Below is approximately the second half of Professor Terrell's critique of binary economics written from the "Austrian" perspective.
Rodney Shakespeare is quoted extensively. He is invited to post a reply.
I will be posting comments regarding the deficiencies of both the "Austrian" approach and binary economics as they relate to the economics of C. H. Douglas. ----------------
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contends that the Fed's independence would be jeopardized as "need" is introduced to the criteria for these central bank loans.43
The amount of discount lending that would occur under the binary economists' plan is not clear, but it would necessarily be large. Yet, if more discount lending would promote more rapid growth, why not make the initial discount window loan truly enormous, perhaps ten times the current U.S. GDP? Certainly this would allow even more rapid capital accumulation, if the binary economists are correct. The limits to such lending are not made clear.
V. Binary Economics, Property Rights and Freedom
As we have seen, the binary economists' plan for capital dispersion would produce a massive business cycle. It is also important to show that the plan is in no way compatible with a free market economy -as the binary economists claim. At its core is the government, reinsuring credit acquisition loans and setting up need based criteria for such loans. As Roth wrote, "Good intentions notwithstanding, the binary property system would simply substitute a new political redistribution process for the extant process.44 Besides, as Roth points out, the federal government already is the largest underwriter of financial risk in the United States (probably student loans and home mortgage loans?). The redistributive nature of these underwriting programs produces enormous losses.45
"...more likely than not, the government's decisions would reflect the concentrated benefit -dispersed cost calculus: credit would generally be allocated to well-defined constituencies, while the (largely hidden) costs would be broadly dispersed across all taxpayers. This would be the inevitable consequence of binary financing; an outcome which would hardly be congruent with the goals of binary economists."46
Where the binary economists' antagonism toward the free market is most plainly seen is, perhaps, their proposed limitation on capital ownership. Kelso and Kelso want to set a limit on the amount of capital that a family can own. "[The state] must prohibit the sterilization and morbidization of capital ownership by those who seek too much capital-productive power."47 Saving, apparently, would be a crime: "Economic health also requires vigilance in preventing families from accumulating more capital- earning power than they can or wish to spend on their own consumption."48
Kelso and Kelso also want to restrict or even eliminate bequests, as an extension of their proposed "principle of limitation." The state would step in to regulate intergenerational transfers and distribute assets after death.
"Property ceases at death...The right to make gifts of one's capital and assets ceases at death. Transfers of property at death, either through institutions or by will, including their taxation, belong to the domain of positive law and public policy. This is also true of limitations on transfers, such as those to charitable foundations, intended to circumvent laws regulating testamentary gifts. Thus the principle of limitations extends to, and countermands, all stratagems to subvert it.
"The legal implementation of the principle of limitation-its application to every situation-is, of course, a task for federal and state legislatures. No specific legislation regulating a capitalist economy is more critical than this."49
At least binary economists want to privatize public property in order to sweep more capital into the constituency trusts they have concocted.50
The Kelsos argue from the de facto existence of government involvement in the economy, and prevalent opinion that it should be so involved, that this constitutes an obligation to be involved. 'Is the federal government responsible for the health and prosperity of the American economy?...Today, both voters and officeholders take it for granted that the answer is yes."51 Vox populi, vox dei. "At issue, then, is not whether government will assume responsibility for economic prosperity, but how it will choose to discharge its ohligation to do so."52 The Kelsos are emphatic, and will brook no dissent:
"...there can hardly be any basis for questioning the establishment of the Capital Diffusion Reinsurance Corporation (CDRC [CCRC in Figure 1]) as a U.S. government backed capital credit reinsurance underwriter, supported by the full faith and credit of the U.S. government. This entity would fulfill a function that is already the government's but that the government is not carrying out in the most rational and purposeful way."53
"Federal and state governments have the duty to adopt a sound economic policy. It is also government's duty to take primary responsibility for interpreting, administering, and enforcing the policy of redemocratizing economic power...If we want to redemocratize economic power, we must do it through a new binary national economic policy."54
To remove all doubt as to the legality of the binary economists' proposal, Kelso and Kelso suggest a modification of the 1946 Employment Act (15 U.S.C. 1021) to include reference to "capital workers."55
Ashford and Shakespeare argue that a true free market obviously has failed, because there are so many government interventions-bailing out big firms, subsidizing farming, research, etc., redistribution of income, etc. "[T]he redistributions continue and on a very large scale precisely because the market distribution of income has proved economically and politically unacceptable to almost everybody."56 This is begging the question. A true free market does not work, they argue, because the government is in fact intervening to correct failings. Ashford and Shakespeare condemn hypocritical defenders of the "free market" for favoring all these interventions. Then they want to say that their hypocrisy imp lies that the free market must not work. This is clearly an ad hominem attack.
