Binary economics

Binary economics is a heterodox theory of economics that endorses both private property and a free market but proposes significant reforms to the banking system. The aim of binary economics is to ensure that all individuals receive income from their own independent capital estate, [Robert Ashford & Rodney Shakespeare (1999) "Binary Economics – the new paradigm"] using interest-free loans issued by a central bank to promote the spread of employee-owned firms. [Rodney Shakespeare (2007) "The Modern Universal Paradigm".] These loans are intended to: halve infrastructure improvement costs, reduce business startup costs, and widen stock ownership.

Binary economics is a minority discipline, hard to place on the left-right spectrum. [Robert Ashford (1990) "The Binary Economics of Louis Kelso: the Promise of Universal Capitalism" (Rutgers Law Journal, vol. 22 No.1. Fall, 1990).] It has variously been characterized as an extreme right-wing ideology and as extremely left-wing by its critics. [Robert Ashford & Rodney Shakespeare (1999) op. cit;] ["Time" Magazine, June 29, 1970.] The ‘binary’ (in ‘binary economics’) means ‘composed of two’ because it suffices to view the physical factors of production as being but two (labour and capital which includes land) and only two ways of genuinely earning a living − by labour and by productive capital ownership. Humans are usually considered as owning their labour, but not necessarily the other productive factor – capital. [Louis Kelso & Patricia Hetter Kelso (1967) "Two-Factor Theory: the Economics of Reality".]

Binary economics is partly based on belief that society has an absolute duty to ensure that all humans have good health, housing, education and an independent income, as well as a responsibility to protect the environment for its own sake. The interest-free loans proposed by binary economics are compatible with the traditional opposition of the Abrahamic religions to usury. [Rodney Shakespeare & Peter Challen (2002) "Seven Steps to Justice".]

Proponents [Norman Kurland, Dawn Brohawn & Michael Greaney (2004)"Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security".] of binary economics claim that their system contains no expropriation of wealth, and much less redistribution will be necessary. They argue that it cannot cause inflation and is of particular importance as more of the physical contribution to production is automated. [James S. Albus (1976) "Peoples' Capitalism - The Economics of The Robot Revolution".] and that the Binary economics paradigm [Sofyan Syafri Harahap (2005), "Accounting Crisis". William Christensen "Search for a Universal Paradigm: Making Justice Live For All" International Conference on "Universal Paradigm of Socio-Scientific Reasoning", Asian University of Bangladesh, 2005.] is particularly helpful in addressing the issue of why developing countries languish. [A notable lecture on this matter was given by Ing. B.J Habibie (former President, The Republic of Indonesia) at the international conference "Islamic Economics and Banking in the 21st Century", Jakarta, Indonesia, November, 2005. The former President, a successful aircraft engineer, well understands the potential of technology to create wealth. See also Thoby Mutis (1995) "Pendekatan Ekonomi Pengetahuan dalam Manajemen Kodedeterminass".] Advocates [ Rodney Shakespeare & Peter Challen (2002) "Seven Steps to Justice".] contend that implementing their system will lessen national debt and encourage national unity. They believe binary economics could create a stable economy.

In its intent to involve people in ownership and participation binary economics has affinity with distributism and with the worker cooperatives of the Emilia-Romagna region of Italy and the Mondragón Cooperative Corporation of Spain.

Background

Although elements of binary economics can be found elsewhere (for example, in Pope Leo XIII Rerum Novarum 1891; Harold Moulton (1935) "The Formation of Capital"; the distributism of G. K. Chesterton and Hilaire Belloc; and Ibn Ashur (1946) "Maqasid al Shari’ah al Islamiya") the first clear formulation of the subject was by American lawyer Louis Kelso and Mortimer Adler (the Aristotelian philosopher and educator) in their book "The Capitalist Manifesto" (1958). The title of the book is best viewed as a thing of its time, being a Cold War reference in opposition to communism.

Kelso and Adler continued to write together - "The New Capitalists" (1961) contributes greatly to the understanding of collateral and capital credit insurance - and then Kelso teamed up with political scientist Patricia Hetter Kelso to explain how capital instruments provide an increasing percentage of the wealth and why capital is narrowly owned in the modern industrial economy. [Louis Kelso & Patricia Hetter Kelso (1986 & 1991) "Democracy and Economics Power - Extending the ESOP Revolution through Binary Economics"] Their analysis predicts that widely distributed capital ownership will create a more balanced economy. This is at the heart of the binary claim to create an efficiency which creates justice and vice versa.

Kelso and Hetter then proposed new binary share holdings which (with exception for research, maintenance and depreciation) would pay out their full capital earnings, be capable of being insured and, if loss occurred, would occasion no recourse to the new binary owners. Because of the full payout provision they argued that binary holdings would yield more than five times what is typically paid out today. In the binary economics plan, this improved payout would allow a new widespread capital ownership, and achieve individual incomes which could be possessed by "anybody".

