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Using C hristian Principles to Enhance Economic Theory and Practice:

  by: : Professor Robert Ashford

(080323)
“Using C hristian Principles to Enhance Economic Theory and Practice:
Louis Kelso’s Binary Economics as the More Christian and Scientific Way
First Presented to the Symposium on “Christianity and Economics:
Integrating Faith and Learning in Economic Scholarship”
Baylor University; November 7-9, 2002
Posted with the permission of the author
© 2008
Professor Robert Ashford
Syracuse University College of Law
Syracuse, New York 13244
Tel. 315-677-4680; rhashford@aol.com
Abstract
This paper compares basic premises of classical, neoclassical, Keynesian and binary economics
in the light essential principles of Christianity (as expressed by the words of Jesus) and the scientific
method to explore (1) how economic theory can be improved so as to enable people to better understand
their essential rights and responsibilities in a market economy, and (2) how economic institutions can
be improved to better serve the spiritual and material needs and desires of all people. In the light of
Christian and scientific principles, the various economic approaches are compared with respect to their
theories of production, growth, distribution, efficiency, price, and value, and with respect to their regard
for private property.
The faith-based analysis reveals (1) a fundamental congruity between basic tenets of Christianity
and the basic principles of binary economics, and (2) a fundamental incongruity between Christian
principles and conventional economic theory. Both Christianity and binary economics are built on the
principles of abundance that (1) flows from powers beyond human capacity and (2) is materially
enhanced by human practices that promote inclusive, individual participation in the necessities,
opportunities, and responsibilities of life. These principles of abundance and inclusion conflict with the
dominant approach of conventional economics which is premised on (1) scarcity, (2) the homocentric
notion that human productivity is the fundamental source of abundance (production, wealth, and growth)
and (3) the exclusionary assumption that the distribution of ownership has no fundamental positive
causal relationship to increased abundance unless traceable to increased labor productivity.
This Christian faith-based preference for binary economics over conventional economics is
corroborated and reinforced by a comparison of the various economic theories based on the standards
of the scientific method. These standards require of any theory (1) workable assumptions, (2) internal
consistency and (3) replicable description, prediction, and prescription. Judged by these scientific
standards, binary economics is to be favored over conventional economics. Accordingly, compared to
conventional economic approaches, binary economics should be included in the analysis in many
contexts in which economic, financial, legal, political, and moral theory is taught, researched, debated,
and implemented.
(080321) “ Using Chr istian Principles to Enhance Economic Theory and Practice:
Louis Kelso’s Binary Economics as the More Christian and Scientific Way"
First Presented to the Symposium on “Christianity and Economics:
Integrating Faith and Learning in Economic Scholarship”
Baylor University; November 7-9, 2002
Posted with the permission of the author
© 2008
Professor Robert Ashford
Syracuse University College of Law
Syracuse, New York 13244
Tel. 315-677-4680; rhashford@aol.com
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. SUMMARY OF FAITH BASED ANALYSIS OF BINARY AND
CONVENTIONAL ECONOMICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A. Some Essential Principles of Christianity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
B. Examining Economic Paradigms Based On Christian Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
III. OVERVIEW OF BINARY ECONOMICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
IV. THE ANOMALY OF UNUTILIZED PRODUCTIVE CAPACITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
V. THE BINARY HYPOTHESIS REGARDING UNUTILIZED PRODUCTIVE CAPACITY . . . . . . . . . . . . . . . 12
VI. BINARY ECONOMICS AS A DISTINCT PARADIGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
A. On Paradigms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
B, The Binary Economic Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C. Six Powers of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
D. Binary and Conventional Growth Theories Compared: The Importance of Ownership . . . . . . . . . . . . 17
E. The Supply of Capital and The Principle of Binary (Ownership-Distribution-Based) Growth . . . . . . . 17
F. “Free Market” Theories of Price and Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
VII. APPLYING BINARY PRINCIPLES TO THE US ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
A. A Model of a Binary Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
B. The Cost of Financing to Participating Corporations and the Binary Owners . . . . . . . . . . . . . . . . . . . 23
C. Binary Growth in a Binary Time Frame . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
D. Why is the binary infrastructure necessary to manifest binary growth? . . . . . . . . . . . . . . . . . . . . . . . . . 25
VIII. THE POSITIVE AND MORAL CONTENT OF BINARY ECONOMICS AND PRIVATE PROPERTY 26
A. Greater Abundance Without Redistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
B. The Normative Content of Binary Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
C. Love and the Highest Form of Charity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
IX. CHOOSING AMONG PARADIGMS ON CHRISTIAN PRINCIPLES AND SCIENTIFIC PRINCIPLES:
ADDRESSING UNUTILIZED PRODUCTIVE CAPACITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
A. The Choice of Paradigms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
B. Duties of Corporate Fiduciaries and Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
C. Responsibilities of Advocates for the Disadvantaged. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
D. Responsibilities of Teachers - The People Have a Right to Know. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
X. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1 Binary Economics was first advanced by corporate finance attorney, investment banker, and
philosopher, Louis Kelso. See, L.O. Kelso and M.J. Adler, The Capitalist Manifesto (1958); L.O. Kelso and
M.J. Adler, The New Capitalists; (1961) L.O. Kelso and P. Hetter, Two-Factor Theory: The Economics of
Reality (1967); L.O. Kelso and P.H. Kelso, Democracy and Economic Power: Extending the ESOP
Revolution through Binary Economics (1986, 1991). The authoritative and most complete source of writings
by Louis Kelso (the originator of binary economics) can be found on the web site of The Kelso Institute: <<
http://www.kelsoinstitute.org >>.
For the author’s presentation of binary economics as a distinct paradigm, see generally, Binary
Economics: the New Paradigm, (1999) with Rodney Shakespeare; "Louis Kelso's Binary Economy," Volume
25 Journal of Socio-Economics, pp. 1-53 (1996) (available online at westlaw.com in its jjsocecon data base);
“The Binary Economics Louis Kelso: The Promise of Universal Capitalism,” 22 Rutgers Law Journal 3
(1990) ; "A New Market Paradigm for Sustainable Growth: Financing Broader Capital Ownership with Louis
Kelso's Binary Economics," Volume XIV, Praxis, The Fletcher Journal of Development Studies, pp. 25-59
(1998). “The Binary Economics of Louis Kelso: A Democratic Private Property System for Growth and
Justice,” Chapter 6 in Curing World Poverty: The New Role of Property, (1994), John H. Miller, C.S.C.,
S.T.D., editor; “Binary Economics, Fiduciary Duties and Corporate Social Responsibility:
Comprehending Corporate Wealth Maximization for Stockholders, Stakeholders, and Society,” 76
Tulane Law Review 1531 (2002); Memo On Binary Economics to Attorneys for People of Color and
Women Re: What Else Can Public Corporations Do For Your Clients?,” 79 St. John’s Law Review
1221 (2005); “Universalizing the Right to Acquire Capital with the Earnings of Capital: Binary Economic
Strategies for Empowering Poor and Working People and Achieving More Sustainable Growth” Global
Business and Economics Anthology, Volume 1, pp. 235-245 (December 2007)
“Using Christian Principles to Enhance Economic Theory and Practice:
Louis Kelso’s Binary Economics as the More Christian and Scientific Way"
Presented to the Symposium on
“Christianity and Economics:
Integrating Faith and Learning in Economic Scholarship”
Baylor University; November 7-9, 2002
Posted with the permission of the Author
© 2002
Professor Robert Ashford
Syracuse University College of Law
Syracuse, New York 13244
Tel. 315-677-4680; Fax by appointment
rhashford@aol.com
I. INTRODUCTION
This paper compares premises of classical, neoclassical, Keynesian and binary economics1 in the
light essential principles of Christianity (as expressed by the words of Jesus) and the scientific method to
explore
(1) how economic theory can be improved so as to enable people to better understand their
essential rights and responsibilities in a market economy, and
2 Robert Ashford, "Socio-Economics: What Is Its Place in Law Practice?" Volume 1997
Wisconsin Law Review 611 (1997) and “The Socio-Economic Foundations of Corporate Law,” 76 Tulane
Law Review 1187 (2002).
