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Beyond austerity and stimulus:

democratizing capital acquisition with the earnings of capital as a means to sustainable growth

Abstract: To enhance (1) the earnings of poor and middle-class people and (2) sustainable growth, this article recommends broadening competitive market op- portunities to acquire capital with the earnings of capital. The prospect of more broadly distributed capital earnings in future years provides incentives to profitably employ more labor and capital in earlier years. Without redistribution, modest changes in the system of corporate finance will enable market participants to price the value of more broadly distributed capital acquisition and thereby provide market incentives to produce (1) enhanced earnings for poor and middle-class people, (2) enhanced corporate profits and growth, (3) reduced need for welfare dependence, government spending, borrowing, and taxes, and (4) enhanced sov- ereign creditworthiness. The approach advanced in this article rests on a theory of fuller employment that operates in the long run as well as the short run. It is somewhat similar to Keynesian theory and yet also distinct and complementary. If the approach is implemented either alone or in conjunction with Keynesian policies, the fuller employment and broader distributive benefits may surpass ex- pectations based on Keynesian theory and may make both austerity and stimulus strategies more affordable and politically feasible.

Key words: Adam Smith, binary economics, broadening ownership, corporate finance, full employment, economic opportunity, economic recovery, Kelso, Keynes, price theory, productiveness, property rights, wealth distribution, welfare.

In response to the great financial crisis that began in 2007 and emerged full-blown in 2008, efforts to achieve sustainable recovery in the United States, Europe, and most of the world seem polarized in a political and economic debate between proponents of austerity and stimulus. As an alternative to the economic theories that underlie this debate, this article

Robert Ashford is a professor of law at Syracuse University College of Law, Syracuse, New York.

Journal of Post Keynesian Economics / Winter 2013–14, Vol. 36, No. 2 179 © 2014 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com ISSN 0160–3477 (print) / ISSN 1557–7821 (online) DOI: 10.2753/PKE0160-3477360201


advances a market approach offered to achieve more broadly distributed prosperity and enhanced, sustainable growth by “democratizing” (i.e., by extending to poor and middle-class people) competitive market oppor- tunities to acquire capital with the earnings of capital. 1 the approach described in this article, based on principles of binary economics, 2 calls for an implementation of a voluntary, ownership- broadening system of corporate finance that would require no taxes, redistribution, borrowing, or government command. Corporations would be free to continue to meet their capital requirements as before, but they would have an additional, potentially more profitable, market means to do so. this additional means could be voluntarily employed to:

1. enhance the earning capacity of the participating companies, their shareholders, their employees, and their customers;

2. promote more sustainable, environmentally friendly, and more broadly shared growth and prosperity;

3. reduce poverty, welfare dependence, and the need for government expenditures, taxes, and other transfer payments;

4. enhance the value of equity investments and reduce the risk of borrowing; and

5. enhance the creditworthiness of national governments and their ability to raise revenue.

the binary, ownership-broadening approach may be viewed as comple- mentary to the Keynesian approach to fuller employment but differs from it in a number of respects. Several are set forth as follows: first, the enhanced growth predicted by Keynesian analysis materializes in the short and (at most) intermediate run—a time frame in which capital is fixed and labor is the only independent productive variable. In contrast, the enhanced growth predicted by binary analysis (hereinafter referred to as “binary growth”) materializes in the short run and long run. Second, the binary analysis recognizes that values and prices are materially

1 As used in this article, “capital” includes land, animals, structures, and machines— anything capable of being owned and employed in production. It does not include “financial capital,” which is a claim on, or ownership interest in, real capital.

2 the approach that came to be known as binary economics was first advanced in the writings of corporate finance attorney, investment banker, and philosopher, Louis Kelso (see Kelso and Adler, 1958, 1961; Kelso and hetter, 1967; Kelso and Kelso, 1986, 1991). the authoritative and most complete source of writings by Louis Kelso can be found on the Web site of the Kelso Institute (available at www.kelsoinstitute.org).



influenced by the distribution of competitive access to capital acquisition with the earnings of capital. third, the binary growth principle (based on the broader distribution of capital acquisition with the earnings of capital) requires no government redistribution, taxation, borrowing, command, or other market intervention. Unlike the growth predicted by Keynesian analysis (which makes no fundamental distinction between the market’s distribution of income and the redistribution of income), the analysis supporting binary growth materializes without redistribution, as a direct result of corporations voluntarily deciding, based on the binary under- standing of growth, to operate in a potentially more profitable manner by including their employees, customers, neighbors, and others in the process by which they acquire capital with the earnings of capital. One referee’s comment on an earlier draft of this paper noted that “in the General Theory, Keynes emphasized that the two ‘outstanding faults of the economic society in which we live are its failure to provide full employment and its arbitrary and inequitable distribution of income and wealth. the bearing of the foregoing [general] theory on the first is obvi- ous’ (see Keynes, 1936, p. 372). the binary approach provides a theory that suggests that the solution to the second fault identified by Keynes will also help solve the first fault.” before setting forth three fundamental principles of binary economics, it would be well to set forth a number of principles that the binary ap- proach shares with most conventional schools of economics and finance. thus, the voluntary, ownership-broadening approach to corporate finance begins with several widely shared propositions:

1. Corporations seek to employ labor and capital according to their relative contribution to production. 2. One goal of profit maximization is to produce more with more productive capital and less labor so that production generally be- comes increasingly more capital intensive. 3. Profitable business planning requires investing in capital that competitively “pays for itself” (i.e., earns a competitive return for the financial investment needed to acquire it). 4. A major purpose of corporate finance is to enable corporations to acquire capital before they have earned the money to pay for it. 5. by way of corporate finance, major corporations and their share- holders grow richer by acquiring capital with the earnings of capital roughly in proportion to their existing wealth. Notably, by this process millions of shareholders grow richer even as they sleep.


6. this process of capital acquisition with the earnings of capital, and the resultant distribution of capital earnings, is highly concentrated (Wolf, 1995a, 1995b, 2011).

7. Corporate finance planning is forward looking, it contemplates three periods: (1) investment today; (2) production tomorrow, and (3) sales to meet expected demand the day after tomorrow.