Incredibly, Ashford and Shakespeare claim that binary economics is "more faithful to free market principles than the theories, critiques and proposals of even the most ardent `free market' advocates."57 They refer to free market capitalism as "Unfree, unfair, and inefficient market capitalism."58 It is called unfree because "although everyone is theoretically free to acquire productive capital, effective freedom to acquire it is unnecessarily denied to the m any and enjoyed by only a few."59
"Moreover, the binary economy is structured to operate in a way more faithful to free market principles than any existing economy. It is a true free market effectively open to everybody instead of a few. In accordance with true free market logic, it eliminates unnecessary market barriers so as to allow the law of supply and demand to work more efficiently for all people individually. It therefore offers a level of efficiency well beyond that which can be achieved in the existing unfree market economies."60
Later, Ashford and Shakespeare write, "In binary terms, true free market principles are those of open participation, voluntary exchange, and respect for private property."61
This is a semantic game with the term "free market." These binary economists want to redefine a free market as an economy in which there is freedom from all constraints that might prevent a person from attaining command over capital assets. This definition inserts equality of individual capability as a precondition of a free market. A free market, properly understood, is one in which two individuals are free to voluntarily exchange their property without the coercive intervention of a third party. The binary economists' concept of freedom is egalitarianism. One might well ask, what if that person who owns so little capital in the "unfree" economy is less capable of sending those capital assets to their highest and best uses? What if that person has a time preference that is inconsistent with the postponing of consumption that is necessary to invest in capital? Is that person therefore less free? Yet the binary economists are arguing in their ideal world of dispersed capital ownership, everyone would be able to handle capital asset management with an equal degree of skill.
The so-called "binary property right" actually strikes at the core of property rights. It is not mere hubris, then, when Ashford and Shakespeare call the binary property right a "paradigm-altering concept." It is "at the heart of the binary private property system and is the right of all people to acquire, on market principles, private and individual ownership of wealth-creating capital assets..."62 And, "the basic binary property right is the right to acquire capital on non-recourse corporate credit and to repay the loan with the earnings of the capital acquired."63
"The binary property right is...a right to participate in production and in market transactions with willing buyers and sellers of goods and services with re spect for everyone's private property. It is not the right to compel a transaction or to barge in on, or prevent, the voluntary transactions of others...
"Nevertheless, although the binary property right is a market right which respects the rights of others and requires voluntary transactions for its implementation, it is intended to be an effective right and not a merely theoretical one. In other words, it is intended to enable people without capital to compete in practice with existing owners for new capital acquisition. This is done by modifying the present legal and administrative structure to make the right effective in practice."64
Again, the binary economists want to have the voluntary nature of a free market but none of the constraints that might prevent a person from attaining command over capital assets. According to the binary economists, each individual has the right to engage involuntary transactions to acquire capital (and a substantial amount of it). If an individual lacks sufficient wealth, creditworthiness, or income to purchase this capital, it must mean that he doesn't have an effective right. To grant the effective right to that individual means that someone is going to have to increase his wealth, creditworthiness, or income. Transferring wealth to that person, or requiring others to ignore certain factors relevant to his creditworthiness, is inconsistent with "respect for everyone's private property." Yet this is exactly what is required by the binary proposal for capital dispersal. In the view of binary economists, no one should be denied credit for the purpose of buying capital for any reason. Inadequate collateral, a poor repayment history, or any other justification a lender might provide for denying a loan are all swept aside as violations of the binary property right. Even the U. S. Constitution is supposedly consistent with the binary proposal:
"The essence of economic democracy lies in the elimination of differences in earning power resulting from denial of equality of economic opportunity, particularly equal access to capital credit. Differences of economic status resulting from differences in advantages taken and uses made of economic opportunities are natural, proper, and desirable. But all differences based on inequality of economic opportunity, particularly those that give access to capital credit to the already capitalized and deny it to the non- or undercapitalized, are flagrant violations of the const itutional rights of citizens in a democracy."65
The alleged "right ...to be adequately capitalized"66 is violated whenever someone accumulates "more capital than is required to meet the owner's consumption needs and wants and to free him or her from subsistence toil...""67 Any returns to productive work that are not immediately consumed are apparently illegitimate, to binary economists. The Kelsos go on:
"This is the essence of social injustice. It denies the capitalless majority of citizens their right to be productive-a right dependent in our industrial age upon effective opportunity to acquire, own, [p. 26] and protect capital. It denies them equal protection of the laws, which would give them equal access to the freedom and independence that capital ownership provides and enhances.