Page 2 of 34
(2) how economic institutions can be improved to better serve the spiritual and material needs
and desires of all people.
In the light of Christian and scientific principles, the various economic approaches are compared with respect
to their theories of production, growth, distribution, efficiency, price, and value, and with respect to their
regard for private property.
The faith-based analysis reveals
(1) a fundamental congruity between basic tenets of Christianity and the basic principles of
binary economics, and
(2) a fundamental incongruity between Christian principles and conventional economic theory.
Both Christianity and binary economics are built on the principles of abundance that
(1) flows from powers beyond human capacity and
(2) is materially enhanced by human practices that promote inclusive, individual participation
in the necessities, opportunities, and responsibilities of life.
These principles of abundance and inclusion conflict with the approach of conventional economics which
is premised on
(1) scarcity,
(2) the homocentric notion that human productivity is the fundamental source of abundance
(production, wealth, and growth) and
(3) the exclusionary assumption that the distribution of ownership has no important positive
bearing on increased abundance.
Based on Christian faith that the truth of God’s word is proven by its effect, because binary economics
is more consistent with the basic principles Christianity advanced by Jesus, the implementation of a
binary approach to economic growth and justice is more likely to achieve God’s inclusive promise of
abundance than conventional economic approaches based on contrary principles.
This Christian faith-based preference for binary economics over conventional economics is
corroborated and reinforced by a comparison of the various economic theories based on basic standards
of the scientific method. These standards require of any theory
(1) workable assumptions,
(2) internal consistency and
(3) replicable description, prediction, and prescription.2
Judged by these scientific standards, binary economics is to be favored over conventional economics.
Accordingly, compared to conventional economic approaches, binary economics should be given
substantially equal if not greater respect and consideration whenever economic, financial, legal, and
political theory is taught, researched, debated, and implemented.
In the analysis of the various economic approaches, special attention is given to the persistence
of widespread poverty and economic deprivation that persist notwithstanding the existence of vast and
seemingly growing unutilized capacity to reduce and eliminate them. The persistence of unutilized
3 William Feree, S.M., Ph.D., Introduction to Social Justice (1948) and The Act of Social
Justice (1942).
Page 3 of 34
productive capacity (along-side of widespread unmet need and simple wants) is both an economic and
spiritual challenge for anyone concerned for the economically disadvantaged including of course “the
least of these.”
From a Christian perspective the persistence of poverty and economic deprivation,
notwithstanding the unused capacity to reduce and eliminate them, is a strong indication that there may
be something spiritually wrong with the economic theories and practices that either perpetuate or fail to
ameliorate such disturbing conditions. The persistence of unmet needs and wants notwithstanding the
unutilized capacity to fulfill them runs contrary to Jesus’s promise of abundance that flows from the
power of God and that is increased on Earth when people are moved by the spirit of loving inclusion.
Although the problem may be viewed as one resulting from individual choices (dominated by greed,
selfishness and a failure to love) made in the exercise of free will, people concerned with ameliorating
the situation should consider how best to reform the economic theories and institutions that define,
facilitate or suppress the choices apparently open to people.3
When judged by the principles underlying scientific understanding, the persistence of unutilized
capacity along side of unmet needs and wants also constitutes a major anomaly in classical and
neoclassical theory and a major unresolved controversy in economics as a whole that has divided that
discipline into right-wing, left-wing and mixed centrist approaches, none of which has coherently
addressed and remedied the situation. According to classical and neo-classical economics, if markets
were truly free and efficient (as those theories assume), unutilized productive capacity is an anomaly that
should not persist for long; but it has. In classical and neoclassical theory, unutilized and underutilized
productive assets should be sold (at salvage if necessary) to others who will make more profitable use of the.
Even before they become partially or totally unutilized, assets that are not earning competitive returns for
their owners should be sold to those whose rate of return can be enhanced by the acquisition. Prices should
fall to clear all markets. But contrary to the theory, the unutilized productive capacity persists.
In response to the Great Depression (when the existence of vast unutilized productive capacity
became a politically undeniable fact), Keynesian economics was introduced as a major element of
Government economic policy in the U.S.A. and other Western-style capitalist economies precisely to deal
with the persistence of unutilized productive capacity. As a consequence, in practical effect, present
economic policy in those economies is a mixed compromise of classical, neoclassical, and Keynesian theory
and practice; but none of those theories (alone or in combination) has satisfactorily explained the anomaly
of unutilized capacity; nor have they provided an effective strategy or institutional environment to
employ the unutilized capacity profitably to realize more fully on earth God’s promise of inclusive
abundance.
Although they differ in many respects, conventional theories (including classical, neoclassical,
and Keynesian) share a common, generally unstated assumption: namely that the distribution of capital
ownership (as distinguished from the distribution and redistribution of income) has no substantial,
positive relationship to the employment of unutilized capacity and to economic growth. Binary
economics challenges that assumption by assuming that labor and capital are “independently productive”
and reasoning therefore that the distribution of capital ownership has a potent, positive relationship to
growth. Thus, the persistence unutilized productive capacity and suboptimal growth (notwithstanding
Page 4 of 34
unmet needs and wants) and concentrated ownership are not unrelated phenomena, but rather correlative
symptoms of an exclusionary system of corporate finance in which
(1) almost all capital is owned by a small percentage of the population, and
(2) almost all capital is acquired with the earnings of capital.
To remedy this situation, binary economic analysis provides an inclusive, voluntary means by which
people previously excluded from efficient capital acquisition are enabled to acquire capital competitively
with the earnings of capital using the same institutional techniques and advantages that presently enable
well-capitalized people to acquire capital with the earnings of capital.
Compared to other economic approaches, when judged
(1) by Christian principles regarding the source of abundance and the consequences of
voluntary inclusion, and
(2) by the applicable scientific standards (of workable assumptions, internal consistency and
replicable description, prediction and prescription),
binary economics provides
(1) a superior theoretical explanation for the persistence of poverty and economic
deprivation and degradation notwithstanding the unutilized capacity to reduce and
eliminate them and
(2) a more promising means to employ unutilized capacity and promote growth profitably
for the material benefit of all people.
Accordingly, based on Christian and scientific principles, binary economics should occupy a prominent
place
(1) in economic scholarship, teaching, and practice and
(2) in Christian scholarship, writing, and other work offered to aid economic decision
making and promote economic justice.
People involved in those activities are seriously remiss if they continue to exclude binary economics
from their work.
II. SUMMARY OF FAITH BASED ANALYSIS OF BINARY AND CONVENTIONAL
ECONOMICS.