8. Demand for capital (and the labor to create and employ it) depends on expected consumer demand in a future period.

based on principles of binary economics, the voluntary, ownership- broadening approach to corporate finance continues with several proposi- tions that may prove controversial because they seemingly defy widely shared preconceptions regarding the mainstream analysis of production, distribution, and growth. these propositions are set forth and discussed below.

Overview of binary economics

Three basic principles of binary economics

based on the less widely understood binary economic approach to lay the conceptual foundation for a voluntary, ownership-broadening system of corporate finance, three additional propositions can be added to the ones set forth above:

1. both labor and capital do work. 3

2. Although advancing technology may be understood to make labor more productive, advancing technology may also be understood to make capital more productive than labor in task after task—that is, the capital cost per unit of output decreases more rapidly than the unit labor cost (which helps to explain why profitable corporations continually employ capital to replace and vastly supplement the work of labor).

3. the prospect of a broader distribution of capital acquisition with the earnings of capital carries with it the prospect of more broadly

3 the assertion that capital does work does not negate the fact that both labor and capital are generally needed to complete specific kinds of work, or the fact that labor is needed to invent, build, install, operate, maintain, store, repair, manage, and finance capital. but the labor work involved in inventing, building, creating, installing, operat- ing, maintaining, storing, repairing, managing, and financing capital is not the work of the capital itself. And in a market system, people would not be compensated for the labor work needed to employ capital if the employed capital did not do much more work than the labor work needed to employ it.



distributed capital earning capacity and earnings in future years, which in turn will provide the market incentives to profitably em- ploy more labor and capital in earlier years. In other words, the more broadly capital is acquired with the earnings of capital, the more an economy will grow. this principle is called “the principle of binary growth.”

Productivity and productiveness distinguished

One reason why these propositions may seem controversial to many people is that beginning with Adam Smith and continuing through John

M. Keynes, to the present day, most people believe that the primary role

of capital in contributing to per capita economic growth is to increase

labor productivity. Consider, for example, the work of sawing boards.

A person can saw 10 boards per hour with a hand saw, and 100 boards

per hour with a machine saw. Working with a machine saw rather than a hand saw, the worker can saw ten times as many boards in the same time

and therefore has become ten times as productive and has ten times the productivity. One can also say that capital productivity has also increased by a factor of ten. but when sawing each board with the machine saw, the worker is doing much less work. Per unit of production, the work


the sawyer (i.e., “labor productiveness”) has decreased and the work


the saw (i.e., “capital productiveness”) has increased. And given the

total production done in one hour, the machine saw is doing essentially all of the extra work. thus, there is another (binary) way to understand the primary role of capital in contributing to per capita economic growth:

namely, to do an increasing portion of the total work done. thus, binary economics distinguishes between:

1. “productivity” (which is the ratio of the output of all factors of pro- duction, divided by the input of one factor, usually labor), and 2. “productiveness” (a special focus of binary economics, which retrospectively means “work done” and prospectively means “productive capacity”).

the productiveness of capital is more clearly revealed in the work hauling sacks: a person can haul one sack one mile in one hour and is exhausted; (1) with a horse, 10 sacks can be hauled four times as far (yielding a fortyfold increase in production), and (2) with a truck, 500 sacks can be hauled forty times as far (yielding a 20,000-fold increase

in production). According to the binary perspective, the horse and truck

do more than increase labor productivity; the horse and truck are doing essentially all of the extra work.


Accordingly, per capita growth can be understood as capital increas- ing labor productivity but can also be understood as capital doing an ever increasing portion of the total work done and as being capable of distributing (via property rights) an increasing portion of the income derived from production.

Binary growth

Another reason why the three binary principles set forth above may be controversial is that the principle of binary growth is not found in the works of Adam Smith, Karl Marx, Alfred Marshall, John M. Keynes, Milton friedman, John K. Galbraith, Joseph Schumpeter, Robert Solow, Michael Roemer, Robert Lucas, or any of their followers. According to the economic approach employed by the aforementioned writers, whether the distribution of capital acquisition is broader or more narrow among the people within an economy makes no fundamental difference with regard to the fuller employment of labor and capital. thus, the principle of binary growth advances a distinct cause of economic growth uniquely premised on the productiveness of capital and the distribution of capital acquisition with the earnings of capital. this growth principle is “foreign” to the analyses advanced by antecedent writers because there is nothing explicit in those analyses that would logically lead to it—just as there is nothing in the analyses of the motion of physical bodies prior to Isaac Newton that would lead to the proposition that force equals mass times acceleration. to understand a fundamentally new concept, one must be prepared to accept (at least as hypotheses for consideration) principles beyond the confines of antecedent analysis even if they conflict with, or seem superfluous to, that analysis.

Labor productivity growth distinguished

It is important to note that the asserted positive relationship between the distribution of capital acquisition and growth (i.e., the principle of binary growth) is not based on the behavioral premise that people will work more productively if they (1) own more capital, (2) own the land, tools, and/or businesses they work with, and/or (3) have an ownership stake in their employers’ businesses. Such productivity gains are inde- pendent of binary growth. Although most binary economists accept this behavioral premise as true, this behavioral premise (that broader own- ership will increase labor productiveness, and therefore cause growth) is neither unique to binary economics nor inconsistent with the growth theories of mainstream economics. Rather, the unique binary premise is that the promise of broader capital acquisition with the earnings of



capital will, in and of itself, result in the fuller employment of existing capacity (both labor and capital) and greater growth by increasing the distribution of capital income among people and thereby increasing their ability to consume.