Employee Share Ownership Plans (ESOPs) and other plans

Very often the first acquaintance people have with binary economics comes through today’s Employee Share Ownership Plans (ESOPs). [William Greider (1997) "One World, Ready or Not: The Manic Logic of Global Capitalism".] These stem originally from Louis Kelso & Patricia Hetter Kelso (1967)"Two-Factor Theory: The Economics of Reality"; the founding of Kelso & Company in 1970; and then from conversations in the early 1970s between Louis Kelso, Norman Kurland (Center for Economic and Social Justice), Senator Russell Long of Louisiana (Chairman, USA Senate Finance Committee, 1966 - 1981) and Senator Mike Gravel of Alaska. There are about 11,500 ESOPs in the USA today covering 11 million employees in closely held companies. As Binary Economics predicts, some studies have shown productivity improvements as an effect of employee ownership [John Logue et al. (1998) "Participatory Employee Ownership". C. Rosen & M Quarrey (1987 65 Harvard Bus. Rev.) "How Well is Employee Ownership Working?"] and involvement - binary techniques for this are called Justice Based Management.

Conventional economics compared with binary economics - areas of conflict, criticism and contrast

A good understanding of binary economics can be obtained by contrasting various aspects with comparable aspects in conventional economics (especially mainstream Neoclassical economics). The first contrast is that mainstream academic economics is primarily 'positive economics' (the analysis of 'what is') where binary economics proposes an economic system that ‘ought to be’ ('normative economics'). However, binary productiveness analysis is claimed to be a superior account of reality (‘what is’) than classical positive economics.

Conventional economics upholds "productivity" [Robert A. Solo (1991) "The Philosophy of Science and Economics] which is not a direct analysis of physical reality: rather it is the calculation of a ratio or rate of total output divided by unit of input (though usually having separate labour & capital goods input-components, e.g. Cobb-Douglas). In contrast, the binary analysis of "productiveness" (see section below) attempts to give accurate credit to the physical contributions of both labour and capital goods to production, attempting to answer a fundamental economic question - Who or what physically creates the wealth?

The third contrast is that conventional economics believes that interest (as distinct from administration cost) is always necessary; in Binary Economics theory it isn't (certainly where the development and spreading of productive capacity is concerned). [Rodney Shakespeare (2007) op. cit.]

For newly-created money, conventional economics upholds the doctrine of the time value of money whereas binary economics doesn't apply the principle to fiat money.

An assumption of general scarcity is at the heart of conventional economics. Binary economics, however, denies the assumption. Amartya Sen argued that starvation is primarily due to lack of money in the hands of the starving and not the absence of food: thus it is human attitudes, practice and institutions which are at fault.

Binary economics also rejects conventional financial savings doctrine (that there must be financial savings prior to investment) - no financial saving is necessary if money can be created out of nothing. [Michael Rowbotham (1998) "The Grip of Death". James Gibb Stuart (1983) "The Money Bomb".] The theory asserts that what matters is whether the newly-created money is interest-free, whether it can be repaid, whether there is effective collateral and whether it goes towards the development and spreading of various forms of productive (and the associated consuming) capacity.

The contrast continues: Unlike Binary economics, conventional economics is largely unconcerned that the present money supply is generally not directed at the spreading of productive capacity -- broadly, productive capital is narrowly owned [Edward N. Wolff (1995) "Top Heavy: A Study of Increasing Inequality in America" and (1995) "How The Pie Is Sliced: America's Growing Concentration of Wealth".] .

Very fundamentally, binary economics rejects the claim of conventional economics that it promotes a ‘free market’ which is free, fair and efficient. (e.g., as an interpretation of the classical First Fundamental Theorem of Welfare Economics).

The two economics differ on the subject of democracy. Conventional economics upholds the periodic political vote. Binary economics does the same but then deepens democracy [Roy Madron & John Jopling (2003) "Gaian Democracies".] by insisting that productive capital and the practical everyday power its ownership gives to individuals be widely distributed as well. In binary economics freedom is only truly achieved if all individuals are able to acquire an independent economic base.

On environmental issues, binary economics claims to have a big advantage over conventional economics because of the interest-free loans which would be available. (See Environment section below.) The appropriate (non-zero) interest rate dominates conventional economic analysis of environment policy (e.g. in tackling climate change).