"It follows that if every household must own enough capital, no household can or should own too much because the aggregate of what is produced equals the aggregate power to consume generated by production. If the few produce what must be consumed by the many, the many are deprived of their power to produce for themselves and either become wards of charity or die of privation. The condition of too much is reached when a household or consumer unit's capital holdings produce more income than its members wish to spend and in fact do spend on consumption patterns, freely chosen by the individuals concerned, and to the prevailing state of technology."68
Similar "rights" are mentioned elsewhere: a "right to good livehhood" is implied,69 and Franklin Delano Roosevelt's claim that "every man has...the right to make a comfortable living" is approvingly quoted .70 Binary economists also refer to a "right to produce goods and services."71 A right to produce requires the right to command resources necessary for production--and this implies an obligation on the part of others to provide those resources. If they are not voluntarily tendered to the person with the "right to produce," they may presumably be taken. A position more consistent with private property rights acknowledges that before trade no one has a "right" to the property of another. The "economic democracy" of the Kelsos strikes at the foundation of property rights. Ironically, even in the same page they celebrate the free market.
How large, exactly, is the capital portfolio that each person should have? Binary economists link the size of the portfolio to the indeterminate "physical capacity of the economy," a nonsensical concept.72 Ashford and Shakespeare say that the goal should be a "capital estate large enough to supply sufficient current consumer income to support at least one half of an affluent life style (measured in the context of what society as a whole can efficiently produce)."73 "Reasonable" people, it seems, will stop increasing their consumption after a certain standard of living has been attained. "When one has acquired sufficient capital-sourced earning power to satisfy one's consumer needs and wants, sufficient to reasonably provide the living one wishes to enjoy, one has enough capital-oriented earning power."74 Once one has "enough" capital, any excess would be violating the rights of the capital-deprived, so that government intervention is necessary. The state will also need to decide what a "reasonable" standard of living is:
"What constitutes a viable capital estate? How large should it be? In a free society that is a question for each household to decide for itself, subject to the power of government to enforce the limitation set forth in the common law of property. But the logic to which Congress must resort, both under the concept of economic justice and under the philosophy behind the Declaration of Independence and the Constitution, is the equal right of each consumer unit to the opportunity to produce under competitive conditions the income necessary to enjoy the standard of living it reasonably chooses for itself. "Reasonably" refers to the physical capacity of the economy. If its physical capacity is smaller than the aggregate of chosen living standards--a condition that modern technology makes highly unlikely-then Congress must, with equal protection to each, define a lower limit of viability that will prevent any capital-owning family from injuring anyone else's person or property or the public welfare. Social policy concerning family size will here become an essential political consideration."75
Clearly, the binary proposal amounts to a severe attenuation of basic individual property rights. Savings would be illegal, caps would evidently be set on standards of living, and even family size would be regulated.