Treating labor and capital as independent productive variables

the recognition that by doing work, capital does more than increase labor productivity has a fundamental impact on the mathematical foundation of mainstream economics. It requires a mathematical foundation that treats labor and capital as two independent variables—that is, each factor makes a distinct or “independent” contribution to production. the binary approach therefore stands in contrast to the mathematical foundation of the conventional economic approach of Adam Smith who viewed the productive powers of labor as the fundamental source of production and capital merely as the means to increase those powers. 4 Likewise, the binary approach to fuller employment differs from the Keynesian approach, which focuses on the short run in which labor is the only independent productive variable. 5 Keynes’s long run is not analytically different from Smith’s. In effi- cient markets, with competition, the long-run earning capacity of capital decreases to zero, although it is doing an ever-increasing portion of the work. therefore, the distribution of its ownership has no fundamental bearing on growth. thus, like Smith, the Keynesian approach does not treat capital as a second (binary) independent variable in either the short run or long run. As previously noted, in contrast to Keynes’s short-run focus, the binary approach focuses on the long run as well as the short run. by focusing also on the long run, in which capital is a second independent

4 “the annual produce of the land and labor of any nation can be increased in its

value by no other means, but by increasing either the number of its productive la- bourers, or the productive powers of the number of those labourers who had before


be increased, but in consequence of either some addition and improvement of those machines and instrument, which facilitate and abridge labour, of a more proper divi- sion and distribution of employment” (Smith, 1937, p. 326). based on his “labor-only” theory of production and growth, Smith also saw labor as the only fundamental source of value and therefore prices, with the productive powers of capital and the distribution of its ownership playing no fundamental role. See footnote 6 and accompanying text.

5 “It is preferable to regard labour, including of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in given environment of technique, natural resources, capital equipment and effective demand. this is why we have been able to take labour as the sole physical unit which we re- quire in our economic system, apart from units of money and of time” (Keynes, 1936, pp. 213–214).

the productive powers of the same number of labourers cannot


productive variable, both doing work and distributing income through property rights, the binary analysis recognizes that the distribution of capital acquisition has a dynamic impact in both the short run and long run on (1) the future distribution of aggregate demand for both consumer and producer goods, (2) the present demand for the employment of labor and capital, and (3) the expression of value (by workers and owners) and consequent prices.

Appreciating the work of capital quantitatively

Although some economists insist that economic analysis is best struc- tured by considering that capital itself does no work but rather merely facilitates and amplifies the work of labor, others readily concede that capital does work, pointing, for example, to the increasing employment

of robots. however, it is one thing to recognize qualitatively that capital does work and quite another to recognize quantitatively (even if only in approximate or heuristic terms) how much work capital does (and how much more income it could distribute if it were more widely acquired and therefore more fully employed) in a present-day, high-technology economy and eventually in a highly robotic economy. Notably, even Adam Smith recognized the productive power of non- human agents in agriculture where the work of the farmer is assisted at every turn by nature: sun, rain, and soil convert seed to edible fruits and vegetables; and farm animals convert vegetation to milk and meat. but considering his scant mention of the work of “agricultural capital,” he apparently did not see it doing a great deal of the work compared to labor. Moreover, having seen only rudimentary steam engines, and never having seen the immense growth in farm, factory, and other capital- intensive production witnessed by Karl Marx seventy-five years later,

nature does nothing; man does it

Smith declared “in manufactures

all” (Smith, 1937, pp. 344–345). Contemporary ecological understanding reveals the anthropocentric flaw in this aspect of Smith’s analysis. No more in manufacturing than in farming, can it be accurately said that “man does it all.” the ener- gies of sun, wind, water, oil, coal, and many other natural resources contribute immensely more to production than the work of humans not only in agriculture but in all economic activity. Likewise, advancing technology not only makes labor more productive, it continually makes capital assets much more productive than labor in task after task, thereby enabling the owners of capital to employ capital and labor to both replace and vastly supplement the work of labor not only by doing much more,



more quickly, and more cheaply the kind of work previously done by labor, but also by doing vastly more kinds of work than labor (working either alone or with less productive capital) can ever do. Nevertheless, as explained more fully below, even among those present-day econo- mists who recognize that capital is doing ever more of the work, the full potential of capital to distribute demand as its ownership is broadened goes largely unrecognized today even when aided by the analysis of J.M. Keynes and his followers.

The six powers of capital

to appreciate more fully how capital contributes to per capita growth in ways beyond the causal effect of mere increases in labor productiv- ity, it is helpful to consider some productive powers of capital and the implications that flow from them. based on its binary productiveness as an independent variable, capital has six powers important to production, distribution, and growth. Capital can:

1. replace labor (by doing what was formerly done by labor);

2. vastly supplement the work of labor by doing much more of the kind of work that humans can do;

3. do work that labor alone can never do (e.g., elevators lift tons hundreds of feet in seconds; airplanes [and drones] fly; scientific instruments unleash forces that create computer chips that cannot be made by hand; chickens lay eggs and fruit trees make fruit while all farmers can do is assist in the process);

4. work without labor (as in the case of washing machines, automatic bank tellers, gasoline dispensers, vending machines, automated factories, all forms of robotics, and fruit-bearing trees);

5. pay for itself with its future earnings (the basic rule of business investment); and

6. distribute income roughly equal to the value of its output.

the first four powers concern what might be considered the “real economy” powers of capital; the latter two are powers that are most clearly revealed in a private property, market economy with a stable credit system protected by a reliable legal system.

The work of capital vastly supplements the work of labor

from the foregoing consideration of the six identified powers of capital, it follows that characterizing the per capita growth impact of increasingly capital-intensive production as the result of “the substitution of capital for


labor” is a fundamental misconception (just as is characterizing that per capita growth as the result of “increasing labor productivity.” In considering the accumulating wealth of nations that Smith was trying to explain in 1776, and in explaining the far greater accumulation of wealth that has continued to the present day, the work of capital has done (and continues to do) far more than substitute for the work of labor. In reality, the work of capital not only substitutes for, but also vastly supplements, the work of labor.

Production (work) is income

It is no less true on an economy of billions of people, than on Robinson Crusoe’s island, that work (i.e., production) is income. but work is done by both people and things; and capital works on both sides of the production– consumption economic equation by providing vastly increased:

1. productive capacity and production, and 2. capacity to distribute income and leisure.

thus, in a communist society in which capital is owned by the state, the income from capital is also owned by the state; and it can be distrib- uted to people through wages and state-provided benefits. In a private property economy, capital income legally belongs to its owners except to the extent it is taxed or outlawed. According to binary economics, in a private property, market economy, it is the capacity of capital both to do much more work and to distribute much more income and leisure that helps to explain how broadening capital acquisition with the earnings of capital promotes much greater employment of existing capacity (both labor and capital), capital accumu- lation, and growth than would result from merely redistributing a portion of the earning capacity of capital that is formed if it is more narrowly acquired. Accordingly, if an important cause of recessions and anemic growth is related to the future distribution of earnings among the people expected to purchase what could be produced by labor and capital if fully employed at full potential, then private and public market structures and strategies for increasing the earnings of poor and middle-class people should not limit those people, as a practical matter, to labor earnings and a redistribution of a portion of the earnings of capital based on its earning capacity when more narrowly acquired. Rather such structures and strategies should include those people as a practical matter in the competitive opportunity to acquire capital (which is increasingly more productive than labor in task after task) with the earnings of capital and thereby distribute to those people with far greater individual earning capacity and far greater aggregate demand.



