Binary Economics

- a justice which creates efficiency

Report of the COG Economics of Ownership Internet discussion group

organized by the Ohio Employee Ownership Center, Kent State University, Ohio

with support from the Ford Foundation.

Preliminary note.

This Report was put out for consultation and comment to all members of the Economics of Ownership Group and represents an agreed fair summary of the discussion.  The need for such summary became necessary because Keith Wilde (the Moderator from October 1999 to April 2001), revealing himself as partisan, made an extraordinary Report which, apart from being rambling, inaccurate and specious, was libellous.  Mr. Wilde's Report (now entitled “Kelsonians versus Economists”) has since been revised but in many respects is as extraordinary now as it was before.

Report.

Through the good offices of the Ford Foundation and the Ohio Employee Ownership Center, Kent State University, Ohio, USA, the internet Economics of Ownership group commenced its deliberations in October, 1999 at ownership@cog.kent.edu.

Although the general focus was on why binary economics has not yet been readily taken up by conventional economics, other substantial matters were also considered.

Particular features of the often robust discussion were polymathic knowledge, for example, from David Ellerman and Mark Reiners; erudite, although sometimes diversionary, comment from Keith Wilde; a clear and consistent exposition of the Catholic position on capital ownership from John Medaille and Michael Greaney; and, apart from several very high quality contributions, a splendidly honest expression of a period of doubt from Richard Stutsman.  Much constructive critique, comment and helpful information came from, among others, Dan Bell, Thomas Brandt, Wesley Burt, Joseph Doggett, Bill Gish, Michael Harrington, Majorie Kelly, John Lankford, Ronald Ludwig, Deb Olsen, William Ryan, Michael Sarofeen, Jeffery Smith, David Spitzley and Charles Upton.

Binary economics has been developing for fifty years and stems from the work of Louis Kelso.  Its new way of understanding reality opens the way for efficacious new policy.  The three principal tenets of binary economics are:-

·       the productiveness of capital;

·       binary growth; and

·       the binary property right.

i)                    By productiveness binary economics calls attention to the point that more and more of the work required to satisfy human wants is actually performed by non-human capital such as machines, information technology, structures, technological processes, patents and computer-aided production generally.  The huge ability of capital to produce gives it an independence which exists even if a capital instrument achieves something less than complete functional autonomy of 100%.  Thus, just as humans are independently productive but they can co-operate with other humans, or a machine, in a productive process, so capital is also viewed as being independently productive and it, too, can co-operate with other capital or with humans in a productive process.

ii)                   The principle of binary growth holds that economies grow steadily larger as the private, individual acquisition of capital is distributed more broadly among the population on market principles.  For binary growth to happen, all individuals must come, over time, to have a second income stemming from capital ownership (in addition to any labor income).

iii)                 The binary property right is at the heart of the binary private property system.  It is the right of all people to acquire, on market principles, private and individual ownership of wealth-creating capital assets paying out their full earnings.  The capital pays for itself out of its own earnings and no expropriation is involved.

The three concepts - binary productiveness, binary growth, and the binary property right - interact with, and reinforce, one another.  A full account of binary economics is to be found in Binary Economics — the new paradigm, by Robert Ashford & Rodney Shakespeare, University Press of America.

On the big issues, all main contributors to the discussion were substantially in agreement.  Thus, quite early on, the present narrow ownership of capital quickly came to the fore and the general view was that wide ownership is highly desirable.  Such disagreement as there was confined itself to distinctions between the widest possible and wide ownership.

However, it was also quickly recognized that, where wide ownership is concerned, there is a difference between the binary and conventional view.  Binary economics wants all individuals, eventually, over time, on market principles, to have substantial capital ownership.  In contrast, (with the exception of many individual economists), conventional economics is allegedly neutral regarding whether ownership is broad or concentrated, claiming it does not matter.  Consequently, conventional economics takes no action to rectify the present playing field (skewed heavily in favor of concentrated ownership).

Thus the question of whether all individuals, or some, should own capital is a key matter dividing binary from conventional economics.  However, one contributor - David Ellerman (Dellerman@worldbank.org ) - came at the subject from another angle and was largely opposed to absentee owners, preferring that the "stakeholders" own and manage the enterprise possibly along Mondragon lines.  David eschews the notion that "employers" have a moral right to make contracts with "employees" when such contracts give employees no ownership or real voice in the operation of the company.  David is a substantial figure with a distinct, trenchant analysis and policy view which does not include any extension of capital ownership beyond the stakeholders.  He believes that human labor is responsible for all production and, from that belief, upholds a right  for all individuals to receive income either from their labor or from redistributed labor earnings.