Uses of central bank-issued interest-free loans

Binary economics proposes that central bank-issued interest-free loans should be administered by the banking system for the development and spreading of productive (and the associated consuming) capacity, particularly new capacity, as well as for environmental and public capital. While no interest would be charged, there would be an administrative cost as well as collateralization or capital credit insurance. [Norman Kurland (1998) "The Federal Reserve Discount Window" — www.cesj.org] Binary economics is concerned that the banking system 'creates new money out of nothing' by issuing more credit than it has reserves. [John Tomlinson (1993) "Honest Money". Joseph Huber & James Robertson "Creating New Money". Peter Selby (1997) "Grace and Mortgage".] The supply of interest-free loans takes place in circumstances of a move (over time) towards banks maintaining reserves equal to 100% of their deposits. Thus banks would be confined to lending depositors’ money (and the bank’s own capital) & administering the interest-free loans. Some binary economists propose that under binary principles, the International Monetary Fund and its Special Drawing Rights could allow everyone in the world capital ownership.

Not all investments would qualify for the interest-free loans; the development and spreading of new productive capacity would be targeted. For example, the loans would not be available to home buyers, since this would accelerate asset inflation.

Investments eligible for interest-free loans

Public capital investment

Interest-free loans would allow hospitals, sewage works, social housing, roads, bridges etc. to be built at half or less of the present cost. (This use is also advocated by the USA Sovereignty movement - Dennis Kucinich, Ken Bohnsack et al.). However, the capital projects can still, if wished, be built, managed, even owned, by the private sector and use made of Community Investment Corporations and the like. In these Corporations local citizens own the local land and get the rents from it. [Norman Kurland, Dawn Brohawn & Michael Greaney (2004) op. cit.]

Interest-free loans for public capital have been successfully used in Canada, New Zealand and Guernsey. Malaysia is today believed to be experimenting with them. [Rodney Shakespeare & Peter Challen (2002) op. cit.] After 1949 central bank loans were a major factor in the Taiwanese "Land to the Tiller" program which spread land ownership from the few to the many. This was done without causing inflation and was an overall binary solution because, in various ways the money went into the spreading of both productive and consuming capacity. [John Medaille (2007) "The Vocation of Business: Social Justice in the Marketplace".] (One way was by financing the buyout with industrial bonds, thus giving capital to small industries to provide things for the newly empowered farmers to purchase.)

Private capital investment

Ownership of productive (and the associated consuming) capacity, particularly new capacity, can be spread by the use of central bank-issued interest-free loans. [Shann Turnbull (1975/2000) "Democratising the Wealth of Nations" and (2001) "The Use of Central Banks to Spread Ownership". Jeff Gates (1999) "The Ownership Solution" and (2000) "Democracy At Risk".] Interest-free loans should be allowed for private capital investment "IF such investment creates new owners of capital and is part of national policy to enable all individuals, over time, on market principles, to become owners of substantial amounts of productive, income-producing capital". [Norman Kurland (2001) "Saving Social Security" at www.cesj.org.] By using central bank-issued interest-free loans, a large corporation would get cheap money as long as new binary shareholders are created.

It is proposed that all large corporations should have to pay out all their earnings all the time (with exception of reserves for maintenance, depreciation, repair and research). Large corporations will then have the option of obtaining interest-free loans on condition that they help to spread ownership. Medium-sized corporations (which would not be subject to the full pay out provision) will be able to have interest-free loans if they spread ownership.

'Green' environmental capital investment

Interest-free loans should be used, in particular, for clean, renewable energy. At present, a lot of green power-generating projects are not financially viable, but they would be with interest-free loans. Much more clean electricity could then be provided (e.g. by tidal barrages, wave machines, wind turbines, solar electricity, and geothermal power stations).

There are many 'alternative' technologies - at present viewed with varying degrees of skepticism by mainstream science - that, in principle, would be eligible for research and development funding under binary economics. Some of these technologies, if physically possible, would enable the clean generation of electricity for cars, houses, trains and factories and they can be found among the [http://www.peswiki.com/index.php/Congress:Top_100_Technologies_--_RD Top 100 Technologies] which are a mixture of that which lies within, on the edge of, and outside existing science e.g., Blacklight Power (Randell Mills); and Steorn.

mall and start-up businesses including microfinance

Interest-free loans should be used for micro-finance, small business and farms thereby freeing them from the huge pressure of compounding interest-bearing debt. Farm capital can be one half or less of the usual cost. The world’s poor people (e.g., Bangladesh women [Abulhasan Sadeq "Microfinance, Poverty Alleviation and Economic Development: Theory and Practice" international conference on "A Universal Paradigm of Socio-Scientific Reasoning" at Asian University of Bangladesh, 2005.] - 55% of the world's population live on under $3 per day) could be enabled to halve or more the cost of building small businesses by the use of interest-free micro-finance being funnelled through the Grameen Bank and similar institutions such as the Institute for Integrated Rural Development.