A. Some Essential Principles of Christianity
Jesus summed up Christianity with a few rules that most people can understand:
(1) love God above all others;
(2) love your neighbor as yourself;
(3) forgive trespassers and love your enemies (who after all are also your neighbors);
(4) repent all unholy ways;
(5) pray in spirit and in truth for all God’s children;
(6) accompany prayer with deeds (in keeping with the love of God) that help people reach
their highest good, using your worldly wealth wisely, going the extra mile for those who
ask, while not forgetting to provide for the least of these; and
(7) believe in Jesus and his New Covenant of Grace to achieve fulfillment and everlasting
life.
In addition, the following points emerge from the teachings of Jesus:
Page 5 of 34
1. Grace Trumps Karma and the Law: God’s Covenant of Grace distinguishes Christianity
from the Law of Judaism (eye for an eye and tooth for a tooth) and from the Karma principle of
Buddhism (what goes around comes around). From the Christian point of view, Grace trumps both
Karma and the retributive Judgment of the Law. An important aspect of Grace is that it is a generous
gift reflecting God’s love and mercy; Grace is not a product of human effort.
2. God Is the Source of All Good: Jesus teaches that the source of all human good comes
from God. Human will produces good only when consistent with God’s will. The sun, the rain, earth,
plants, and animals (and not human labor) are the fundamental source of production and growth; humans
make their contributions to production but primarily by unleashing and guiding the far greater lifesustaining
powers that God has bestowed in nature.
3. God Promises Abundance: Christianity holds that God’s love and will for people is
revealed in the principle of abundance. In the material world, the abundance was manifested in the
Garden of Eden but was lost by human disobedience to God’s will in the exercise of human free will.
Economic deprivations, injustices and other evils are not a failure in God’s power or will, but the result
of human free will that deviates from God’s perfect will. Nevertheless based on God’s Grace, Jesus
teaches, seek first the Kingdom of Heaven, and all needs will be met.
4. God’s Will Is Inclusive: God made the sun to shine and the rain to fall on the good
and bad alike. Likewise, trees and plants produce oxygen, food, and medicines, and animals produce
food and medicine and do other work, for the good and bad alike.
5. Inclusion Yields Abundance: When Jesus shared bread and fish with thousands,
there was more (not less) remaining after everyone was invited to participate in the meal. Inclusive
participation in God’s material creation yields abundance; whereas exclusionary participation
(hoarding) yields scarcity.
6. Individual Responsibility, Private Property, and Judgment: Jesus assures us of an
afterlife where individuality endures (like the angels in Heaven though not in marriage). God’s salvation
is bestowed on individuals, not families, groups, communities, cliques, collectives, committees,
organizations, corporations, governments, churches, or races. A part of God’s material gift to human
beings is in the form of dominion over land, animals, plants, and other things. Such dominion is
reflected individually by the institution of private property. Private property is an expression of people’s
rights and responsibilities with respect to things. Just as people may do good or bad by employing and
not employing their labor, so too they may do good or bad by employing and not employing the things
they own (i.e., their “capital.”) As Jesus’s lesson of the talents teaches, just as people will be judged
by the work done (and not done) by their labor so to will they be judged by the work done (and not done)
by their capital. For those seeking the Kingdom of Heaven, Jesus specifically cautions people to use
their worldly wealth wisely and warns that people cannot serve both God and money.
B. Examining Economic Paradigms Based On Christian Principles
The Christian principles of (1) Grace, (2) God as the source of good, (3) abundance, (4) loving
inclusion, and (5) individual responsibility manifested by participation in the opportunities and
responsibilities of life provide a good starting point for evaluating conflicting approaches to economics.
Just as Jesus’s inclusive sharing of the bread and fish produced more (not less), economic practices and
Page 6 of 34
institutions that promote the voluntary broadening of participation in economic activity will yield
more abundance than institutions that discourage or impede a broadening of participation.
Grace promises more than a zero sum game. Many conventional economists premise their
homocentric analysis
(1) on the assumption of perfect efficiency (although only God is perfect and human
institutions inevitably fall short of that perfection) and
(2) the supposition that there is no such thing as a free lunch (although every day free
lunches stream down on earth from sun, rain and other benefits of nature).
When Godly principles of economics are understood and implemented, the unnatural scarcity that
prevails today will be replaced by God’s natural abundance without the supposed need for coerced
redistribution.
Conventional economics (classical, neoclassical, and Keynesian) is premised on scarcity and the
homocentric notion that human productivity is the fundamental or primary source of production, wealth,
and growth. In contrast, Christianity and binary economics rest on principles of universal, individual
participation in the necessities, opportunities, and responsibilities of life and on the abundance that flows
primarily from power beyond human will.
The Christian principle that God’s will, not human will, is the source of good reveals that
materially there are two categorical factors of production:
(1) the human (directed by human will, which may or may not be in harmony with God’s
will) and
(2) all non-human creation (the sun, rain, earth, animals, plants and other things which,
having no free will of their own, are entirely reflections of God’s will.)
Accordingly, consistent with the concept of Grace (which is not earned by human effort), the Christian
understanding of material production is a binary understanding of production which necessarily
distinguishes between the human and the non-human factors in a fundamental categorical way.
Conventional economics subordinates the non-human contributors to production (which
inevitably work according to God’s perfect will) to the human factor (which inevitably falls short of
perfection). Adam Smith taught that the primary role of capital is to make labor more productive and to
enable the profitable employment of more laborers. Karl Marx, Alfred Marshall, John Maynard Keynes,
and their followers did not disagree. In describing the great growth in output experienced since 1776,
when Smith published the Wealth of Nations, conventional economics relies primarily on the idea that
capital makes labor more productive.
This conventional conception of production (as most fundamentally a function of labor
productivity) is a homocentric view of production which obscures the idea that
(1) capital is doing ever more of the work and
(2) the distribution of capital ownership has an important, fundamental, positive relation to
growth not caused by an increase in human work or productivity or the redistribution of
demand.
In harmony with these Christian principles, according to binary economics,
(1) labor and capital are independent (i.e, binary) factors of production (although they may
cooperate with each other, just as two people may cooperate with each other, but are
nevertheless independently productive);
(2) technology makes capital much more productive than labor; and
Page 7 of 34
(3) capital has a potent distributive relationship to growth such that the more broadly capital
is acquired the more profitably it can be employed to increase output.
Compared to conventional economics [which holds that
(1) labor is the primary source of production and growth and
(2) broader capital ownership has no positive relationship to growth unless it increases
human productivity],
the binary premises
(1) that capital is the primary source of production and growth, and
(2) that broadening participation in capital acquisition promotes growth,
are more consistent with Jesus's teaching on the source of good and the abundance that results from
loving inclusion. The abundance of God’s Grace does not depend on labor theory of value or
production.
The binary emphasis on universal, individual, participation in capital acquisition as an essential
part of the individual right to life is also more consistent with the Christian emphasis on individuality
than the conventional economic approach. Jesus’s teachings that
(1) individuality endures in Heaven,
(2) salvation is achieved by individuals, not groups,
(3) people will be judged by their use of the capital entrusted to them, and
(4) God’s abundance is augmented by human practices of inclusion indicate that the
opportunities for capital ownership (like the opportunities provided by labor and leisure)
offer benefits and responsibilities for personal and spiritual growth not to be
monopolized by a few.
In conflict with these principles, conventional economics does not view universal, individual
capital ownership as a necessary condition for a free market system (which is supposed to be open to all).
Consistent with these principles, binary economics holds that the promise of supposedly free markets
will fall far short of full productive potential without universal, individual participation in capital
acquisition.
