Binary Economics

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Binary economics is a new, highly modern, economics which, uniquely, combines efficiency with a specific social and economic justice. In binary economics, the justice creates the efficiency and the efficiency creates the justice. The concept of a contributive, distributive and harmonic justice ─ with an emphasis on the sovereignty of the human person in the social context ─ is what primarily distinguishes binary economics from conventional classical capitalist and socialist theories. Binary economics is now beginning to be taught in universities ─ the first is Trisakti University, Jakarta. Trisakti is the biggest private university in Indonesia, the second in prestige, and the birthplace of the Indonesian reformasi revolution.

1 Louis Kelso
2 Employee Stock Ownership Plans
3 Development of Binary Economics
4 Uses of Central Bank-issued Interest-free Loans for forms of Productive Capacity
5 Productiveness

[edit] Louis Kelso

Binary economics was originally established by lawyer and economist Louis O. Kelso (Kelso & Adler, 1958) to explain how capital has become dominant, and narrowly owned, in the modern industrial economy. Kelso’s analysis had an important consequence ─ for an economy to be truly efficient, the ownership of productive capital had to become widely distributed and, likewise, if social and economic justice were to be achieved there had to be the same distribution (on true free market and private property principles).

For Kelso, new binary holdings ─ mainly in the large corporations ─ would pay out their full capital earnings, be capable of being insured and, if loss occurred, there would be no recourse to the new binary owners. Thus Kelso was proposing widespread capital ownership to achieve a widespread new form of income which could be possessed by any individual in the population irrespective of whether or not that individual was in conventional employment (Kelso & Hetter, 1967). The “binary” in binary economics means “composed of two” ─ there are two factors in production (capital and labor) and thus there are two ways of genuinely earning a living ─ by labor or by the ownership of productive capital (Kelso & Kelso, 1991).

[edit] Employee Stock Ownership Plans

Today’s Employee Stock Ownership Plans are originally a binary invention although it must be understood that present ESOPs are not true binary ESOPs because, amongst other things, they do not have full payout of earnings and do not make use of interest-free loans issued from the central bank (Kelso & Kelso, 1991). Kelso hoped that the binary ESOP would allow capitalism to compete with the communist system during the Cold War.

The Employee Stock Ownership Plan (ESOP) is just one of many techniques of corporate finance proposed by Louis Kelso that can be used to broaden capital ownership. Like all techniques it can be misapplied and abused. Nevertheless, the proper use of the ESOP, as envisioned by Kelso, has done much to broaden capital ownership. Those who would evaluate binary economics based on the efficacy of ESOPs should bear in mind that the full potential of ESOPs for broadening capital ownership is needlessly suppressed by debilitating legislation based on conventional economic theory. The primary defect in the present ESOP legislation is that it continues to require poor and working people to acquire capital primarily with the earnings of labor (rather than primarily with the earnings of capital), and therefore provides only very limited ability for poor and working people to acquire capital with the earnings of capital. (Paragraph incorporated from the version on talk page (emphasis added).)

[edit] Development of Binary Economics

Since Kelso’s time binary economics has been developed and explained (Ashford & Shakespeare, 1999; Kurland, Brohawn & Greaney, 2004) so that its essence is more easily understood around the world (Shakespeare & Challen, 2002). For example, at the core of today’s binary economics is a concept of unicity embracing all aspects of life. To Muslims, the concept is Tawhid; to Christians, it is Kingdom (or Kin-dom) of God; to Hindus, Buddhists, Jains and Sikhs, it is Dharma; and to Jews, Shalom ─ the precise words do not matter too much because the underlying comprehension and insights are universal (Shakespeare, 2006).

Moreover, there is now an open, confident embrace of elements from both past and present. From the past come:

a prohibition of riba (interest)
a sense of stewardship
a need for sharing and participation
a strong ethical sense
and a demand for structural social and economic justice rather than merely palliative charity.

From the present come very modern insights e.g., that:

money is created today, out of nothing
in respect of newly-created money which is lent for productive or environmental capital purpose, riba/interest ─ as distinct from administration and any other essential cost ─ is not merely wrong (as it used to be in Christianity) but is not necessary
the technological capacity exists to eliminate poverty and so continuing poverty is the fault of human institutions and practices rather than any inadequacy of equipment or expertise.

Past and present then come together to:

replace the old economics with a new economics
supplant the old politics with a new politics
create a new social morality
deepen democracy
solve the major problems of the environment.

Other consequences include an end to economic colonialism, an improvement in the position of women, policy to unite differing groups, and a wide capital ownership. Thus a unique, comprehensive view of society and its possibilities is being presented.

There has also been a change of emphasis in what is taken to be the first practical matter to be discussed in binary economics. Whereas, in the past, the need for every individual in the population to have a substantial ownership of full payout capital was emphasized, today the presentation is more usually made ─ and this is especially important for Islam (Choudhury and Shakespeare, 2007, see in particular, Integrating Islamic Finance into Mainstream-- Harvard paper, March, 2006) ─ by first emphasizing the use of a supply of interest-free loans issued by the central bank (but administered by the banking system) for various forms of productive capacity which can take many different forms (e.g., Turnbull, 2001).