VI. Conclusion
The claims of binary economists can be quite extravagant, and they lack no confidence in the ultimate success of their new paradigm. Ashford and Shakespeare write that "...the binary view of production...has momentous implications which will reshape the way people look at everything economic and much else besides. Those implications will eventually fill articles and books..."76 Kelso and Kelso make other bold claims:
"We can, in time, inoculate people against poverty. ...[W]e can raise the earning power of the underproductive and prevent the sterilization of excess capital productive power accumulated by those who will not and cannot use it for their own consumption. We can tame, if not wholly eliminate, the business cycle in the American economy. We can plan and deliberately effect economic health, both for the national economy and for each consumer unit within it. We can indeed demonstrate for the world how to produce goods and services in such a way as eventually to make all consumers economically autonomous, as they were under nature's original economic plan for preindustrial humanity."77
In this society of evenly dispersed capital, there will be no need for welfare or charity. "Welfare, private charity, boondoggle employment, and other modes of redistribution might well be necessary as temporary political or emergency expedients. But once the democratic capitalist goals have been attained, charity and other forms of redistribution should no longer be needed.78
The benefits of binary economic s are said to extend even to a change of human nature, so that people will become happier with less:
"...as all people acquire an increasingly secure capital base, it is conceivable that there will be a diminution in perceived human needs (which, in the case of some people today, amount to almost limitless dreams of conspicuous consumption) to a more balanced understanding of what is really required for human happiness. Fear of, and the reality of, material insecurity are probably the main reasons why some humans come to have almost limitless wants and greedy, highly possessive attitudes. ...The binary economy, however, holds a potential for greatly improving attitudes because it provides a profound material security for all."79
Elsewhere the Kelsos claim that their "economic democracy" will eliminate inflation as well." Other binary economists believe that binary economics is also going to produce environmental purity and habitat preservation, because incomes will be so high that we can afford to produce using more expensive methods that are less damaging to the environment.81
Binary economists stress the uniqueness of their "new paradigm." Yet the theory is riddled with severe problems. Milton Friedman, who once debated Kelso, called Kelso's "two-factor economics" a "crackpot theory," and with considerable justification, it seems. It is not clear from reading binary economists that they understand the "conventional" economics that they are criticizing. Many binary economists are not formally trained in economics. This is not necessarily a problem, as many of the greatest insights in economic thought came from people who had no such training. Yet, for an organized effort to reform the discipline of economics, binary economics reveals surprisingly little participation from those schooled in the discipline. Louis Kelso himself had degrees in law and finance, Robert Ashford is trained in law, and Rodney Shakespeare has a degree in history. Shakespeare, co-author (with Ashford) of a major work defending binary economics, states that he "tried to study conventional economics but found that every book on economics gave him a headache."82 From which he concluded that economics was fundamentally flawed.
Binary economics is, in sum, a cluster of significant theoretical errors masquerading as a market-friendly solution to our worst economic problems. Kelso's employee stock option plan is a legitimate method of simultaneously compensating employees and solving a pervasive principal-agent problem. Binary economics takes the ESOP and turns it into a fantastic Wolkenkuckucksheim, heedless of the massive inflation that would necessarily accompany its policy proposals. --