Jesus teaches that the truth of God’s word is proven by its effect. The principles of Grace,
abundance, and inclusion apply to human institutions as well as to individuals. Human institutions are
expressions of human will, and are therefore subject to the imperfections of human will. As long as
human institutions involved in the production, distribution and consumption of material wealth operate
contrary to God’s inclusive will, there will be unnecessary scarcity, suffering, injustice, and degradation
of human beings and their environment. Institutions that promote the voluntary broadening of
participation in economic activity will yield more abundance than institutions that hoard and discourage
or impede a broadening of participation.
For those with an abiding concern for the economically disadvantaged, contemporary
industrial economies (based on a patchwork of compromised classical, neoclassical, Keynesian and
socialist principles) leave much to be desired. The failure of economic institutions to reflect God’s
promise of inclusive abundance is glaringly revealed in the persistence of poverty and economic
deprivation notwithstanding the unutilized productive capacity to reduce and even eliminate them. The
failure is further revealed in the great concentration of wealth in the hands of a few while most people
live in economic insecurity or desperation no matter how hard they work.
Even in the most prosperous contemporary economies, there is
4 In the U.S.A. for example, the three thousand or so largest corporations own approximately 95%
of investable assets.
5 In the case of major prime credit-worthy companies in the U.S.A., the source of funds for
capital acquisition, in approximate terms, are as follows: 70% with retained earnings, 23% with debt and
7% with direct issuance of shares. See R. Brealey & S. Myers, Principles of Corporate Finance (2nd
edition, 1984); Lynn A. Stout, The Unimportance of Being Efficient: an Economic analysis of Stock Market
Pricing and Securities Regulation, (87 Mich. L. Rev., 613 at 648, 1988).
6 Edward N. Wolff, Top Heavy: A Study of Increasing Inequality in America (New York,
Twentieth Century Fund, 1995) and Edward N. Wolff, "How the Pie is Sliced: America's Growing
Concentration of Wealth," The American Prospect, No. 22, (Summer 1995), pp. 58-64.
Page 8 of 34
(1) persistent and seemingly growing unutilized productive capacity in the face of persistent
unmet needs and wants and
(2) a distribution of wealth that excludes most people from any hope of acquiring substantial
capital ownership no matter how hard they work.
In light of
(1) the Christian mandate to love one’s neighbors, go the extra mile, provide for the least of
these, and use worldly wealth wisely and
(2) God’s will for inclusive abundance for his children,
the persistence of unutilized capacity in the face of need and want and the persistent exclusion of most people
from capital ownership (notwithstanding reform efforts of well-meaning people for centuries) is a sign that
something in economic affairs is operating contrary to the will of God and is therefore in need of correction.
In what way can the integration of Christian principles into economics enhance economic understanding to
enable the economic system to employ the unutilized capacity to produce greater and more widely distributed
abundance?
Consistent with the Christian principles of abundance, inclusion, and individual participation in life’s
opportunities, binary economics seeks to increase abundance by expanding individual participation in the
process by which capital is acquired with the earnings of capital. Binary analysis observes that
(1) major corporations own most of the capital in virtually every economy;4
(2) almost all capital owned by those corporations is acquired with the earnings of capital;
(3) much of it is acquired with borrowed money;
(4) virtually all of it is acquired with the indispensable foundation consisting of a stable
property, monetary, credit, and market system dependent on government protection; 5
and
(5) relatively little capital is acquired with the earnings of labor.
At the same time, in terms of corporate wealth, 1% of people own 50% of the capital; and 10% own
90% of the capital, leaving 90% of the people owning little or nothing.6
Thus, under the prevailing system of corporate finance, as corporate assets grow and continually
buy additional assets with their earnings, they benefit people primarily in proportion to existing wealth.
Under this approach, the rich benefit the most; the middle class benefit less; and the poor benefit least
of all. Looking at the economy as a whole, the system offers
(1) growing capital ownership and most of the best jobs to the well-capitalized,
(2) the remaining jobs and welfare to others, and
(3) products to anyone with money or credit to buy them
Page 9 of 34
(4) while the negative effects of corporate production are “externalized” so that the are
borne to the extent possible, by persons other than the corporation’s investors and
privileged employees.
Those who own little or nothing are offered jobs, welfare, and cheaper products as their participation in
economic growth; but they are effectively denied the governmental incentives and policies that assist
well-capitalized owners in acquiring additional capital with the earnings of capital.
This system (that works primarily for the ownership benefit of relatively few people) is
advanced by many economists as a primary cause of the material success of the western-style capitalism
and the defeat of communism. But Jesus’s Covenant of Grace and abundance is not intended only for
the rich. God's laws are universally applicable. The mechanisms that enrich the few can also enrich
everyone as participation in capital acquisition is broadened in a holy way. To acquire capital with the
earnings of capital, the rich use the pre-tax earnings of capital, collateral, credit, market and insurance
mechanisms to diversify and reduce risk, and a monetary policy intended to protect private property.
By God’s laws, the same institutions and practices that work profitably for the well-capitalized can also
work profitably for all people.
Christian principles (of inclusion, individuality, abundance, and the true source of growth)
indicate 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 individually included in the
acquisition process. Conversely, the economic theories, practices and institutions that presently
dominate economic teaching, research and scholarship effectively exclude most people from capital
acquisition and suppress the creation of abundance by monopolizing and hoarding the full productive
capacity of capital.
Binary economic institutions and practices are therefore more in harmony with Christian principles
and promise broader inclusion and greater abundance than conventional economic approaches based on
principles of scarcity and exclusion and on homocentric theories of growth premised primarily on the notion
that the primary function of capital is to increase human productivity. Accordingly, this paper explains how
binary economic theory and practice can be used to enhance mainstream economic understanding and be
applied to reform the system of corporate finance to produce greater, more broadly shared abundance by way
of the efficient broadening of capital ownership.
III. OVERVIEW OF BINARY ECONOMICS
Binary economics simultaneously offers a unique
(1) conception of economics and
(2) prescription for establishing a more inclusive, competitive and democratic private property
system.
It offers a new paradigm for understanding economic efficiency, growth, and justice that is foundationally
distinct from classical, neoclassical, Keynesian, and socialist economics. Focusing on a great anomaly left
unexplained or poorly explained classical, neoclassical, and Keynesian economics (i.e., the persistence
of unutilized productive capacity in a context in which markets are supposedly becoming more efficient)
and left unremedied by any approach yet applied, Binary economics specifically offers both a
foundationally distinct explanation and a market-based solution that promises a means to produce much
greater and broadly shared abundance.
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As an economic theory, binary economics holds that broad-based capital acquisition on market
principles has a potent (but presently untapped) distributive relationship to growth that is independent of
productivity gains and governmental strategies to redistribute or regulate demand. (This proposition is
known as the principle of binary growth). In other words, the distribution of capital ownership is positively
related to growth in important ways not comprehended by conventional economic theory. Like no other
economic paradigm, binary economics
(1) reveals important market connection between unutilized productive capacity and wealth
concentration, and
(2) offers unique strategies to achieve the goals of efficiency, broadly shared growth, and
economic justice by way of widespread, and eventually universal, individual, capital
ownership.
By relaxing one unproven (and generally unstated) assumption of conventional economics (the
assumption that the distribution of capital ownership has no substantial positive relationship to growth
that cannot be comprehended by productivity or the redistribution of income and capital), the anomaly
disappears: As a first-order approximation, unutilized productive capacity is simply the flip side of
concentrated ownership. Unutilized productive capacity and wealth concentration are correlative
manifestations of the fact that capital
(1) is independently productive,
(2) contributes far more to growth than results from its substitution for labor,
(3) routinely returns its investment (or “buys itself”) primarily for a
relatively small group of existing owners while excluding the vast
majority of people from the capital acquisition process and
(4) is thereby prevented from distributing the consumer income that would
provide market incentives to employ its unutilized productive capacity.
