likely to pollute the environment, oppress their workers, cheat or defraud their customers, or engage in other forms of unethical behavior. The end goals of communism (worker ownership of the means of production and a life of leisure) would have been achieved without the need for violent revolution, statist government, or the confiscation of property.

Are the goals of binary economics egalitarian like those of communism?

The term “egalitarian” is often used to mean “equal results” (as opposed to “equal opportunity”) — which is not the goal of binary economics. Binary economists believe in everybody having an equal opportunity to acquire capital assets and share in the new wealth created by technology, automation, and other forms of capital. This does not mean that everybody will choose to take advantage of the capital ownership opportunities afforded by the Capital Homestead Act. Those who work hard and smart and invest well, on the other hand, might well achieve million dollar capital incomes by the time they retire at relatively young ages, say, 50 or 60. But, as was called for in the 1776 Virginia Declaration of Human Rights (the precursor to the Declaration of Independence), binary economics enshrines as a basic human right the equal opportunity and access of every person to “the means of acquiring and possessing property” in order to obtain security and pursue happiness.