Two theories of production and growth

Since Adam Smith first published his inquiry regarding the accumulat- ing wealth of nations, when analyzing how production and productive capacity have grown since the first publication of Smith’s Wealth of Nations in 1776, conventional market economics interprets the role of capital as primarily facilitative: capital increases labor productivity, thereby allowing for a rise in output per unit of labor, the employment of more labor, the payment of higher wages, the distribution of more demand, and the investment in more capital, which in a virtuous cycle of growth would promote more of the same. In analyzing this hoped-for virtuous long-term cycle of growth, the ability of capital to do work and distribute income (through property rights) is not identified as a distinct cause of growth. According to binary economics, however, in contributing to economic growth, capital does much more than increase the productivity of the people who work with it. Increasingly capital is doing both ever more and an increas- ing portion of the work, and therefore, absent redistribution and institutional restraints on its broader acquisition, would be distributing an increasing portion of the income. Per unit of output, a major economic incentive is generally to produce more with more productive capital and less labor. And as capital does ever more of the work, the recognition of its increasing abil- ity to do work (its productive capacity) and distribute the income it earns or could earn if more broadly acquired (its distributive capacity) becomes increasingly important to achieving a virtuous cycle of growth. In comprehending growth, the difference between the productivity approach and the productiveness approach can be illustrated by figure 1a and figure 1b, which depict growth as a function of technological advance over time. figure 1a, depicting the productivity view, shows both labor and capital productivity growing in a relatively constant ratio relative to each other based on the relatively stable (though in recent years, declining) ratio of labor/capital factor shares of total income in the United States. figure 1b, depicting the binary view, shows labor productiveness remaining roughly constant while capital productiveness increases significantly, thereby ac- counting for a growing ratio of total production. Obviously, if income is pay for production, it cannot be simultane- ously true that:

1. capital is doing most of the work, 2. labor is earning most of the income, and 3. markets are efficiently pricing the value of labor and capital con- tributions to production.


Figure 1 Economic growth

(a) The productivity view of the labor–capital relationship

30 percent capital productivity Total growth 70 percent labor productivity Technological advance over time
30 percent
70 percent labor
Technological advance over time

(b) The productiveness view of the labor–capital relationship

Labor productiveness remains fairly constant but contributes a declining percentage of total productiveness Total
Labor productiveness
remains fairly constant
but contributes a
declining percentage
of total productiveness
Capital productiveness
grows and contributes a
growing percentage of
total productiveness
Technological advance over time

Productiveness, efficiency, and neoclassical growth theory

Each of the six powers of capital set forth above, when actually reflected in production, contributes to growth (including mere labor replacement, which produces the same physical output, plus leisure, or unemployment and/or welfare dependence, depending in large part on who acquires the capital), but only the first power directly involves the mere substitution of capital for labor. the productive power of capital to vastly supplement the work of labor and thereby increase the income of its owners (and to a lesser extent the labor income of some of those employed) occasions a growth that is not the result of efficient resource and labor employment allocations at the margin of some hypothetical equilibrium that (in the



context of technological advance) never materializes. thus, although many economists and policy advocates use the marginal efficiency theory of neoclassical economics as the foundation for (or the primary compo- nent of) a general theory of growth, the capital/labor substitution process is only one component of growth; and from the binary perspective, the wealth enhancing contribution of market pricing and resource alloca- tion is severely limited so long as the distribution of capital acquisition remains narrow (see the next section). Although productivity ratios, and the prices associated with them, may be helpful theoretically and practi- cally in guiding market participants regarding the relative employment of capital and labor, their role in determining the distribution of income from production and in producing and distributing demand for growth is not well specified by the neoclassical analysis that supports the wealth maximization promised by allocational efficiency.

Productiveness, values, prices, and market efficiency

the binary approach offers a new perspective on the impact of the broader distribution of capital acquisition on value, price, and market efficiency. In an assumed efficient market in which labor is assumed to be the only independent productive variable, most consumer goods and services will be worth the work people are willing to do by their labor to acquire them. this expression of the basic connection between prices and the payment needed to employ labor is (1) how Adam Smith and John Maynard Keynes saw it, (2) the foundation of price theory, 6 (3) the foundation for the argu- ment that given the limits of production possibility, an efficient allocation of resources maximizes “the size of the pie,” and (4) in an economy in

6 “the real value of all the different component parts of price, it must be ob- served, is measured by the quantity of labour which they can, each of them pur- chase or command. Labour measures the value not only of that part of the price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit” (Smith, 1937, p . 50). “the real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it” (ibid., p. 30). “the value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other com- modities, is equal to the quantity of labor which it enables him to purchase or command.

“the value of wealth

to those who possess it, and who want to exchange it for

new productions, is precisely equal to the labor it can enable them to purchase or command (ibid., pp. 30–31). “Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the val- ues of different commodities at all times and at all places” (ibid., p. 36).