A number of remarkable implications flow from the principle of binary growth. One practical
implication is that much of the capital presently owned by America's three thousand or so largest
companies, that historically have returned their inflation adjusted value every five to seven years
primarily for existing owners, could do so even more profitably if all people were allowed entry into the
capital acquisition process by way of competitive capital acquisition rights. A second implication is that
with modest reform of the existing markets for capital acquisition, in an under-capacity producing
economy, substantial growth and more broadly shared wealth can be achieved without the involuntary
redistribution of income or capital. In other words to address the problem of poverty and the needs of
the economically disadvantaged (which has defied conventional solutions based on left-wing, right-wing
and centrist economic and political theory), God’s way is easy. It merely requires an opening of the
capital acquisition system so that all people (not only the well-capitalized and a very few others) can
participate individually in the production of God’s bounty not only as laborers, but also as owners of
productive capital.
IV. THE ANOMALY OF UNUTILIZED PRODUCTIVE CAPACITY
Of particular interest to those who value Christian teaching, binary economics provides a new
understanding and suggests new strategies regarding the persistence of vast (and many would say growing)
unutilized productive capacity to reduce and eliminate economic deprivation in markets that are supposedly
becoming more competitive and efficient. Particularly noteworthy as a matter of public policy is the
unutilized productive capacity of the assets owned by major prime-credit-worthy corporations. This is where
an enlightened approach to corporate economic policy can have its greatest impact on industry, shareholder
wealth, working people, and the material well-being of every individual.
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Thus, if asked to determine the facts, the general counsel of most prime credit-worthy companies
would (after completing the due diligence of consulting with all appropriate experts) conclude that their
companies (even as they determine the need to effect major downsizings, plant closings, and lay-offs)
owned the productive capacity (with available capital assets and labor) to profitably increase output by
perhaps 10-20% if there were only the customers with money to buy what could be readily produced at
even lower unit costs. This would apply not only to consumer goods but also to producer goods, so that
within existing unutilized productive capacity, there is the capacity to create even more unutilized
productive capacity.
There are of course different definitions of unutilized productive capacity, depending upon the
purpose of economic inquiry. Mainstream economic analysis generally employs a narrow and frequently
documented “static” approach to unutilized productive capacity that focuses primarily on existing assets and
available labor at a given wage. The presently unemployed portion of each existing or available factor is the
“static unutilized productive capacity” for that factor. But from the perspective of corporate fiduciaries the
question is what business strategy should be pursued to most profitably employ available capital and labor
over time. If some measure of unutilized productive capacity could be profitably employed, corporate
profits and shareholder wealth would increase accordingly. A central question for the corporation and
corporate fiduciaries is what approach to unutilized productive capacity will best serve to maximize corporate
wealth.
The importance of employing unutilized capacity is also a central issue for people concerned about
the welfare of the economically disadvantaged and for government policy makers vested with a responsibility
in matters of economic welfare. The unutilized productive capacity of an economy’s corporations means a
capacity to provide more basic necessities (such as food, clothing, shelter, transportation, and health care) and
more simple comforts and conveniences, by way of greener and more socially responsible industrial processes
and practices. The ever-present threat of plant closings, downsizing, and layoff is a reflection of unutilized
productive capacity. Many economic assaults on the environment resulting from destructive production
technologies (that continue despite the know-how to ameliorate or replace them with greener technologies)
can be understood as reflections of unutilized productive capacity. Despite neoclassical assumptions of
diminishing returns, much of the unused productive capacity is generally marked by diminishing unit costs
and increasing economies of production made unprofitable only by insufficient consumer demand even at
discount prices.
Mainstream economics divides into different schools on the existence, extent, and significance of
unutilized productive capacity and what to do about it. These schools offer different guidance to private
corporations and public policy makers. Neoclassical economics assumes perfect competition and efficiency
as the starting point of analysis. In the world of perfect neoclassical efficiency, unutilized capacity (beyond
need for peaks in market demand and an insurance for emergencies beyond the predictable) should not persist
for long. As previously noted, if markets are truly efficient, persistent unutilized productive capacity is an
anomaly and should not persist for long. Unproductive assets should be sold, even at salvage if necessary.
Even before they become partially or totally unutilized, assets not earning competitive returns for their owners
should be sold to those whose rate of return can be enhanced by the acquisition.
Moreover, according to neoclassical economics, as markets become more competitive, unutilized
productive capacity should decrease, not increase. But to most observers, these conclusions are belied by
experience. Major companies today boast that they are ready to feed, clothe, and shelter the world if there
were only sufficient income to buy what can be readily produced. However true this boast is today, it was
less true in 1900 and still less true in 1800. Driven by a political ideology that confuses a neoclassical theory
of marginal efficiency with an unnamed (but essentially classical) macro-economic theory of growth, so7
Keynes, General Theory of Employment Interest and Money, Harcourt, Brace & World, Inc.
(1936) pp. 213-214.
8 Note that the Keynesian approach is not in harmony with the law of private property, which
sees capital and labor as independent earners, and which necessarily distinguishes between the distribution
and redistribution of income and capital.
Page 12 of 34
called free market reforms have been initiated on the national and international level supposedly to make
markets more competitive. Nevertheless, as markets have globalized and supposedly become more
competitive, unutilized productive capacity of the world’s major corporation has seemingly, in the eyes of
many people, paradoxically have increased rather than decreased. The neoclassical generic solution of simply
deregulating markets, without regard for remaining, embedded, institutional advantages (that enrich some
while excluding others) is therefore suspect in this context.
According to Keynesian analysis, there is indeed persistent unutilized productive capacity which
belies the neoclassical assumptions of near-perfect efficiency: untapped growth potential, unutilized
productive capacity and underemployment of labor and capital persist despite classical and neoclassical
economic theory to the contrary. Markets are far from perfectly competitive, and their operation results in
a persistent shortfall in “effective demand.” The result is an endemic under-utilization of people and resources
which can be at least partially corrected by government action. But in addressing unutilized productive
capacity, the Keynesian analysis attaches no special significance to the distribution of capital ownership.
Indeed, Keynes specifically says that in understanding his approach:
“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 require in our
economic system, apart from units of money and of time,”7
Accordingly, Keynesian analysis
(1) attaches no special significance to the distribution of capital ownership (because in Keynes’s
model capital earns no independent income, and has no value apart from labor) and
(2) by focusing on effective demand, makes no fundamental distinction between the distribution
and redistribution of income and capital.8
Moreover, although Keynesian strategies may remain a central element in the workings of every major
economy, unutilized productive capacity persists and is seemingly growing in the USA and most industrial
economies (although we are simultaneously being told that the relevant markets are becoming more
competitive).
Nevertheless, although they differ in many respects, all mainstream approaches to unutilized
productive capacity share basic assumptions (namely assumptions of [1] scarcity, [2] human productivity as
the fundamental source of production and growth, and [3] no substantial positive relationship between the
capital ownership distribution and growth) which are contrary to Christian and binary economic principles.