[edit] Uses of Central Bank-issued Interest-free Loans for forms of Productive Capacity

Thus such loans, (bearing only an administrative cost, including capital credit insurance if necessary (Kelso & Adler, 1961) and generally requiring collateral and issued in circumstances of a 100% reserve, gold-backed money supply) would be available for:

Public capital investment thereby allowing hospitals, housing, roads, bridges, libraries, sewage works, fire stations, water supply, schools etc. to be constructed for one half, or one third of the present cost. Over time, the National Debt would reduce. However, the capital projects can still, if wished, be built by the private sector, managed by the private sector, even owned by the private sector. The key point is that the cost, at the very least, is being halved.
Private capital investment if such investment creates new owners of capital and is part of policy to enable all individuals, over time, on market principles, to become owners of substantial amounts of productive capital. By using central bank-issued interest-free loans, administered by the banking system on market principles, a large company/corporation would get cheap money as long as new shareholders are created.
Green capital investment, particularly for clean, renewable energy. At present, using interest-bearing loans, a lot of green technology is not financially viable. With interest-free loans, however, it would become viable. Thus we could have, for example, clean electricity through tidal barrages, dams, windmills, wave machines, solar electricity, and geothermal power stations.
Small and start-up businesses thereby freeing them from the crushing pressure of interest-bearing debt. (In the case of small and start-up businesses, there would be no requirement for wide ownership.)

The overall effect of such loans is to increase wealth and distribute it more widely in counter-inflationary circumstances.

[edit] Productiveness

There is a slightly technical matter to be grasped before binary economics can be properly understood ─ the distinction between the conventional concept of productivity and the binary concept of productiveness. Productivity, in the conventional classical and neo-classical sense, is the ratio of labor as input to the overall output. In contrast, binary productiveness is the percentage of labor or capital that contributes to the output (capital contributes a large percentage as even Marx understood -- Kelso 1957). Labor and capital are of a different, although co-operating, nature and therefore should be seen as separate inputs contributing to output.

For example, a man digging a hole with his hands will take three hours to achieve his task by using only labor. By using a form of capital ─ a shovel ─ he will be able to dig the hole in one hour or dig three holes in the same amount of time it took him to dig a hole with his hands. The productiveness of the human labor is 25% while the productiveness of the shovel is 75%.

Criticism

Criticism of binary economics tends to concentrate on the example of the man digging the hole. The criticism claims that: a) somebody invented the shovel; b) the shovel cannot be independent.

But the fact that somebody invented the shovel has nothing to do with its present use for digging a hole and binary economics views the shovel as an independent contributor which co-operates with the man. Just as two humans can, and do, 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.

Criticism on the lines as indicated above can be found in Timothy D. Terrell Binary Economics: Paradigm Shift Or Cluster of Errors? summarizing a critique given by Timothy Roth (Roth 1996, pp. 58-59) on the shovel example. 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 hole digger has no role in the productiveness of the shovel. Yet binary economics does not say the digger has no role in the shovel’s productiveness -- both binary economics and Roth (Roth 1996, p. 60) agree that man and shovel together produce far more than man or shovel separately.

Moreover, when an automated factory, or a huge dam producing electricity and fresh water, are considered, the critics of the binary analysis of productiveness have a problem ─ in the case of the automated factory there is no human input (design and building have been paid for, and maintenance and repair are maintenance and repair but not a direct contribution to production). In the case of the dam, with relatively little human input although it is cricial, the physical output of the capital is huge (and, don’t forget, the sun, weather and gravity can be viewed as co-operating capital assets but ones which cannot be owned).

References

External links

Texts

Ashford, Robert The Binary Economics of Louis Kelso, (Rutgers Law Journal, vol. 22. 1990).
Ashford, Robert Louis Kelso’s Binary Economy (The Journal of Socio-Economics, vol. 25, 1996).
Ashford, Robert & Shakespeare, Rodney (1999) Binary Economics the new paradigm.
Choudhury, Masudul Alam & Shakespeare, Rodney (2007) The Universal Paradigm and the Islamic World-system.
Gauche, Jerry Binary Modes for the Privatisation 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, Colombia University, May, 2006)
Kelso, Louis & Kelso, Patricia Hetter (1986 & 1991), Democracy and Economic Power.
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.
Kelso, Louis (1957), Karl Marx: The Almost Capitalist (American Bar Association Journal, March, 1957)
Kurland, Norman The Federal Reserve Discount Window (Winter 1998, Journal of Employee Ownership Law and Finance).
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.
Roth, Timothy P. (1996). A Supply-Sider's (Sympathetic) View of Binary Economics. Journal of Socio-Economics 25 (1): 55–68.
Shakespeare, Rodney & Challen, Peter (2002) Seven Steps to Justice.
Shakespeare, Rodney, Integrating Islamic Finance into the Mainstream (paper delivered at Harvard, April, 2006)
Shakespeare, Rodney (2006) The Modern Universal Paradigm.
Shakespeare, Rodney & Proudfoot, Wilf (1976) The Two-factor Nation.
Turnbull, Shann (2001) The Use of Central Banks to Spread Ownership.
Turnbull, Shann (1975/2000), Democratising the Wealth of Nations.