HOMESTEAD: De Soto and Kelso: Contrasts and Comparison

[Keith Wilde <kwilde@magi.com>]

We have established over the past several months that the key element in
Kelsonian binary economics is an insistence that capital is independently
productive.  A corollary is that the marginal calculus used by economists
to evaluate relative factor productivity and explain factor payments is
irrelevant and even obscurantist.  As capital accumulates, more and more of
total output is attributable to capital, and it is therefore a distortion
of reality to give labor (human input) credit for increased productivity
and a consequently rising claim on total product.  Instead of basing claims
on relative productivity, therefore, fairness in distribution should be
achieved by steps to make capital ownership more nearly equal.

The archive of our binary economics discussion justifies the observation
that Kelsonians think of capital as embodied technology.  To them, capital
is a physical asset, whether a shovel, a donkey or an automated elevator.
General prosperity is therefore a function of increasing the quantity of
such capital relative to the number of people-with the critical
caveat/condition that ownership of the capital must be equitably
distributed in order that personal incomes will be adequate to purchase all
the output. Increased human felicity is thus a very direct function of the
number and sophistication of our energy slaves relative to human numbers.
(I believe that "energy slave" is language that became current only in the
sixties and seventies, after the Kelso-Adler collaboration.  Kelsonians
appear to retain this vision of technological optimism, attributed in part
to Buckminster Fuller, where most of the work will be done by machines.)

Hernando de Soto's concept of capital is very far from the embodied
technology perspective. The poor of Third World and formerly communist
countries have built and accumulated plenty of assets, he says, but they
are constrained by institutional inadequacies from converting their assets
into capital.  His point can be made with slight paraphrasing of a familiar
sneer:  "If you have so darn many assets, why aren't you rich?"  Most
capital (in the sense of assets) in the Third World falls outside the grasp
of a financial system and therefore cannot be carved up conceptually and
used as collateral for loans to finance inventory, wages, buildings and
machinery.  An asset, no matter how cleverly designed or skillfully
constructed, does not necessarily constitute capital-at least not the kind
that can be used for building and accumulating more assets and capital.
Call it capital if you want, but this (enormous, he says) quantity of
wealth is not part of capitalism. Instead of a serving as the foundation
for a vibrant system of capitalism, it is dead capital.  

Related to this distinction between capital in de Soto's sense and assets
in the Kelsonian technological sense are two empirical observations: 50% of
capital in advanced countries is in the form of real estate; in Third World
countries the figure is more like 75% (de Soto figures).  These figures
provide a reality check on the assets-as-embodied-technology perspective.
Land and buildings are important, but is it realistic to suggest that as
buildings accumulate and land values rise they are, independently,
producing more of the output that consumers purchase?  Do the donkey and
elevator analogies have a cogent fit here? 

The relative magnitude of real estate in total capital and the importance
of energy resources in powering machines are two considerations which
suggest that binary economics focuses too exclusively on motive force in
its conception of capital.  Failure to account for these other kinds of
capital (assets) may lead binary enthusiasts to have an exaggerated
expectation of binary growth.  This is a subject which appears not to have
been explored in the very limited critical literature on Kelso's economic
theories.  I have some doubt that effort of this kind is warranted,
however, for the distributive implication of Kelsonian policies is widely
shared and there is no need of the binary theory to demonstrate that his
financial techniques can work.     

The de Soto arguments obviously (from endorsements) go down well with what
Soros has called "market fundamentalists".  He does not advocate any
measures that are as obviously redistributive in intent as those of Kelso
(binarist denials to the contrary notwithstanding).  On the other hand, de
Soto himself provides no basis for arguing that Kelso-type measures should
be avoided.  His analysis implies plenty of work for lawyers, accountants
and political scientists as well as for economists and politicians.  So
far, at least, I see no reason why those activities could not incorporate
features of the kind that would facilitate ownership spreading consistent
with Kelsonian techniques.



Keith Wilde
Canada Pension Plan
Ottawa
kwilde@magi.com
613 990-8125 (office)
613 747-6847 (res)