which capital ownership is highly concentrated so that the vast majority

of people earn almost entirely from their labor, the theoretical basis for the consequential empirical measure of (a) the price of labor, capital, and all goods and services, and (b) the factor shares of aggregate income. however, the willingness of people to work at a given wage depends on their competitive opportunity to acquire capital with its earnings and then to receive its full net return (Ashford, 2011a, 2011b). In an economy in which capital acquisition is much more broadly dis- tributed, the value of goods and services is not limited to the work people are willing and able to do by way of their labor, but also includes the work they are willing and able to employ their capital to do. Without a horse, few sacks are “worth hauling” before the hauler becomes exhausted. With

a horse, many more sacks are worth hauling; and the economy of sack

hauling will grow as horse (and truck) ownership becomes more broadly distributed. Expanding this single-product economic model to include all the goods and services (which per unit over time are produced with ever more productive capital and less labor) does not alter the analysis. Any economy will grow with a broader distribution of capital acquisi- tion because people can express value not only by the work they do but

also by the work they employ their capital to do. Moreover, the broader distribution of capital income will produce not only a greater but also a different distribution of demand. thus, from a binary perspective, (1) the technical relationship used in marginal productivity analysis regarding the relative employment of capital and labor in production; and (2) the factor income shares derived from production are significantly dependent on the distribution of the opportunity to acquire capital with the earnings of capital. from

a conventional economic perspective, in terms of its impact on prices,

capital/labor substitution, employment, and factor income shares, the market distribution of capital acquisition is either irrelevant or of only minor consequence. Competitive market prices require (1) no barriers to entry, (2) voluntary (rather than coerced) exchange, and (3) no monopolization of the means of production. the recognition that (1) labor and capital both do work, (2) capital is increasingly more productive than labor in performing task after task, (3) capital can increasingly repay its acquisition cost with its future earnings, reveals (1) not only how the distribution of its owner- ship and future income can become progressively more concentrated, (2) but also how (with a system of corporate finance that promotes capital acquisition with the earnings of capital primarily in proportion



of existing wealth) wealth will become progressively more concentrated (absent redistribution). thus, (1) presently there are prevailing, largely unexamined, conceptual and institutional impediments to a voluntary ownership-broadening system of corporate finance that would enable market participants to price the value of broadening capital ownership, and (2) these impediments must be identified and removed before (a) the presumed theoretical, allocational benefits of efficient pricing can be fully realized, and (b) available labor and capital can be employed at its full potential.

Policy implications of binary economic analysis

Mainstream and binary strategies compared

the mainstream strategy for promoting economic recovery is a com- posite mainstream left- and right-wing mix of government policies to promote (1) capital acquisition with the earnings of capital primarily for corporations and well-capitalized persons (generally in proportion to their existing wealth), and (2) primarily jobs (but by no means the best or highest paying jobs) and various forms of welfare redistribution for poor and middle-class people. If the binary analysis has validity, then in a market economy in which production is becoming ever more capital intensive, sufficient earning capacity to purchase all that can be produced cannot be distributed by jobs and welfare alone. the missing element in these strategies (that could easily be added without extra cost to anyone) is an understanding of the need to open the existing system of corporate finance to provide poor and middle-class people with practical, competitive access to the same institutions of corporate finance, banking, insurance, loans and guaranties, and favorable tax and monetary policy (presently routinely provided to corporations and people to acquire capital with the earnings of capital primarily in pro- portion to their existing wealth) so that poor and middle-class people can also enhance their earning capacity by way of capital acquisition with the earnings of capital but in proportions not limited by their ex- isting wealth. Major creditworthy companies are uniquely positioned to provide this access in a profitable way. their incentives for doing so in the aggregate are discussed in the sub- sections below. their incentives for doing so on the microeconomic level and the related first-actor-collective-action impediments are discussed in the next section under that heading.


Private implementation of ownership-broadening corporate finance

to understand, first on the aggregate level, how ownership-broadening corporate finance 7 might be in the interest of major corporations and their shareholders, consider the largest 3,000 or so creditworthy corporations in the United States, which own more than 90 percent of the nation’s invest- able capital. 8 At diminishing unit costs, most of these corporations could profitably produce much more of the goods and services that people would purchase if they had the earnings to do so. Presently, almost all capital acquired by these corporations is acquired with the earnings of capital, and much of it is acquired with borrowed money. 9 At the same time, the ownership of this corporate wealth is highly concentrated: Approximately 1 percent of the people own 40–50 percent of the wealth and 10 percent own 90 percent of the wealth, leaving 90 percent owning little or none (see Wolff, 1995a, 1995b, 2011). thus, capital returns its value at a rate reflective of its long-term (suppressed) earning capacity as it pays for its acquisition cost primarily for a small minority of the population. because present demand for the employment of labor and capital is dependent on demand for consumer goods in a future period, a volun- tary pattern of steadily broadening capital acquisition promises more production-based consumer demand in future years and therefore more demand for a fuller employment of labor and capital in earlier years. thus, if the techniques of corporate finance were opened competitively to all people, then the present demand for capital investment and employment would increase in anticipation of the broadening distribution of capital income to poor and middle-class people with unsatisfied consumer needs and wants. Accordingly, a broader distribution of capital acquisition and income strengthens the promise of capital to pay for itself with its future earnings, makes profitable the employment of more capital and labor, and

7 for a fuller description, see Ashford (1996, 2010); Ashford, Ashford, and hall (2011, 638–651); Ashford and Shakespeare (1999, pp. 236–272). for an analysis of the impact of binary financing in standard micro- and macroeconomic terms, see Ashford and Kantarelis (2008).

8 Source: Russell Investment, Russell U.S. Indexes, www.russell.com/Indexes/data/ US_Equity/Russell_US_equity_indexes.asp.

9 During the fifteen-year period from 1989 through 2003, in the case of major American companies, the sources of funds for capital acquisition, in approximate terms, reveal that annually retained earnings accounted for at least 70 percent and more usually 80 percent of the capital acquisition. borrowing accounted for almost all of the rest. Sale of stock as a source of funds never exceeded 5 percent and was nega- tive in most years (see brealey et al., ch. 14, pp. 561–563).



enhances the prospects of sustainable economic recovery and enhanced growth. It will also therefore increase the market value of well-run cor- porations and their shareholders within the growing economy.