Economic principles that are consistent with Christian principles and the scientific method and that offer the
win-win possibility of ownership-distribution-based growth should not be excluded from mainstream
economic analysis. Of particular importance in this context is the third assumption (generally unstated) that
all mainstream economic approaches share in common: namely, the assumption that the distribution of capital
9 H.G. Moulton, The Formation of Capital (1975, 1935) (Originally published in 1935 as
Publication Number 59 of the Institute of Economics of the Brookings Institution).
Page 13 of 34
ownership has no fundamental independent causal relationship to the persistence of unutilized productive
capacity and the potential for economic growth.
V. THE BINARY HYPOTHESIS REGARDING UNUTILIZED PRODUCTIVE CAPACITY
By relaxing the unproven assumption that capital has no potent distributive relationship to growth,
the contrary binary assumption (that capital has a potent distributive relationship to growth) provides an
alternative explanation for unutilized productive capacity. The binary hypothesis is that unutilized productive
capacity and concentrated ownership are the direct market consequences of faulty market institutions and
practices that:
(1) concentrate capital ownership, by effectively excluding market participation by non-owners
in the process of acquiring capital with the earnings of capital, and
(2) thereby monopolize and suppress the true productive capacity of capital, by preventing
capital from
(a) being acquired more broadly and rapidly, and
(b) thereafter distributing to consumers the income to purchase what can increasingly
be produced by capital.
Demand for capital investment is derivative of demand for consumer goods. It arises in anticipation of future
consumer demand.9 In an economy operating at less than full capacity, a voluntary pattern of steadily
broadening ownership promises more production based consumer demand in future years and therefore more
demand for capital goods in earlier years. Accordingly, if markets were structured to diffuse ownership
voluntarily (by enabling all people to acquire capital with the earnings of capital), then within the time frame
of capital investment projections of major U.S. corporations (usually approximately five years) increasing
consumer demand (more widely distributed through the acquisition of productive capital) will profitably
employ unutilized productive capacity and produce growth.
For example, within a period of perhaps five to fourteen years, if members of the poor and
middle classes are enabled to compete with existing owners for the acquisition of corporate shares
representing the capital requirements of companies worthy of prime credit, these poor and middle-class
people would bring to the corporate finance bargaining table a chip not possessed by existing owners:
a pent up appetite for more of the necessities and simple luxuries of life that richer people enjoy. After
the capital has paid for itself (repaid its acquisition debt obligations) the earnings of capital acquired by
members of the poor and middle class, if paid to them, will distribute more consumer demand than if that
capital had been acquired by the wealthy. Had that capital been acquired by existing owners, its income
would have been courted for additional investment, but in the context of less consumer demand. In an
economy operating at less than full capacity, compared to the investment opportunities that would have
existed without the availability of ownership-broadening market mechanisms, the broader market
distribution of capital and income generated in a binary economy will create greater investment
opportunities for existing owners as well as for the new binary owners.
VI. BINARY ECONOMICS AS A DISTINCT PARADIGM
A. On Paradigms
10 People first adopt paradigms, and then perform their theoretical and empirical analysis.
Thomas Kuhn, The Structure of Scientific Revolutions (2nd ed. 1970).
11 Aristarchus of Samos, in a remarkable insight, first proposed the sun-centred solar system
in the third century AD. For Aristarchus’s work, see T.L. Heath, Aristarchus of Samos, the Ancient
Copernicus (1913). Presently, the concept is taught to grade school children.
Page 14 of 34
Jesus offered people a New Covenant, based on God’s Grace and human faith, as a new paradigm
to help people understand their relationship to God, how to live their lives, and how to achieve individual
salvation. In living the good life, Jesus taught the importance of starting on a proper foundation. Consider
for example, the house built on a rock foundation, the seeds in fertile soil, and the vine and the branches.
Therefore, perhaps the most important beneficial consequence that can come from integrating Christian faith
with economic understanding is at the foundation of economics (where it connects and must be in accord with
the fundamental principles of God’s creation.) It is always good to work to improve theory and practice in
the branches of a discipline, where interstitial improvements certainly can have a substantial cumulative
positive impact; but in the light of (1) the great need and unfulfilled potential of billions of people, (2) the
unexplained and unremedied persistence of unutilized (and therefore hoarded) productive capacity, and (3)
Jesus’s teaching of the critical need to build on the correct foundation, a reexamination of the foundation of
mainstream economics is also called for if God’s promise of abundance that naturally results from the
inclusion of all people in God’s intended benefits, including capital acquisition, is to be taken seriously.
Consistent with Jesus’s teaching, today most scientists recognize that even the most “scientific”
knowledge is contingent on the models or paradigms of thought upon which they rest.10 Historically, major
new paradigms change the way people understand reality. Sometimes they dispel illusions and establish the
foundation for major new discoveries. For example, every day, people see the sun rise and the sun set, but
what they see is a grand illusion built on a faulty paradigm resting on a false assumption. Some principles
that were difficult to understand by almost everyone in one era can be taught to grade school children in the
next.11 When the earth-centered paradigm for the solar system was replaced by the sun-centered paradigm,
a false assumption resting on an illusion was replaced by a true assumption based on facts, and the foundation
was laid for the discovery of Newton’s laws (which make no sense in an earth-centered solar system) and
much of modern science.
It is important to note, moreover, that alternate paradigms need not be mutually consistent to be
useful. Sometimes paradigms complement and supplement understanding, as exemplified by the distinct
conceptual contributions to physics made for example by Newton, Planck, Heisenberg, and Einstein.
Sometimes paradigms conflict and are yet informative of different aspects of the “same” reality, as in wave
theory and particle theory, which are both used to describe the properties of electrons. Indeed, much
economic theory and practice make use of conflicting classical, neoclassical, Keynesian, behavioral,
institutional and other models often to explain the same behavior. Binary economics should not therefore
be excluded from the array of conceptual tools used to understand economic behavior merely because
its premises conflict with conventional theory or because it explains supposedly the same economic
behavior in a fundamentally different way. Whatever one thinks of the classical, neoclassical and Keynesian
paradigms, binary economics will provide important insights regarding the persistence of unutilized
productive capacity and how it might be profitably employed to reduce economic deprivation while
benefitting everyone. For those moved by Christian values, this conclusion is reenforced by the
recognition that when compared to the mainstream economic paradigms in the light of Jesus’s teaching,
binary economics qualifies as the most Christian way.
12 Note the choice of the word “automobile” (i.e., self-moving”) to express in words the
independent productiveness of the then marvelous “horseless carriage.” In the context of the prevailing
economic theory, objections to the binary concept of independent capital productiveness have sometimes been
expressed by observations like “capital is not an independent producer because it takes the person to operate
the capital.” However, even though motor cars then did not generally drive themselves without a driver,
people thought of them as “self-moving” and therefore independently productive, no less than the horse
whose work it replaced and vastly supplemented with work of its own.
Page 15 of 34
B. The Binary Economic Fundamentals
As an economic theory, three related principles can be used to establish binary economics as a
paradigm distinct from conventional economic theory:
(1) labor and capital are independently productive;
(2) technology makes capital much more productive than labor, and
(3) capital has a potent distributive relationship to growth such that the more broadly capital
is acquired the more profitably it can be employed to increase output.
Thus, binary economics derives its name from the premise that capital and labor are independent (or “binary”)
factors of production. Although they cooperate together (just as two people cooperate when working
together), each factor does its own work, has its own productive capacity, and demonstrates its own
“independent productiveness.”
In teaching people, Jesus spoke in concrete parables and metaphors to illustrate God’s lessons.
