A detailed action plan to eliminate poverty and keep people free from big government. Please note that this article is from an American perspective but the concepts can be adapted to any monetary system.

by Norman G. Kurland
© 1972 revised 2002

(Later published in The Journal of Socio-Economics, Vol.30 pgs. 495-515)

Part 1 - Introduction

What is money? In his 1967 book coauthored with his wife Patricia Hetter Kelso, Two-Factor Theory: The Economics of Reality, the late Louis O. Kelso described money:

Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. 1

What is clear from this description is that money is a "social good," an artifact of civilization invented to facilitate economic transactions for the common good. Like any other human tool or technology, this societal tool can be used justly or unjustly. It can be used by a few who control it to suppress the natural creativity of millions of people, or it can be used to achieve economic liberation and prosperity for all affected by the money economy.

How important is money? Meyer Amschel Rothschild, the founding father of one of the world’s most powerful financial dynasties, has been quoted, perhaps apocryphally, as having said:

Let me issue and control a nation’s money and I care not who writes the laws. 2

Confirming the relationship between money power, access to property, and political power, is the clear-sighted observation of Benjamin Watkins Leigh in the 1820 Virginia debates on the U.S. Constitution:

Power and property may be separated for a time, by force or fraud – but divorced, never. For, as soon as the pang of separation is felt … property will purchase power, or power will take property. 3

It takes no genius to understand the relationship between money and market prices. "Too many dollars chasing too few goods" is the classic definition of inflation. And history is replete with cases where money has been politically controlled to benefit the few at the expense of the many.

In this paper a case will be made for a prudent and humane transformation of any nation’s monetary system. In the future, it will be shown, new money could be created in ways that can unharness the full productive potential of society, while closing what The Wall Street Journal (September 13, 1999, p. A1) recognizes as the growing wealth gap between the richest 10% and the rest of society 4. Furthermore, such reforms could be undertaken voluntarily without the need to redistribute existing wealth. Under the proposed model of development, prices, wages and interest rates would be determined completely by competitive market forces, not by the whim of central bankers, politicians or organized power blocs.

This paper will show that Say’s Law of Markets – that supply can create its own demand and demand its own supply – can be made to work. Higher rates of sustainable growth could be achieved, assuming: (1) capital credit is universally accessible and (2) profits are fully distributed to raise overall consumption, savings and investment levels. Reforms based on this new economic paradigm, first developed by Louis O. Kelso and later refined by Robert Ashford and Rodney Shakespeare 5, would result in an asset-backed money supply that would provide sufficient liquidity to banks and other financial institutions for financing an expanding portion of the new productive assets which are added each year to grow the economy.

Unutilized productive capacity, concentrated capital ownership and widespread unmet needs and wants characterize, in different degrees, every economy in the world. In this context, the potential for substantial ownership-linked "binary growth" calls for a fundamental reconsideration of monetary policy and its relevance to Say’s Law.

The term "binary", when used by Kelso and those embracing his theories, refers to two all-embracing categories – people (or "labor") and things (or "capital") – to describe every kind of physical and intangible input to the productive process. Binary economics involves the study of how technological change impacts the relationship between labor and capital. As a socio-economic paradigm, it reveals the impact on income and asset distribution, as well as the moral, political and social implications, of universal access to capital ownership under theoretically free market conditions.

While this author recognizes that both Karl Marx and John Maynard Keynes, and their many followers in academia, have rejected Say’s Law of Markets, this paper will point out how the binary economic model originally conceived by Louis Kelso refutes the criticisms of Marx and Keynes and offers a more sound moral and economic framework for promoting sustainable development within a market system. The Kelso model – recognizing both labor and capital as direct and interdependent sources of mass purchasing power – would be structured to create a more just and more productive system than any market system in the history of modern civilization.

Wealth distribution assumes wealth creation. According to recent studies, productive capital (i.e., technological and systems advances and improved land uses) accounts for almost 90% of productivity growth in the modern world. 6 Thus, balanced growth in a market economy depends on incomes distributed through widespread individual ownership of productive capital, i.e., all nonhuman means of production. The technological sources of production growth would then be automatically linked by free market forces to the ownership-based consumption incomes needed to purchase new products from the market. Thus, Say’s Law of Markets – which both Marx and Keynes attempted to refute – would become a practical reality for the first time since the Industrial Revolution began.

As Ashford and Shakespeare have explained, binary economics reconciles Say’s Law to the persistent coexistence of unutilized productive capacity and unmet needs and wants. This new perspective recognizes that "supply (in the form of increasing capital productiveness) will generate demand in proportion to its distribution." 7

The challenge this paper will present, especially to academic economists, is in its mathematical demonstration of how Say’s Law of Markets can be reconciled both with the classical quantity theory of money and various measures of net national product (NNP) to permit accelerated rates of growth without inflation, as predicted by binary economic theory. A side-effect of this proof is to relegate the Phillips’ curve – asserting that inflation and unemployment are inextricably linked – to the dustbin of economic history.

The ultimate aim of this paper is to present a logical and unified market system that is structured to combine economic efficiency with fundamental principles of economic justice. 8 Implicit in this position is that no known economy in the history of civilization, particularly since the advent of modern technology, has offered both genuine justice for all, and optimum rates of productive efficiency. If this author is correct, those frustrated by today’s unfree and unjust market economies are urged to come together for serious study and discussion of an alternative model of development – the new paradigm of binary economics.

To Part 2

Notes

1. Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality, New York: Random House, 1967, p. 54.