Corporate fiduciary duties

the primary duty of corporate fiduciaries is to not to maximize share price at every moment in time (sometimes referred to as “short-termism”), but to develop relatively long-term business plans to maximize corporate wealth and thereby to enhance shareholder wealth. 10 In good economic times, and even in periods of sluggish growth or reces- sions, many if not most, major corporations have capital acquisition plans that they might finance with (1) retained earnings (which might otherwise be distributed as dividends to shareholders), (2) borrowed money, and/or (3) sale of shares; and directors are duty-bound to choose the method that optimizes corporate wealth. Any creditworthy capital acquisition plan can usually be financed with borrowed money, but using retained earnings or selling shares might often better serve corporations and their shareholders. Given synergistic potential between a corporation and would-be sharehold- ers, it might be in a corporation’s interest to forgo the use of retained earn- ings and borrowed funds and instead raise the necessary funds for capital acquisition by selling shares to investors, for example, to Warren buffet or bill Gates. to purchase such shares, if Warren and bill prefer not to liquidate existing holdings, they might borrow the money to purchase the shares; and in light of their net worth, they are in a position to do so. the share-selling corporation would not care if the source of cash is borrowed money rather than the purchaser’s own assets. the lender would normally insist that the shares be pledged as security until the loan is repaid and would normally insist on additional security from the borrower usually in the form of the borrower’s assets (collateral). but the additional security need not be assets of the wealthy borrower, but rather could be supplied in the form of capital credit insurance 11 (payable to the lender in the event

10 See, for example, Paramount Communications v. QVC. Network, Inc., 637 A. 2d 34 (Delaware Supreme Court 1994).

11 Although perhaps less familiar to some readers than other institutions that facili- tate corporate finance, capital credit insurance has been available for centuries. Lloyds of London and AIG are well-known examples. And while the AIG debacle is certain evidence that capital credit insurance can be abused and corrupted, few people famil- iar with the benefits of commerce are suggesting that the institution should be abol- ished. to the contrary, the government of the United States has taken steps to preserve and fortify that institution for the benefit of those who routinely participate in capital acquisition with the earnings of capital even as they sleep. In light of the beneficial impact of ownership-broadening capital acquisition, that benefit should also be rou- tinely extended to poor and middle-class people.


of default) with insurance premiums paid either directly by the borrower or by the lender with the cost passed to the borrower via a higher interest rate. the binary approach provides an understanding of how poor and middle-class people can also obtain such insurance.

Using existing private institutions

to acquire capital with the earnings of capital, well-capitalized corpora- tions and people use:

1. the earnings of capital;

2. collateral;

3. nonrecourse corporate credit; and

4. market and insurance mechanisms to diversify and reduce risk.

they also benefit from a proactive government role in protecting individual freedom and property rights, and maintaining public goods including physical, financial, and monetary infrastructure. the same institutions that can work profitably for well-capitalized corporations and people can also work profitably as poor and middle- class people are included in the capital acquisition process. Moreover, in an economy operating at less than full capacity, the principle of binary growth indicates that if capital can competitively pay for its acquisition costs out of its future earnings primarily for existing owners, it can do so even more profitably if all people are included in the capital acquisi- tion process. Just as investment trustees can act for Warren and/or bill, so they can also act for poor and middle-class people. If poor and middle-class people, represented by qualified trustees, are able to compete with existing owners for the acquisition of corporate shares representing the capital require- ments of creditworthy companies, they would bring to the bargaining table corporate wealth-enhancing opportunities that well-capitalized people generally cannot offer (namely, a pent-up appetite to purchase the necessities and simple luxuries of life that richer people have long enjoyed from capital income). After the acquisition debt obligations are repaid with the dividends on the binary stock, the distributed earnings of capital acquired by members of poor and middle-class people will create more production-based consumer demand than if that capital had been acquired by richer people. More of the capital earnings, if acquired by richer people, would be invested in investment opportunities, but the investment opportunities would not be as great in the context of a nar- rower distribution of capital ownership and a consequential relatively weaker consumer demand.


Figure 2 Projecting binary growth


100% 83.4% 85.7% 88.7% 89.9% 90% 80% 75% 80% 66.7% 60% 50% Percentage of annual
83.4% 85.7% 88.7% 89.9% 90%
Percentage of annual capital acquisitions
fully paid and distributing income to owners

Broader distribution without redistribution

Lest one confuse the binary approach with the Keynesian approach, it should be noted that if one or more of the corporations decided to sell shares to Warren rather than bill as the most competitive offer (i.e., most consistent with corporate wealth-maximizing goals), bill could not complain that the transaction was a redistribution. Likewise, nor could Warren, bill, or any other investors complain of redistribution if the directors determined that the sale of shares to trustees for the benefit of the binary beneficiaries is the most competitive offer. figure 2 illustrates the aggregate growth-sustaining feature of an ownership-broadening economy. based on the assumptions specified below, figure 2 shows the number of years of annual ownership-broadening acqui- sitions that will have paid for themselves over time. figure 2 assumes:

1. a seven-year cost recovery period for capital investment; 2. in every year after the implementation of the binary economy, some number, N, of an economy’s creditworthy companies have profitably utilized binary financing to acquire some percentage, X, of their capital investments; 3. the capital credit insurance is profitably priced to repay the lending banks for those financings that fail to repay their acquisition loans so that X is net of those failures; and


4. N, X, and the rate of return on capital remain constant throughout the period.

Although beginning slowly, the broadening distribution of capital acquisition and income will increase steadily and thereby provide the basis for binary growth. Each year after the initial cost recovery period, an addition year of binary capital will have paid for itself and will be distributing capital income to poor and working people. Consistent with the conservative assumption of a seven-year capital cost recovery period, figure 2 shows the steady growth in fully paid-for annual capital acquisi- tions. In the eighth year, the first annual acquisition of capital will have paid for itself and will begin paying its full return to the new owners. In the ninth year, the second annual capital acquisition will be fully paid for and will therefore begin paying its full return to the new owners. In fourteen years, 50 percent, and in the twenty-eighth year 75 percent, of the annual capital acquisitions will have paid for themselves, and will begin paying their full annual return to the new owners, and so on. In the long run, the linkage between supply (in the form of the incremental productiveness of capital) and demand (resulting from the increasing widespread market distribution of capital income to consumers) ap- proaches 100 percent. the more binary financing that is undertaken, the greater are the distributional growth effects. If the rate of return on capital investment increases (as binary principles predict would occur in an ownership-broadening economy) then the curve shown in figure 2 would rise more steeply and approach the specified percentages sooner in time.

Maintaining market share in a growing economy

to maintain market share in the projected growing economy, based on their capital investment planning horizon, producers will have to increase production and productive capacity before binary income begins to be distributed to its new owners. because present demand for capital goods is positively affected by anticipated future demand for consumer goods, the broader distribution of capital acquisition and capital income should be reflected in increased employment of labor and capital within produc- ers’ capital investment planning horizon. With a capital cost recovery period of seven years, and a capital investment planning horizon of five years, market incentives for increased capital investment by producers of consumer goods might materialize for some producers in the third year. furthermore, the producers of capital goods needed by the producers of consumer goods to increase their productive capacity may experience



market incentives for increased capital spending and labor employment as early as the first year.

