Binary Economics: The New Paradigm

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Kelsoweb_1by Robert Ashford and Rodney Shakespeare, University Press of America, Lanham, Maryland: 1999 (464 pp., Cloth $45.00, Paper $24.50)

Reviewed by Patricia Hetter Kelso

Not many people are aware that the Employee Stock Ownership Plan (ESOP) was hatched from a macro-economic theory which qualifies in every respect as a genuinely new paradigm in economics. Louis Kelso himself took awhile to realize this. Almost until the end of his life he believed that he had merely corrected an error in the classical model. This was a critical error, since it is responsible for the historical bottleneck in the private property free market system that prevents market-sourced income from flowing to the many who want and need to consume its products.

In Binary Economics: The New Paradigm, Robert Ashford and Rodney Shakespeare, an American law professor and an English historian respectively, explain the premises and principles which Louis Kelso first discovered and then developed and refined into a logically coherent model of the free market system during his long career (more than 50 years) as a lawyer and investment banker. Although academic economists have either ignored Kelso or dismissed him as an “amateur crank” (Paul Samuelson’s famous epithet), his binary paradigm explains, as theirs do not, such “anomalies” as the economic decline of the middle class, growing social alienation, and our inability to transfer technology to the emerging nations in ways that do not create bubble economies that inevitably burst.

Most unsettling, conventional economists neither understand the cause of depression nor how to prevent the next one except through massive applications of the standard Keynesian remedies which even the European welfare states are repudiating because of their negative effects on monetary integrity, motivation and property. Not long ago, Lester Thurow, a superstar of his profession, writing on the Asian crisis, admitted without apology: “Economic collapses are an intrinsic part of capitalism.”

The most urgent problem conventional economists are at a loss to solve is economic growth — how to bring it about in the poor countries, or how to restore the “magic” at home after it has gone. (Cf. Paul Krugman, Peddling Prosperity, 1994, p. 9.) Economic growth is essential to modern industrial economies whose political commitment to full employment is constantly assaulted by technological change. It is the rising tide that is supposed to lift all the boats. As John Diebold pointed out in Beyond Automation (1970), economic growth is essential to the painless introduction of technological change. When economists assert, as they have done since the beginning of the Industrial Revolution, that technological change creates more jobs than it destroys, their tacit assumption is that economic growth will proceed at a fast enough clip to restore the employment lost. The conventional economic paradigm chains the full employment economy to perpetual expansion. It offers no surcease or escape from this overriding necessity.

Louis Kelso’s binary paradigm, on the other hand, shows the way to both accelerate economic growth and to liberate the economy from the relentless pressure to expand. Ashford and Shakespeare devote much of their book to these two problems. The key is to unblock the purchasing power created by the free market but not distributed to consumers with current needs and wants. And the way to do this is to end the monopoly of capital credit so that the poor and the middle class can buy and pay for productive capital the way the rich always have, from its earnings. Restructuring our “unfree economy” to widen economic participation through owning and employing both factors of production — productive capital as well as labor — would conform to all the rules of market logic, most importantly, private property.

Here are fresh, new ideas, meticulously and faithfully explained, for benignly correcting the maldistribution of the productive power of capital that has kept the free market from working for the many as well as it has for the few.

— Originally published in “Owners at Work,” the newsletter of the Ohio Employee Ownership Center, Kent State University, Vol. XI, No. 1, Summer 1999