On binary growth there was also agreement.  After all, it is indisputable that when people with unsatisfied needs come to have additional, secure, income, growth is inevitable.  And it would also seem to be indisputable that, because productive capital has an ever-increasing capacity to produce more, the continual introduction of new technology (via efficient market investment) would greatly increase growth if both productive and consuming power are widely distributed (as in binary economics).

There was, however, some difference between contributors over the amount of growth which is possible from wide capital ownership.  The difference may reflect personal views as to the degree of ownership which is possible or desirable, or it may reflect misunderstanding of what new technology is capable of doing.  That said, Alan Zundel (Institute For the Public Good, www.publicgood.org) thought that there would be binary growth but it would not be as much as claimed.  Alan also stated that the physical contribution of capital to production would not necessarily be reflected in increased earnings for capital because such earnings are a reflection of supply and demand.

In response, Mark Reiners demonstrated that Alan's position was based both on a misunderstanding about how the return of income shares to production factors would self-adjust to market supply/demand fluctuations in a binary system, and based on the failure of symmetry and conventional marginal rate of substitution/isoquant analysis.  Mark's critiques are supported by the Encyclopaedia Britannica and are significant particularly because they show how the use of conventional theory to deny the existence of binary growth is flawed.  http://cog.kent.edu/archives/ownership/msg01964.html

Rodney Shakespeare, moreover, set out the reasons (including the full payout of capital's earnings) why, in practice, an expanding binary economy would have very substantially increased earnings for capital while Shann Turnbull (see below) drew attention to the effects on growth of using interest-free money for the financing of wide-ownership capital assets.  Such money alone might increase the income productivity of the financed assets by a significant amount.

The subject of binary growth and its associated wide capital ownership did, however, cause some dissension for another, and very surprising, reason.  The background is that, very obviously, the binary requirement that all individuals come to own substantial amounts of capital is a practical implementation of social and economic justice.  Thus Norm Kurland (of the Washington-based Center for Economic and Social Justice, www.cesj.org) made the case that a just distribution of goods in an economy requires equitable access to the means of producing goods.  This is the "homestead" principle and its meaning in a post-industrial economy is equitable access to the financial and collateral mechanisms which allow individuals to own a share of the productive capacity.  Consequently, quite remarkably, wide ownership and binary growth implement social and economic justice while also enhancing economic efficiency.

Yet, early in the discussion, objection was taken to mention of justice on the ground that justice was a normative ("ought") matter which is not within the purview of (conventional) economics.  Binary proponents pointed out that, as the justice causes the efficiency, it certainly ought to be within the purview!

There was also considerable interest taken in the work of Shann Turnbull (sturnbull@mba1963.hbs.edu).  Shann, author of Democratising the Wealth of Nations, is a doughty wide ownership proponent who had much discussion with another author and doughty proponent - Norm Kurland.  That discussion was essentially over methods of implementation of capital ownership.  A method of implementation is far from being a fundamental division.  Shann favored Ownership Transfer Corporations whereas Norm feared that the OTCs have an expropriation element to them.  Shann favors expropriation because he believes investors can get overpaid thus exacerbating wealth inequality.  However, he also favors tax incentives to more than offset expropriation of long term ownership.  There was another discussion between Shann and Norm concerning the internal structure of companies.  In this area, Shann has a range of excellent ideas (he particularly feels that ownership is not enough and the issue of control must be considered) and so have Norm and cesj (who think similarly!).  The Group welcomed all these ideas.  (It is also good to note that, outside the Group, Shann and Norm got together to jointly issue a Statement of Vision with a target of 10,000 signatories and already signed by people from 32 countries.  The Vision welcomes debate on the various policy alternatives towards the extension of capital ownership to all).

Stephen Kane then entered the discussion.  Although no one could claim that, to date, things had ever been boring, Stephen's arrival brought fireworks.  When things finally settled down, it became clear that Stephen knew, understood, and agreed the value of all the main binary proposals, but felt that binary language and theory deters conventional economists.  Binary proponents then countered by saying that the theory and language embodied the new paradigm and its concepts, so objection to theory and language ultimately got down to objection to binary understanding and policy prescription. 

Rather similarly, Keith Wilde thought that the binary theory of growth was not necessary because the growth could be explained to conventional economists in a conventional way.  Binary proponents, however, doubted this because, among other reasons, conventional economics had an incomplete understanding of the productive powers of capital and hence did not understand the immense possibilities when technology is advanced and its ownership widely distributed.

