Ownership

The answer essentially came when David Ellerman posted his chapter on ESOP Analysis and Evaluation -- conventional economists view "Kelsoism" as cranky. To which can be added the observation that conventional economists indeed view it as so cranky that they generally do not deign to put their objections in writing, let alone bother themselves to read the relevant documents. The off-hand dismissal -- or the poisonous whisper -- is all.

"The U.S. today has so-called ESOP plans that give some tax loophole advantage to certain kinds of profit-sharing trusts. Louis Kelso, a San Francisco lawyer, has made extensive claims for such innovations. Often John-Law schemes, in which somehow, out of bank loans, equity is created from thin air, get involved in the profit-sharing Gospel. Those few economists who have audited the economic theories underlying the proposals and the claims made for them have generally not rendered favorable verdicts on them. I must concur in these negative appraisals." (Samuelson, 1977, n. 3, p. 16)

The plain fact is that the passage is indicative of a deep hostility to workers owning capital. Indeed, so deep is the hostility that Samuelson does not appear to have noticed that non-ESOP investment often relies on tax breaks; that most capital investment today is done using credit in some form; and that few would broadly object to forms of profit-sharing.

In fact, the Samuelson passage lets the cat out of the bag -- the attack on "Kelsoism" takes place, not because there has been serious consideration given to the underlying theory and its accompanying analysis, but because conventional economics will not countenance the inevitable consequence of the theory and analysis i.e., widespread individual capital ownership. That is not to say, of course, that conventional economics does not countenance SOME wider capital ownership in one form or another, but that is a world away from the genuine widespread individual capital ownership to which most COG members aspire.

David E.'s chapter was published in 1990 (when neo-classical triumphalism was manifesting itself) and so he is not likely to be appraised of recent developments in binary thinking. This email is therefore written in the hope that he, and others, will have a look at what is (very briefly) set out here and then, maybe, go on to consider the full-scale exposition in book form.

The crunch issue is the conflict between the conventional and binary paradigms. At its most fundamental, a paradigm is a view of physical reality. Such a view becomes a scientific view (and does not conventional economics claim to be a science?) if it:-

In physics, Boyle's Law is such a view -- it tells us that, if the pressure on a volume of gas is doubled, the volume will be halved. For all I know Boyle's Law may not be accurate at very high or low pressures or temperatures, but it is good science and a practical view for the everyday world.

Now at the heart of economics is a view of physical reality on the key matter of who or what creates the wealth. Or rather, there should be such a view but, unfortunately, conventional economics does not really provide one or, if it does, provides it inadequately, or, simply, fudges it.

Thus it is true, as David Ellerman says, that conventional economists recognise and understand capital productivity. Yet recognizing capital productivity is certainly not the same thing as a detailed analysis of the role of capital (and the role of labor) in a particular task such as digging a hole, carrying a load, sending messages round the world, growing food or copying a document. Nor is it the same thing as recognizing that capital and labor are independent producers which can work by themselves or co-operate with other independent producers, be they capital or labor.

Failing to understand that capital and labor are independent producers is an obvious point at which conventional economics goes wrong. It assumes that, in the process of wealth creation, there is always a necessary and substantial physical connection between capital assets and human labor. It then deeply embeds this mistakenly assumed interdependence between labor and capital by placing it at the foundation of marginal productivity analysis. Yet this is to ignore the fact that fish and animals breed; plants and fruit grow; and, today, millions of robotic and technical mechanisms and technological processes run, or almost run, by themselves.

When conventional economics applies its productivity concept to the near-automated factory, for example, labor productivity rises rapidly (as the factory sheds labor) and then rockets to infinity when no workers (as distinct from repair-maintenance workers) are employed in the production process. Because conventional economics tries to skate over the matter of who or what really does create the wealth, it ends with the completely self-contradictory productivity concept which, in a fully automated factory, has infinite labor productivity but no production workers. Alternatively, the productivity concept is rising astronomically at one moment and then collapsing to nil the next. That is preposterous.

The binary analysis of such a factory, however, recognizes the co-operation of capital and labor in shifting percentages -- as the contribution of capital rises, that of labor declines. Consequently, there is no contradiction.

So, rather than attempting to provide an accurate picture of the percentage contributions of independent factors (labor and capital) to the creation of wealth, conventional economics fudges the issue. It often calculates capital productivity by combining the output of capital and labor with respect to per-dollar capital input -- the true percentage contribution of each factor (capital and labor) is NOT being calculated.

But, in any case, a rigorous examination of the conventional analysis demonstrates that, at bottom, the importance of capital is viewed as increasing labor productivity. The independent productiveness of capital is never allowed. Consequently, conventional economics is at a loss when faced with the example of the fully automated factory which has people who design and build it and people on call to do repairs but few, if any, people actually involved in the productive process. If, say, one person is involved in the productive process, conventional productivity (always biased towards labor productivity) atrributes most of the ouput to that one man who is given an astronomical productivity but, when he is replaced by a machine, the labor productivity collapses to nil. Simply, conventional economics refuses to look at the physical detail of who or what actually does the work and the productivity concept is self-contradictory.

So David E. in his The World Is Round contribution (saying that "Kelsoism" makes itself ridiculous by not realizing that conventional economics understands the contribution of capital to the creation of wealth), is avoiding the key question:-- Regarding various tasks, does conventional economics or binary economics have the better view of who or what physically creates the wealth?

In considering the question, it is helpful to remember that the core of the conventional paradigm was first given large-scale expression by Adam Smith in his Wealth Of Nation, 1776. Although the Wealth Of Nations has an inchoate recognition of the contribution of capital, Smith essentially gives most, if not all, of the credit for wealth creation to labor. That was reasonable for 1776 (before the industrial revolution had really got under way) but it blocks a realistic understanding of a world over two hundred years later.

Unfortunately, conventional economics has no intent of developing a realistic understanding in the way binary economics has done. If, in a post-industrial age, the true contribution of capital to wealth creation were to be properly recognised (and binary economics does recognize it), it would be logically necesary for everyone to own at least some capital if they are to have much hope of being genuinely and substantially productive (and therefore properly able to consume). But -- as the Samuelson passage demonstrates -- at bottom, conventional economics may pay lip-service to wider capital ownership but it always will do its damndest to prevent really widespread capital ownership ever happening.

a) Binary growth (as Keith W. notes) arises because, by putting greater productive (capital) power (and therefore greater consuming power) into the hands of people (poor and middle classes) who have a greater propensity to consume, more spending arises.

But there is more to binary growth than that. Briefly, binary economics always encourages capital investment and technological advance and so more efficient, and greater ouput; and it also gives income security and so people have less need to save for the disastrous 'rainy day'.

b) But please note that, by giving a degree of economic security to everyone, binary economics seems potentially capable of moderating people's desires for material conumption (which, according to present conventional economics, are limitless and never-ending).

c) Binary economics enables the introduction of green technology and, crucially, enables society to stop a person's environment-destroying activity by offering that person another way of being genuinely productive.

One last matter. Conventional economics claims that it does not matter who owns the capital as long as it has been efficiently allocated. Well, binary economics efficiently allocates capital -- the market mechanims for the allocation of capital are rigorously upheld. So, if it does not matter who owns the capital, why does conventional economics try to prevent the individual, widespread ownership of capital?

The paradigm issue