Some additional effects

Some additional effects of broader capital acquisition (logically flowing from the binary principles) that offer a reasonable expectation to enhance the prospects of sustainable economic recovery and growth, and that may be immediately reflected in light of the prospects of a binary economy, are:

1. Reduction in welfare dependence and welfare expense: As capital income is more broadly distributed to welfare-dependent people, government transfer payments can be reduced, thereby providing

a basis for lower general tax rates.

2. Increase in government revenues and reduction in tax rates: As capital income is more broadly distributed to individual taxpay- ers, they will pay more in taxes, thereby increasing government revenues and providing a basis for lower general tax rates.

3. tax benefits for participating corporations: Participating corpora- tions whose shares (1) provide binary beneficiaries with additional taxable income, or (2) allow for a reduction in welfare payments, may receive a tax deduction representing some portion of the in- creased government revenues and/or reduced government spending

occasioned by the earnings distributed to binary beneficiaries as dividends on the binary stock of the participating corporations.

4. With enhanced corporate profitability, wealth, and share-value, and with lower need for government spending, private and government- sponsored retirement security will be enhanced.

5. Enhanced sovereign credit ratings: the binary projections portend

a beneficial impact on widely shared concerns regarding creditwor-

thiness of a number of nations based on their perceived inability to repay their sovereign debt. this concern is based on troublesome financial indicators reflected both in present data and trends pro- jected over the terms of government bonds, which frequently span ten or more years. the troublesome financial indicators include relevant ratios among (1) government revenues, (2) government debt, (3) government expenditures, and (4) gross domestic product. Other national statistics bearing on these indicators include trends in (1) corporate profits and balance sheets, (2) the value of publicly traded equity, (3) employment, and (4) personal income, savings, and debt. In light of binary principles, based on the sustained ef- fect of ownership-broadening financing on these indicators and


statistics, the creditworthiness of the sovereign debt of countries that employ the binary approach will increase. 6. Greener growth: Although binary growth may raise environmental concerns, emergence of a competitive ownership-broadening alter- native and the resultant broader distribution of capital income will make greener technologies (presently unutilized and underutilized) more affordable to those consumers who would prefer them and more easily financed.

thus, with a widely shared understanding of the binary growth that would logically follow from a broader distribution of capital acquisition with the earnings of capital, the trends of all of the factors set forth above used to evaluate the economic projections, growth potential, and the cred- itworthiness of individuals, corporations, and nations would be positively affected. With the binary understanding, people and their governments would have a blueprint for the binary market reforms that would improve projections made by proponents of austerity and stimulus; market partici- pants would have an enhanced confidence and optimism regarding the creditworthiness of sovereign debt and the future of the global economy; the sustained effect of ownership-broadening financing set forth above will make both austerity and stimulus measures more affordable and more eas- ily harmonized politically to the extent deemed desirable; and the market effect resulting from that understanding would be immediate.

The first-actor-collective-action problem

however, even under such conditions, a first-actor-collective-action prob- lem would remain that inhibits ownership-broadening binary financing because there is no guarantee (and good reason to doubt) that such projected aggregate benefits from ownership-broadening capital acquisition would be enjoyed proportionally by participating corporations whose more broadly distributed shares gave rise to the more broadly distributed income. for example, if General Motors were to encapitalize its employees, custom- ers, and neighbors, those beneficiaries would likely spend much of their enhanced earnings at least initially on immediate needs of food, clothing, shelter, and so on, and to the extent they use it to purchase automobiles, they might purchase cars made by competitors. Moreover, although there is an optimistic logic to the prediction that binary growth would in the aggregate be greener growth (because greener technologies will be more affordable and more easily financed, many poor and middle-class people may prefer to spend their enhanced capital income on brown rather than



greener products and services. Nevertheless, as explained below, there is reason to believe that with cooperative planning among major corpora- tions and with government leadership, both of these problems may be effectively addressed. the collective-action problem would be somewhat mitigated by the encapitalization of customers in proportion to their patronage of the goods and services produced by the participating corporation. 12 It would also be mitigated by any tax benefits given to participating corporations whose dividends on binary shares yield increased government tax revenues and reduced welfare payments. It would also be mitigated in company towns and city neighborhoods in which the greater wealth of “neighbor” residents of the participating corporations result in benefits to the par- ticipating corporations such as (1) lower property and/or other local tax rates, (2) improved neighborhoods, schools, and hiring conditions, and (3) lower crime and insurance rates. there would also be a mitigating direct benefit resulting from the good will that might be engendered from the public toward corporations willing to broaden their share ownership by way of the ownership-broadening trusts. but the collective-action problem would not be wholly eliminated by these mitigating effects. Even if the binary approach were widely under- stood and accepted as theoretically beneficial in the aggregate, it is therefore reasonable to assume that it would not be voluntarily instituted by many corporations until there is sufficient support on the part of other market participants committed to its implementation. this critical support would include (1) sufficient participation in binary financing by the producers of food, clothing, shelter, health care, transportation, communication, en- tertainment, and other goods and services that poor and working people would purchase more of if they had the earning capacity to do so, and (2) sufficient support on the part of investors in those producers. Nevertheless, this collective action problem is not a prisoner’s dilemma in which the actors’ decisions are kept from one another. to the contrary, if the binary analysis is accepted and deemed a desirable approach to corporate finance in the aggregate as described above (which is admittedly unlikely to occur until economists begin teaching it), then the expected benefits are greater as the approach is more broadly understood and implemented in a coordinated fashion. If the principle of binary growth is valid, then it would seem that most market participants would benefit

12 Somewhat like many frequent-flier programs, customers who have a continuing relationship with corporations like energy utilities, telephone companies, Internet and entertainment access companies, airlines, major retailers, and banks can be paid divi- dends in the form of credits against future purchases.


from its widespread implementation; and it would be in their rational in- terest to promote coordinated implementation. No major high-technology economy is without trade and business associations that regularly meet, plan, lobby, and act in concert to improve the business climate for their profit-seeking activities.