Mark Reiners particularly clarified that binary economics remains highly, and arguably even more, important in a general economic environment where information and knowledge-value are factors of increasing importance to production.  Mark explained that the thrust of technological advance provides a growing body of examples of capital achieving 100% productiveness and, thus, complete autonomy per production function.  He stated that this developmental thrust presents us with the prospect of an "infinite productivity" horizon that has the most dire distributional implications for the extant labor-based mechanism of the current economic system.  Contributors supported his view that the thrust suggests the probability that there may well be an ultimate historic near inevitability to a binary theoretical and distributional imperative. http://www.cesj.org/binaryeconomics/binalt-reiners.htm

Mark also pointed out that the conventional productivity-based critique of binary economics is flawed in that productivity-based analysis is based on an ontologically unsound assumption of continuous, instead of discrete, factor substitution viability.  The distributional and general theoretical significance of this usually overlooked flaw is immense and is underscored by the Encyclopaedia Britannica which says:-

Another difficulty arises from the fact that marginal productivity assumes that the factors of production can be added to each other in small quantities. If one must choose between adding one big machine or none at all to production, the concept of the marginal product becomes unworkable.  This "lumpiness" creates an indeterminacy in the distribution of income.

From the viewpoint of the individual firm, this objection to neo-classical theory is more serious than from the macroeconomic viewpoint since in terms of the national economy almost all additions to labour and capital are very small.

A related problem is that of substitution among factors.  The production function implies that land, labor, and capital can be combined in varying proportions, that every conceivable input mix is possible.  But in some cases the input mix is fixed (e.g., one operator at one machine), and in that situation the neo-classical theory breaks down completely because the marginal product for every factor is zero."

It is precisely into the vacuum left by this "indeterminacy in the distribution of income", and the more general breakdown in classical theory (alluded to above), that the theoretical and practical import of the independent productiveness of capital of binary economics steps, with awesome distributional and positive-feedback growth implications.  Indeed, it is precisely in providing theoretical and practical institutional resolutions to this distributional indeterminacy and neo-classical theoretical breakdown that binary theory rationalizes and legitimizes the entire idea of universalizing equity ownership.

So at this point, remembering that on all the main issues there was substantial agreement and that Group members were generally of the view that the binary techniques for implementation of wide ownership were practicable, it would seem possible to summarise the areas where there is insufficient understanding between binary and conventional economics as follows:-

a)            Binary economics believes that conventional economics obscures the true contribution of capital to production as part of a strategy to maintain the present narrow pattern of capital ownership.

b)            Binary economics wants all people to have capital ownership whereas conventional economics, at best, only wants some.

c)            There are differing views over the amount of growth resulting from the widespread ownership of capital.

d)            In binary economics the justice and the efficiency are intimately related.  In contrast, conventional economics wishes to know nothing of justice.

e)            The language differs.

f)            Conventional economics believes that binary theory is not necessary to justify binary prescriptions.

g)            The conventional productivity-based critique of binary economics is inevitably flawed because binary economics is based on the foundationally different concept of binary productiveness.

Yet such a summary, without more, would deny the readers of this Report knowledge of a remarkable, and highly significant, occurrence exemplifying the hostility continually faced by binary economics.  The crux of the matter seems to be that binary economics claims a new paradigmatic understanding of physical reality which underpins binary growth and the associated justice.  However, the claim seems to enrage conventional economics which says that no new understanding is necessary.

To some people the conflict might, at first sight, seem to be of small import yet in reality, around it, swirl all the arguments and proposals for the wide ownership of capital and, alas, the overt and covert activities of those determined to oppose it.  Early in the discussion the binary proponents were accused of being over-sensitive, even paranoid, in alleging that conventional economics as a whole was opposed to wide ownership and that the opposition could manifest itself in hatred of binary economics.

In the event, however, there was to be some evidence of the binary view.  Keith Wilde, the then moderator of the group, who wants wider capital ownership, but not ownership for all, wrote a report of the discussion.  Unlikely though it may seem, the report, while admitting the extensive agreement in the Group on the main issues and Keith's own agreement on the main issues, also contained offensive accusations about binary economists.

Some believe that the accusations of the report came about because of its author's opposition to ownership for all.  Whatever the reason, the report is, alas, typical of the hostility that binary economics - an open, even-handed and generous concept if there ever was one - sometimes has to endure.  Most important of all, the Wilde affair points up the need for a university base with the resources:-

a)            to correct misconceptions about binary economics; and

b)            to teach the upcoming generation a new understanding and policy prescription which is capable of solving many of the major problems of the world.

The Ford Foundation and Kent University are thanked for their help and invited to do their best to establish a university base.  Although detail is not possible in a report such as this, a number of people have contributed documents and proposals to the COG library and the work at Kent University continues to expand the cause of wide ownership to groups throughout the world. 

Group members feel that the Ownership discussion, although tense at times, has been well worthwhile and, if possible, should be continued in one form or another.

August, 2001