What simple concrete metaphors will serve to help people understand the relation of capital and labor
to increased production and greater abundance? In comprehending this relation, the central concept of
conventional economic theory (that capital makes labor more productive) can be illustrated by the
example of sawing ten boards in one hour with a hand saw as compared with sawing one hundred boards
in an hour with an electric saw. The conventional approach views the human factor as the most
fundamental factor of production, and capital as a dependent factor that can be employed to make labor
more productive. After all it takes the person to operate the saw, whether manual or mechanical.
However, from a binary perspective, human labor is much more dependent on the non-human
factor than the other way around. The sun shines and rain falls without human effort. With help from
the sun, rain, and earth (and countless worms and other organisms) vegetation produces oxygen, food,
and medicines; animals produce food and medicines, do other work, and provide other benefits. Physical
structures and materials support and protect us. Humans make contributions to the process, but their
capacity is limited and mostly made by learning to unleash and guide the far greater, independently
productive powers of the non-human contributions that are available by discovering and employing the
natural laws of creation.
A good example of the independent productiveness of capital (and a better illustration of the
relationship between capital, labor and increased production) are revealed by the work of human
transportation. Walking can be good exercise and fun; but when it is done for reasons other than its
intrinsic worth (as work), it is generally more productive in many contexts, to employ a horse or
automobile to do most of the work in transporting people. The horse is capital and is definitely independently
productive. It does its own work, even though it must be guided by a person. The same is true of an
automobile.12 Another example is seen in the work of hauling logs: a person can haul one small log one mile
in one hour and is exhausted; (1) with a horse, five logs can be hauled twice as far in half the time (yielding
a ten-fold increase in output) and (2) with a truck five hundred logs can be hauled forty times as far (yielding
a twenty thousand-fold increase in output).
Page 16 of 34
In terms of “productiveness” (which retrospectively means “work done” and prospectively means
“productive capacity”), the horse, automobile, and truck do much more than increase the productivity of the
human who rides, leads, and drives them; the horse, automobile, and truck are doing most of the extra work.
Looking at how production and productive capacity has changed since 1776, in countless aspects of work,
binary economists maintain that increased production (growth) is primarily the result of increasing capital
productiveness and the distribution of its ownership rather than increasing labor productivity.
Of course, people who provide the labor needed to invent, design, finance, build, install, operate,
monitor, repair, and manage capital, earn income by doing so. Nevertheless, the work of inventing, designing,
financing, building, installing, operating, monitoring, repairing, and managing capital is not the work of the
capital itself.
According to the conventional perspective, the most important function of technology is to make
labor more productive. However, from a binary perspective, it is much more important to recognize that
technology makes capital much more productive than labor. As would be measured by their value in
truly efficient markets, a basic strategy in capital investment is to produce more, at lower cost, with more
productive capital and less labor. The primary role of capital therefore is both to replace and vastly
supplement labor productiveness with increasing capital productiveness rather than to increase labor
productivity. Furthermore, capital works on both sides of the economic equation with vastly increased
(1) productive capacity and production, and
(2) capacity to distribute income and leisure.
Thus, although it is good to be able to earn by laboring, it is better still to also be able to earn by
owning; and the full binary economy will empower everyone to earn increasingly by owning. 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 explains how the distribution of its ownership not only enriches and helps to
liberate every individual who comes to own it, but also has an immense positive impact on capital
accumulation and growth.
C. Six Powers of Capital
Once it is recognized that capital is independently productive, then its independent powers can
be understood and employed consistent with their full economic potential. In reality, capital does far
more than make labor more productive, facilitate labor specialization, and enable the profitable
employment of more workers. Increasingly, capital is doing proportionately ever more of the work.
Based on careful observation, capital reveals six independent powers. Specifically, capital can
(1) replace labor (doing what was formerly done by labor);
(2) vastly supplement the work of labor by employing capital to do much
more of the kind of work that humans can do (such as the greatly
increased hauling that can be done employing horses or trucks);
(3) do work that labor can never do (e.g., elevators lift tons thousands of
feet in the air; airplanes fly; scientific instruments unleash forces that
create computer chips that cannot be made by hand; 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, automated
machines, robots, and wild fruit-bearing trees);
(5) pay for itself out of its future earnings (the basic rule of business investment); and
(6) distribute the income necessary to purchase its output (the logic of
double-entry book-keeping and an expression of Say’s Law of Markets).
13 Keynes, General Theory of Employment Interest and Money, pp. 131-141, 217.
Page 17 of 34
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. Each of these ways of contributing to growth (including mere labor
replacement, which produces the same output as before, plus leisure), is significant, but only the first directly
involves the substitution of capital for labor (marginal or otherwise). Thus, although some economists and
policy advocates use marginal efficiency theory as the foundation for a general theory of growth; in fact the
capital/labor substitution process is only one component of growth (operating after the creation of greatly
increased productive capacity) and its wealth-enhancing contribution to efficient pricing and resource
allocation is limited for reasons discussed below.
D. Binary and Conventional Growth Theories Compared: The Importance of Ownership
The binary assumption that economic growth is primarily a function of increasing capital
productiveness and its distribution stands in conflict with Adam Smith’s basic paradigm for growth which
is grounded in the notion that capital makes labor more productive and enables the profitable employment
of more workers. This productivity principle is central to neo-classical economics, except that neoclassical
theory technically speaks only to efficiency (the efficient employment of people and resources to produce
desired goods and services) and not explicitly to economic growth. (Conscientious economists acknowledge
that the theory of neoclassical efficiency is not a theory of growth. Everyone could be slowly starving to
death on a doomed planet orbiting a dying sun, and yet every transaction might be neoclassically efficient.
Nevertheless, frequently the principles of neoclassical efficiency are falsely advanced as a de facto theory
growth and distribution in the realms of political economy and politics, and in the policies of major economic
and financial institutions that facilitate capital acquisition primarily for existing owners.) Likewise, in
advancing his General Theory in which, apart from time and money, the unit of labor is the sole physical unit,
Keynes explicitly characterized his approach to full employment as founded on a “productivity theory” of
capital, which he builds on the productivity theory of wages advanced by Alfred Marshall.13 In all these
conventional approaches to growth, the distribution of ownership is irrelevant unless it affects labor
productivity.
E. The Supply of Capital and The Principle of Binary (Ownership-Distribution-Based)
Growth
To repeat for emphasis, the principle of binary growth holds that capital has a potent distributive
relationship to growth such that the more broadly capital is acquired the more profitably it can be
employed to increase output. This principle follows from the premises that capital is independently and has
(relative to labor) a vastly greater capacity to do work and distribute income.
Although resting on a normative conception of private property (to be discussed later), the principle
of binary growth is a factual proposition rather than an assertion of value. The principle is generally true,
false, or not subject to being verified or falsified, whether or not it is good, just, or holy for more or all people
to be able to acquire capital with the earnings of capital.
This principle departs from the market analysis of Adam Smith and all who followed him. Smith
understood the value and price of capital to be a function of labor productivity and the supply of capital;
for Smith, the distribution of capital ownership was of no particular significance regarding it price or
value unless it affected labor productivity. His analysis reveals no recognition that the market
14 Keynes, General Theory of Employment Interest and Money, pp. 213.
Page 18 of 34
distribution of capital ownership (from very narrow to very broad) could also affect its value and price.