Notes: 1 Ashford and Shakespeare (1999), p. 7. 2 Ashford and Shakespeare (1999), p. xi. 3 See Kelso and Adler (1958, 1961), Kelso and Hetter (1967), Kelso and Kelso (1986), Ashford (1990, 1996), Gauche (1998), Ashford and Shakespeare (1999). 4 Ashford (1996), p. 10. 5 Kelso and Kelso (1986), p. 20. 6 Roth (1996), pp. 58, 59. 7 Roth (1996), p. 60. 8 Ashford and Shakespeare (1999), p. 60. 9 Kelso and Kelso (1986), p. 17. 10 Kelso and Kelso (1986), p. 165. 11 Kelso and Kelso (1986), p. 168. 12 Mises (1956), pp. 84, 85. 13 Ashford and Shakespeare (1999), p. 28. 14 Ashford and Shakespeare (1999), p. 30. 15 Ashford and Shakespeare (1999), p. 23. 16 Mis es (1956), p. 86. 17 Mises (1956), pp. 86, 87. 18 Roth (1996), pp. 61, 62. 19 Roth (1996), p. 59. 20 Ashford (1996), p. 8. 21 Kelso and Kelso (1986), p. 17. 22 See Roth (1996), p. 61. 23 Kelso and Kelso (1986), p. 8. 24 Kelso and Kelso (1986), p. 114. 25 Ashford and Shakespeare (1999), p. 128. 26 Mises (1956), p. 85. 27 Kelso and Kelso (1986), p. 20. 28 Kelso and Kelso (1986), p. 128. 29 Kelso and Kelso (1986), pp. 35, 36. 30 Kelso and Kelso (1986), pp. 36, 37. 31 Ashford and Shakespeare (1999), p. 39. 32 Kelso and Kelso (1986), pp. 34, 35. 33 Kelso and Kelso (1986), p. 37. 34 Ashford and Shakespeare (1999), p. 126n. 35 See Roth (1996), p. 61. 36 Kelso and Kelso (1986), p. 36. 37 Kelso and Kelso (1986), p. 34. 38 Kelso and Kelso (1986), p. 40. 39 Kelso and Kelso (1986), p. 40. 40 Ashford and Shakespeare (1999), p. 125. 43 Roth (1996), pp. 65, 66. 44 Roth (1996), p. 64. 45 Roth (1996), p. 64. 46 Roth (1996), pp. 64, 65. 47 Kelso and Kelso (1986), p. 33. 48 Kelso and Kelso (1986), p. 20. 49 Kelso and Kelso (1986), p. 27. 50 Kelso and Kelso (1986), pp. 121, 122; Gauche (1998). 51 Kelso and Kelso (1986), p. 109. 52 Kelso and Kelso (1986), p. 110. 53 Kelso and Kelso (1986), p. 111. 54 Kelso and Kelso (1986), p. 122. 55 Kelso and Kelso (1986), p. 123. 56 Ashford and Shakespeare (1999), p. 65. 57 Ashford and Shakespeare (1999), p. 17. 58 Ashford and Shakespeare (1999), p. 10. 59 Ashford and Shakespeare (1999), p. 11. 60 Ashford and Shakespeare (1999), p. 17. 61 Ashford and Shakespeare (1999), p. 19n. 62 Ashford and Shakespeare (1999), p. 7. 63 Ashford and Shakespeare (1999), p. 47. 64 Ashford and Shakespeare (1999), p. 48. 65 Kelso and Kelso (1986), p. 115. 66 Kelso and Kelso (1986), p. 25. Kelso and Kelso (1986), pp. 24, 25. 68 Kelso and Kelso (1986), pp. 25, 26. 69 Kelso and Kelso (1986), p. 12. 70 Kelso and Kelso (1986), p. 23. 71 Kelso and Kelso (1986), p. 11. 72 Binary economists apparently regard the existence of temporarily idle capital (factory downtime at night, etc.) as evidence of unused physical capital. 73 Ashford and Shakespeare (1999), p. 49. 74 Kelso and Kelso (1986), p. 29. 75 Kelso and Kelso (1986), pp. 27, 28. 76 Ashford and Shakespeare (1999), p. 32. 77 Kelso and Kelso (1986), p. 21. Note here the goal of "economic autonomy" or self-sufficiency. If this means that people have greater ability to fulfill their own economic goals, this is fine. But if this means less reliance on others through specialization and trade, then this autonomy will lead to poverty. 78 Kelso and Kelso (1986), p. 37. 79 Ashford and Shakespeare (1999), p. 54. 80 Kelso and Kelso (1986), p. 26. 81 Ashford and Shakespeare (1999), pp. 54, 55. 82 Ashford and Shakespeare (1999), p. 464. --
Works Cited Ashford, Robert H. 1990. "The Binary Economics of Louis Kelso: The Promise of Universal Capitalism," Rutgers Law Journal 22:3-120. ______. 1996. "Louis Kelso's Binary Economy," Journal of Socio-Economics, 25:1, 1-53. ______, and Shakespeare, Rodney. 1999. Binary Economics: The New Paradigm. Lanham, MD: University Press of America. Gauche, Jerry N. 1998. "Binary Economic Modes for the Privatization of Public Assets," Journal of Socio- Economics, 27:3, 445-459. Kelso, Louis O., and Adler, Mortimer J. 1958. The Capitalist Manifesto. New York: Random House. ______. 1961. The New Capitalists. New York: Random House. Kelso, Louis O., and Hetter, Patricia. 1967. Two- Factor Theory: The Economics of Reality. New York: Vintage. Kelso, Louis O., and Kelso, Patricia H. 1986. Democracy and Economic Power. Cambridge, MA: Ballinger. Mises, Ludwig von. 1956. The Anti-Capitalistic Mentality. Princeton: Van Nostrand. Roth, Timothy P. 1996. "A Supply-Sider's (Sympathetic) View of Binary Economics," Journal of Socio-Economics, 25:1, 55-68. --
Binary Economics: Paradigm Shift or Cluster of Errors? March 14, 2003 Timothy D. Terrell Assistant Professor of Economics Wofford College 429 N. Church St. Spartanburg, SC 29303-3663 [EMAIL PROTECTED]
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