2. Frederick Merton, The Rothschilds, A Family Portrait, New York: Atheneum, 1962.

3. Benjamin Watkins Leigh, speech on November 3, 1829, Proceedings and Debates of the Virginia State Convention of 1829-1830, Volume I, New York: De Capo Press, 1971, p. 156.

4. In his book, Top Heavy: A Study of Increasing Inequality of Wealth, New York: Twentieth Century Fund, 1995, Dr. Edward N. Wolff of New York University mentioned that "in 1992, the financial wealth of the top 1 percent was greater than the combined wealth of the bottom 90 percent." Based on his later analysis of the Federal Reserve’s Triennial Survey of Consumer Finances, Dr. Wolff stated that "the nation’s 400 richest families grew by an average of $940 million each from 1997 to 1999, whereas over a recent 12-year period of 1983 to 1995, the modest net worth of the bottom 40 percent of households plummeted 80 percent." (See his paper "Recent Trends in Wealth Ownership" presented at a conference on Asset Ownership in the United States at the New York University, December 10-12, 1998.) Globally, the trends are worse. Jeff Gates in Democracy at Risk: Rescuing Main Street from Wall Street, Cambridge, MA: Perseus Publishing, 2000, cited studies showing that "the world’s two hundred richest people more than doubled their net worth in the four years to 1999, to more than $1 trillion – an average $5 billion each.... This combined wealth ... now equals the combined annual income of the world’s poorest 2.5 billion people" (p. xiv).

5. See The Capitalist Manifesto, Louis O. Kelso and Mortimer J. Adler, New York: Random House, 1958; The New Capitalists: A Proposal for Freeing Growth from the Slavery of Savings, Louis O. Kelso and Mortimer J. Adler, New York: Random House, 1961; Two-Factor Theory: The Economics of Reality, Louis O. Kelso and Patricia Hetter, New York: Random House, 1967; Democracy and Economic Power: Extending the ESOP Revolution, Louis O. Kelso and Patricia Hetter Kelso, Lanham, MD: University Press of America, 1991. (The first two books by Kelso and Adler, and other Kelso writings, are accessible free from the web site of the Kelso Institute for the Study of Economic Systems at www.kelsoinstitute.org.)

See also Binary Economics: The New Paradigm, Robert Ashford and Rodney Shakespeare, Lanham, MD: University Press of America, 1999. In the academy, Professor Ashford has pioneered the consideration of binary economics as a distinct economic paradigm, with special emphasis on "The Principle of Binary Growth," which holds that "capital has a potent distributive relationship to growth." According to Professor Ashford, the principle of binary growth distinguishes binary economics from all prior schools of economic thought.

Other articles on binary economics by Robert Ashford include: "A New Market Paradigm for Sustainable Growth: Financing Broader Capital Ownership with Louis Kelso’s Binary Economics," Volume XIV, Praxis, The Fletcher Journal of Development Studies, pp. 25-59, 1998; "Louis Kelso’s Binary Economy," Volume 25, Journal of Socio-Economics, pp. 1-53, 1996 (available on westlaw.com in its jjsocecon data base); and "The Binary Economics of Louis Kelso: The Promise of Universal Capitalism," 22 Rutgers Law Journal 3, 1990 (available on the web site of the Center for Economic and Social Justice at www.cesj.org .

A compendium of writings by many authors on this subject (prepared in collaboration with the Center for Economic and Social Justice) can be found in Curing World Poverty: The New Role of Property, John H. Miller, ed., St. Louis, MO: Social Justice Review, 1994. Several articles in Curing World Poverty and a broad array of related writings on the moral, political, social and economic implications of the Kelso paradigm are available on the web site of the Center for Economic and Social Justice op.cit. at www.cesj.org.

For a sympathetic analysis from a conventional Keynesian perspective, see Stephen V. Kane, "The Theory of Productiveness: A Microeconomic and Macroeconomic Analysis of Binary Growth and Output in the Kelso System," 29 Journal of Socio-Economics, 541-563, 2000. For another good presentation on binary economics, see Jerry Gauche, "Binary Economic Models for the Privatization of Public Assets," 27 Journal of Socio-Economics 445-459, 1998.

6 . John W. Kendrick, "Productivity Trends and Recent Slowdown: Historical Perspective, Causal Factors, and Policy Options," Contemporary Economic Problems, Washington, DC: American Enterprise Institute, 1979; also R. M. Solow, in Mathematical Methods in the Social Sciences, 1959, pp. 89-104, K. J. Arrow, S. Karlin, and P. Suppes, eds., Palo Alto, CA: Stanford University Press, 1960. Also: Edward Denison, Accounting for United States Economic Growth: 1929-69, Washington, DC: Brookings Institution, 1974, and Accounting for Slower Economic Growth: The United States in the 1970s, Washington, DC: Brookings Institution, 1979.

7. Binary Economics: The New Paradigm, op.cit. at 294. Ashford and Shakespeare further note that "the binary analysis reveals that the law of supply and demand is a natural law, not a political law that can be repealed or evaded to escape its consequences. Just as the law of gravity affects all things material, so too the law of supply and demand affects all things economic. By this law more is produced in open markets than in closed ones. It is thus not only a natural law with universal consequences but also a law that manifests itself in differing ways in different property systems. In state-sponsored communist societies, supply creates very little demand. In the unfree market economies, supply creates considerably more demand, but far from as much as it could. In the open, binary private property system, however, supply will eventually create vastly greater demand." Ibid. At 295.

8. See chapter 4 of Curing World Poverty: The New Role of Property, op cit.