Loans to students

It is binary policy that, since further and higher education should be encouraged, student loans should not bear interest.Fact|date=March 2008

Productiveness

Binary productiveness and conventional productivity are distinct concepts. [Mark Douglas Reiners "The Binary Alternative and the Future of Capitalism" available at [http://www.cesj.org/ Center for Economic and Social Justice] .]

Conventional productivity, generally labour productivity, is the ratio of labor as input to the overall output. [Robert Ashford "Binary Economics − an overview" (2006) http://ssrn.com/abstract=928752.]

In contrast, binary productiveness is the percentage of total physical input that labor and capital each contributes to the output. [Robert Ashford "Louis Kelso’s Binary Economy" (The Journal of Socio-Economics, vol.25, 1996).] Capital contributes an increasing physical percentage as even Marx understood. [Louis Kelso "Karl Marx: The Almost Capitalist" (American Bar Association Journal, March, 1957).] Consider the example of a man digging a hole. Using his hands this takes him four hours. But, by using a form of capital − a shovel − he can dig the hole in one hour or dig four holes in the same amount of time it took him to dig one hole with his hands. The physical productiveness of the human labor is 25% while the physical productiveness of the capital shovel is 75%.

A criticism of the hole and shovel example has been made by Timothy D. Terrell [Timothy D. Terrell " Binary Economics: Paradigm Shift Or Cluster of Errors?" Ludwig von Mises Institute.] summarizing a critique given by Timothy Roth. [Timothy P. Roth, (1996) " A Supply-Sider’s (Sympathetic) View of Binary Economics", Journal of Socio-Economics 25 (1) pp. 58–59.] The criticism states that: a) somebody invented the shovel; b) the shovel cannot be independent. 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 human hole digger has no role in the productiveness of the shovel.

However, binary economics states that the fact that somebody invented the shovel has nothing to do with its present use for digging a hole and the shovel is viewed as an independent contributor which co-operates with the man just as the man co-operates with the shovel. Moreover, just as two humans can 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.

Estate duty

As part of binary policy to develop capital ownership for each member of the population, there is no estate duty (or Inheritance tax) on death "if" the estate devolves in such a way as to spread capital estates to more individuals. If it does not do so, binary economics proposes a graduated tax.

References

Texts

*Albus, James S.(1976) "Peoples’ Capitalism - The Economics of The Robot Revolution".
*Ashford, Robert & Shakespeare, Rodney (1999) "Binary Economics - the new paradigm".
*Ashford, Robert "Louis Kelso’s Binary Economy" (The Journal of Socio-Economics, vol. 25, 1996).
*el-Diwany, Tarek (2003) "The Problem With Interest".
*Gates, Jeff (1999) "The Ownership Solution".
*Gates, Jeff (2000) "Democracy At Risk".
*Gauche, Jerry "Binary Modes for the Privatization 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, Columbia University, May, 2006).
*Kelso, Louis & Kelso, Patricia Hetter (1986 & 1991), "Democracy and Economic Power - Extending the ESOP Revolution through Binary Economics".
*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".
*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".
*Schmid, A. Allan,(1984), “Broadening Capital Ownership: The Credit System as a Focus of Power," in Gar Alperovitz and Roger Skurski,eds. "American Economic Policy", University of Notre Dame Press.
*Shakespeare, Rodney & Challen, Peter (2002) "Seven Steps to Justice".
*Shakespeare, Rodney (2007) "The Modern Universal Paradigm".
*Turnbull, Shann (2001) "The Use of Central Banks to Spread Ownership".
*Turnbull, Shann (1975/2000), "Democratising the Wealth of Nations".

External links

* [http://www.binaryeconomics.net/ Binary Economics now]
* [http://www.thegreatideas.org/ Center for the Study of The Great Ideas]
* [http://www.cesj.org/binaryeconomics/be-inanutshell.htm Binary Economics In A Nutshell]
* [http://www.cesj.org/ Center for Economic and Social Justice]
* [http://www.globaljusticemovement.net/ Global Justice Movement Net]
* [http://www.globaljusticemovement.org/ Global Justice Movement Org]
* [http://www.globaljusticemovement.net/articles/7HUF-IslamicFinance-rs-0603.htm Integrating Islamic Finance into Mainstream]
* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=928752 Binary Economics - An Overview by Professor Robert Ashford]
* [http://www.cesj.org/binaryeconomics/binaryalt-reiners.htm The Binary Alternative & The Future of Capitalism]
* [http://www.cesj.org/binaryeconomics/binary-cwp1ed.pdf The Binary Economics of Louis Kelso]
* http://ssrn.com/abstract=277508
* http://www.cesj.org/binaryeconomics/price-money.html
* http://cog.kent.edu/lib/TurnbullBook/TurnbullBook.htm
* [http://papers.ssrb.com/sol3/papers.cfm?abstract_id=87979 Capital Democratization]
* [http://www.comer.org Committee on Monetary & Economic Reform]