{"id":92,"date":"2014-05-02T13:32:06","date_gmt":"2014-05-02T20:32:06","guid":{"rendered":"http:\/\/kelsoinstitute.org\/louiskelso\/?page_id=92"},"modified":"2016-10-04T14:56:00","modified_gmt":"2016-10-04T21:56:00","slug":"why-i-invented-the-esop-lbo","status":"publish","type":"page","link":"https:\/\/kelsoinstitute.org\/louiskelso\/literary-legacy\/why-i-invented-the-esop-lbo\/","title":{"rendered":"Why I Invented the ESOP LBO"},"content":{"rendered":"

by Louis O. Kelso and Patricia Hetter Kelso<\/strong><\/p>\n

\u00a0In October 1929, when the U.S. economy began to sink into that deep morass later immortalized as the Great Depression, I was not quite 16 years old, and at a loss to understand this mysterious catastrophe.<\/p>\n

To my innocent young mind, the Depression seemed absurd.\u00a0 Here was an economy endowed by Nature with more than enough of everything necessary to produce a high standard of living for all.\u00a0 Why, then, were factories running part-time or shut down?\u00a0 Why were valuable tools and machinery allowed to rust?\u00a0 Why were millions of threadbare and ragged people foraging in garbage cans or standing in soup lines, when farmers could grow mountains of food and fiber on land now lying idle and manufacturers were as eager and able to make clothing and every other useful thing as storekeepers were to sell them?\u00a0 Why did growers saturate entire orchards of sweet ripe oranges with gasoline before throwing them into rivers to float past starving children?\u00a0 Why did trains meant to carry people rattle along with coaches almost empty, while freight trains were loaded down with homeless, jobless vagrants?<\/p>\n

These and other equally inexplicable questions \u2014 prompted by what I saw, read and heard around me \u2014 constantly roiled around in my mind.\u00a0 None of it \u2014 the foreclosures, the unemployment, the low wages, the suffering of millions of innocent people \u2014 made any sense.<\/p>\n

But what I saw as the economy of the absurd my elders stoically accepted.\u00a0 For them it was business as usual.\u00a0 They took it for granted that a capitalist economy would sooner or later collapse, just as volcanos periodically erupt, locusts darken the sun and rivers swell into raging floods.\u00a0 In 1931 President Hoover reminded the nation that \u201cdepressions are not new experiences, though none has hitherto been so widespread.\u00a0 We have passed through no less than fifteen major depressions in the last century.\u00a0 We have learned something as the result of each of these experiences.\u201d<\/p>\n

Fifteen major depressions in a single century?<\/em>\u00a0 What knowledge could the elders have gleaned from these grisly lessons when they still didn\u2019t know the cause of depression, the cure for depression or how to prevent future depressions?\u00a0 (And in case anyone should be feeling smug about our own generation\u2019s intellectual progress, the fact is that, sixty years after the event, economists\u00a0still<\/em>\u00a0do not agree on what caused the Great Depression.)<\/p>\n

So the brash young man I was then decided to launch his own investigation.\u00a0 This economic mystery had to have a rational explanation.<\/p>\n

Several years of hard intellectual detective work led me to conclude that the problem lay with the\u00a0assumptions<\/em>\u00a0underlying the concept of the free market.\u00a0 One of them was wrong.\u00a0 And the original error was sown by none other than the father of modern economics, Adam Smith, himself.<\/p>\n

It was simply not true, as Smith had assumed and economists after him still assume, that\u00a0only<\/em>\u00a0human labor produces goods and services, i.e.<\/em>, real wealth.\u00a0 Nor is the corollary true, that, therefore, labor jobs and labor employment are the only ways people can produce and earn income.\u00a0 In the real economic world there are in fact\u00a0two<\/em>\u00a0ways in which people can make productive input.\u00a0 One is through labor.\u00a0 The other is through capital \u2014 land, structures, tools, machines and processes \u2014 the creatures of scientific and technological advance.<\/p>\n

Nor was it true, as Smith also assumed, and as U.S. national economic policy, the Employment Act of 1946, also assumes, that productive power was as democratically and effectively distributed\u00a0after<\/em>\u00a0the Industrial Revolution as it had been in the pre-industrial eons before technology harnessed the energy of Nature, although \u2014 and this is at the heart of the problem \u2014 it was in that pre-industrial era that our ideas about free market economics and our principles of democracy were formed.<\/p>\n

We have been running the economy on a myth \u2014 the \u201crising productivity of labor\u201d \u2014 to protect ourselves from the fact that technological progress really substituted capital input for labor input.\u00a0 Regardless of whether new jobs came into being to replace those destroyed, as capital input increased, labor\u2019s input, relative to capital\u2019s, declined.\u00a0 Under the property rule of the free market, each participant receives the value of his or her contribution.\u00a0 Therefore, working people\u2019s\u00a0legitimate\u00a0<\/em>income share was proportionally shrinking, while capital owners\u2019 was increasing.\u00a0 Technological advance was causing the productiveness of capital to rise.\u00a0 But working people owned no non-residential capital.<\/p>\n

The problem was that, although the logic of a market economy had not changed, the facts of production had changed.\u00a0 Free market logic still compelled every consumer to be a producer, i.e.<\/em>, to make productive input.\u00a0 But the Industrial Revolution had changed the idea and nature of work or production from labor-intensive to capital-intensive.\u00a0 And in the process it changed the way people must earn incomes if we are to avoid the political and economic ills that flow from coerced income redistribution from those who earn to those who need.\u00a0 The Industrial Revolution changed \u201cwork\u201d from something people once did primarily by the power of their bodies and brains to something increasingly done via (other peoples\u2019) privately owned capital instruments.<\/p>\n

But we never adjusted our economic institutions to accommodate this important new environment.\u00a0 We went on acting as if the Industrial Revolution had never taken place, or if it had, as if it had not changed anything as basic and vital as the Puritan work ethic.\u00a0 And when World War II ended, we hastened to pass the Employment Act of 1946, enshrining into national economic policy the false notion that a nation can solve all its economic problems and avoid depression by providing as many people as possible with labor jobs, genuine or \u201ccreated.\u201d<\/p>\n

Nor is it irrelevant to my story that while Congress was furiously debating this anachronistic piece of legislation, I had just completed writing my own economic analysis.\u00a0 I called my manuscript, \u201cThe Fallacy of Full Employment,\u201d later published as\u00a0The Capitalist Manifesto<\/em>.<\/p>\n

Now, after more than a half-century of running our economy on employment and jobs while disregarding that most goods and services are produced through capital, people are disillusioned to discover that:<\/p>\n