Government policy

the basic logic underlying the benefits that seemingly flow from voluntary ownership-broadening binary financing springs from the confluence of (1) the three basic principles of binary economics, (2) other commonly shared principles of finance, (3) the corporate wealth-maximizing duties of corporate fiduciaries, and (4) the enlightened self-interest of investors. Nevertheless, to facilitate the benefits of broadening the distribution of capital acquisition with the earnings of capital, several government actions would likely be practically necessary and several others would seemingly be desirable. the most notable facilitative government action would be to eliminate the corporate tax on corporate income paid to the ownership-broadening trusts to enable them to repay the lender and to pay dividends to binary beneficiaries. this tax relief can be wholly justified on grounds of both economics and justice. because the corporations have no use of the in- come that it passes on to the trustees, there is no reason to tax it on the corporate level. Moreover, taxing that corporate income would severely retard the repayment of the acquisition debt and reduce the enhanced earning capacity of the beneficiaries, which is precisely the economic impetus for the benefits outlined above. It is also noteworthy that there are many ways that existing owners receive access to the pretax (un- taxed) earnings of capital by way of investment tax credits, deductions for research and development, depreciation (often accelerated), offshore (usually capital) income, executive compensation, and other strategies for “zeroing out” corporate income. these provide substantial benefits largely in proportion to existing wealth. these many ways provide little or no benefit to people with little or no capital ownership. taxing the corporate income that would deny poor and middle-class people access to the “first round” of pretax capital acquisition with the earnings of capital and thereby would have the effect of perpetuating this severe disparity in the economic opportunity to acquire capital with the earn- ings of capital. Moreover, as with any government-facilitated program to extend oppor- tunity to people, eligibility and antidiscrimination rules for determining beneficiary participation would be needed. Likewise, rules governing the qualification and duties of binary trustees, lenders, and capital credit



insurers would be needed, as they are for other special types of fiduciary, credit, and insurance providers. beyond such actions, the government could take an active role with respect to the collective action and environmental sustainability issues. first, dividends might be paid in the form of special script usable only for the goods and services of qualified producers. Once so used, the script could then be exchanged by participating corporations for general cur- rency or bank credit. Second, to facilitate the availability and reduce the cost of private capital credit insurance, the government might establish a national ownership-broadening capital credit reinsurance entity modeled after the fhA home loan reinsurance program (which might or might not be backed by the full faith and credit of the government). third, legislation could authorize the constituency trust to trade and thereby diversify the investments of binary beneficiaries so as to diversify their share ownership. fourth to bring down the cost of credit for ownership- broadening financing, a nation’s central bank might monetize ownership- broadening loans until they are retired. 13 to benefit from the advantages of government reinsurance and monetization, qualified binary financing might be restricted to the economic basics (the essential needs) such as food, clothing, shelter, health care, education, and energy) and restric- tions might also be based on ecological concerns.


by focusing on the long run as well as the short run, the ownership-broad- ening binary approach offers an alternative path to fuller employment of labor and capital beyond, and yet complementary to, those suggested by the polarized austerity-stimulus debates. It is based on an economic understanding of growth built on the premises that capital (1) does work and distributes income, (2) is doing ever much more of the work and could produce and distribute more broadly ever much more income as more people are enabled to acquire it with its earnings, and (3) if broadly acquired, will thereby promote a fuller employment of labor and capital over the short run and the long run than an identical economy in which the market participants are exposed only to a classical, neoclassical, and Keynesian understanding of growth. In reading an earlier draft of this paper, one referee’s comment raised the question of whether the same benefits promised by the binary approach

13 for a description of the financial and economic aspect of central bank monetiza- tion of ownership broadening financing, see the authorities set forth in note 7.


might be achieved via stimulus, redistribution, tax policy, and other Keynesian measures to increase aggregate demand without broadening capital acquisition with the earnings of capital. Such a question assumes the two approaches are competitive or in some sense mutually exclu- sive. Yet, when one considers that the binary approach (1) is voluntary and involves no taxation or government intervention, (2) addresses the problem of aggregate demand not only in the short run but also in the long run, and (3) works to benefit people not only with greater demand for employment but also with access to property rights in capital income (usually more stable than labor rights to income), it seems more likely that the binary impact on fuller employment will be complementary to benefits derived from Keynesian policies. Moreover, if capital is capable of doing ever more of the work and distributing ever more of the income, then the Keynesian logic that (1) suggests that fuller employment effects and distributive benefits to poor and middle-class people will result from redistributing only a portion of the income of capital (2) also suggests that those effects and benefits will likely be even greater if an increasing portion of the income of more broadly distributed capital acquisition is added over the short run and the long run to the short-run expected ag- gregate Keynesian increase in demand. In justifying his focus on the short-run it is true that Keynes said in the long run we are all dead. however, his proposition is not true. In the long run (the period in which capital investment is variable), the vast majority of people are still alive and in need of income not only from labor, but from capital. the people include babies, preschool children, students (every generation of which graduates deeper in debt), young adults, people in their thirties, forties, fifties, and sixties (far too many deeply in debt and strug- gling to make ends meet on jobs and welfare alone), ever more expected to live into their seventies, eighties, and beyond, then mostly unable to earn from labor but certainly able to earn from their capital if enabled to acquire it with the earnings of capital. thus the economic well-being of virtually all people includes a strategic market relationship to the long- run in which capital can acquire capital with the earnings of capital and thereafter distribute capital income to its owners. On the subject of the long term, another referee’s comment read astutely as follows: “Clearly in a fully robotic economy—similar to the one de- picted by Woody Allen in his movie Sleepers in which all work is done by robots—the question is then how to distribute the income produced by these robots to the general public.” the binary answer is: through the private property system, (using the same institutions that enrich people presently primarily in proportion to their existing wealth) but aided by



a long-run theory of growth that holds that the prospect of more broadly distributed capital earnings in future years provides incentives to profit- ably employ more labor and capital in earlier years. Economists certainly perform an important social purpose when they advocate conscientiously in the public interest; but they also have an im- portant role in teaching people what other approaches are available so that people can decide for themselves what economic policies they prefer and what representatives they might elect to serve their interests.


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