The principle of binary growth also conflicts with Keynes’s understanding of growth and full
employment. As noted, Keynes attached no fundamental significance to the distribution of capital as a
determinant of employment, growth, prices, or value. Like Smith, Keynes did not consider that the
distribution of capital ownership could directly affect its rate of accumulation or value. Indeed, Keynes
explicitly excluded the productive and distributive effects of capital from his analysis:
“For the only reason why an asset offers a prospect of yielding during its life services
having a value greater than its initial supply price is because it is scarce; and it is kept
scarce because of the rate of interest on money. If capital becomes less scarce, the
unutilized yield will diminish, without its having become less productive – at least in the
physical sense.”14
Thus, Keynes contended that capital is valuable because it is scarce and scarce because it must compete
with the interest rate on money, and not because it has real productive and distributive capacity of its
own. For Keynes, the real productive capacity of capital is not represented as a fundamental,
independent variable in his model, which is a fancy way of saying it is fundamentally irrelevant.
But binary economists contend that
(1) capital is independently productive and
(2) the real productive and distributive power of capital is the most fundamental determinant
of its full-potential contribution to its growth (accumulation), earning capacity, and
value.
The realization of the full potential of capital productiveness is significantly dependent on the market
structure that determines the distribution of its ownership. Capital is kept scarce by hoarding and
suppressing its true productive capacity, thereby making it more expensive to acquire. From a binary
perspective, Keynes got it backwards: the liquidity premium of money is a result (rather than the primary
cause) of the scarcity of capital (note that for individuals, the percent of cash to total wealth generally
decreases as total wealth increases), which is in turn the result of institutional barriers and monopolistic
preferences that exclude most poor and working people from acquiring capital with the earnings of
capital to finance the fuller employment of people and resources necessary to satisfy more fully their
unmet needs and wants.
Because demand for capital is derivative of demand for consumer goods, broader ownership (in
an under-capacity producing economy) will produce increasing demand for both consumer and capital
goods, thereby increasing capital investment and accelerating rather than decreasing its rate of return
despite its increasing supply (or as Keynes might say, despite its “decreasing scarcity”). Thus, rather
than assuming an irrelevant status as in Keynesian, neoclassical and classical analysis, the distribution
of capital acquisition is central to the rate of capital acquisition and growth according to binary analysis.
F. “Free Market” Theories of Price and Value.
Also central to understanding whether and how broader ownership increases the rate of growth
(and capital cost recovery) is the theory of value and competitive pricing used to analyze the dynamics
of a market economy. As to the question of pricing and value, and its relation to efficiency and full
employment, the binary perspective is distinct from conventional analysis. Adam Smith believed that
human labor was not only the fundamental source of production, but also the only fundamental source
15 A. Smith, Wealth of Nations, (1776, Random House ed. 1937), pp. 30-37, 50.
16 Keynes, General Theory of Employment Interest and Money, Harcourt, Brace & World, Inc.
(1936) pp. 213-214
17 Of the classical economists, only Jean Baptiste Say identified Smith’s erroneous
assumption that capital was not independently productive. Specifically, Say, took issue with Smith
analysis as follows:
"To the labour of man alone he [Smith] ascribes the power of producing values. This is an error.
A more exact analysis demonstrates ... that all values are derived from the operation of labour,
or rather from the industry of man, combined with the operation of those agents which nature
and capital furnish him. Dr. Smith did not, therefore, obtain a thorough knowledge of the most
important phenomenon in production; this has led him into some erroneous conclusions, such,
for instance, as attributing a gigantic influence to the division of labor, or rather to the separation
of employments. This influence, however, is by no means inappreciable or even inconsiderable;
but the greatest wonders of this description are not so much owing to any peculiar property in
human labor, as to the use we make of the powers of nature. His ignorance of this principle
precluded him from establishing the true theory of machinery in relation to the production of
wealth." Say, J., A Treatise on Political Economy, 1830, 6th American Edition, p. xl-xli. This
was not Say's only objection to Smith's approach (see Say, 1830, pp.xli-xliii); but if binary
theory is right in holding that capital has both a potent productive and distributive relationship
to growth independent of productivity, then Say's objection to Smith's human productivity
analysis, may come to be recognized as his most important critique of Smith's work.
Page 19 of 34
of value and determinant of price. Smith conceived of all value and prices of all production as ultimately
a function of
(1) the cost of labor and capital to produce it, and
(2) the cost of labor commanded in exchange for it.
All of these costs (including the cost of capital) are functions of the individual decision of whether to
work or remain idle at an offered wage (which is itself a function of the individual’s productivity).15
In short, the work to acquire anything is an expression of the value to the worker of the thing to be
acquired. Conversely, things are worth some function of the work people are willing do to acquire them.
This is the foundational theory of pricing in the conventional approach to competitive market economics.
Keynes’s approach is consistent with the approach of Smith. He spends hundreds of pages to advance
an economic system in which, “apart from money and time...the unit of labor ...[is] the sole physical
unit...”16 In such a framework, the distribution of capital as a productive agent of ownership is as
irrelevant to prices and values as it is to the supply of capital and growth.
However, once one assumes that capital is independently productive, then the idea that labor is
the only source of value and the unit measure of price can be seriously called into question.17 In a binary
economy, the value of goods and services is not only a function of what work people are willing to do
to pay for them, but also a function of what work they (as owners) are willing to let their capital do. The
person who has no capital and wants logs hauled, will either have to do the work herself or do the work
necessary to pay someone (or something) else to do the hauling. In rationalizing a market system of free
exchange, this logic is the essence of the labor theory of value. Unfortunately, it obscures and denies the
vital importance (to the expression of value and the determination of price) of institutions that protect
property rights regarding capital and the vital importance of extending those protections to all people.
Page 20 of 34
The person who owns capital and wants logs hauled can do work and express value as an owner by
letting her horse do the hauling. If capital ownership is limited to a few, markets cannot be efficient in
their pricing of labor, capital and the goods and services produced by them.
To build on this example, assume an economy without animals or tools, comprised of individuals
with an appetite for twenty log-haulings per person per day, but an average individual physical capacity
to complete only ten log-haulings per day. In such an economy, most people will have substantial unmet
needs and wants no matter how hard they work. If people continue to haul logs beyond a certain point
they will be too tired and have no time to enjoy the fruits of their labor. Nevertheless in a grim sense,
given a normal utility function, there will be only as much hauling as “worth while.” The price of
hauling is the work and is an expression of the worker’s (suppressed) appetite and value; and utility is
maximized. Supposedly, Pareto could not be more satisfied. This is also true theoretically in the more
complicated economies envisioned by Smith and Keynes. But with the introduction of horses (requiring
one person four hours per day to maintain and fully employ) that can haul one hundred logs per day, as
a first approximation the amount of hauling will be proportional to the ownership distribution of horses.
Increased production and value will not be expressed by way of increased labor but rather by way of
increased and more broadly distributed capital ownership. As a first approximation, the amount of log
hauling is likely to double if ten rather than five percent of people are able to acquire horses, and ten
times as great if fifty percent can acquire horses. If ownership of the horses is open to all, everyone’s
appetite for log-hauling may be satisfied. On the other hand, if ownership is monopolized by a few, there
will be great unutilized capacity along with great need and want, although people are working as
productively as they can. Even if many people are languishing and prematurely dying, human log
hauling will continue until hauling is no longer “efficient” (worth while to those without horses). People
will theoretically maximize their utility functions, but only some of those utility functions will have a
viable, independent variable that represents the productive capacity of capital.
Of course, with a monopoly of horses having plenty of unutilized productive capacity and with
the leisure to think things through, the owners of the horses (recognizing human desires - values - beyond
log-hauling) might find it useful to employ their capital (and some workers) to haul more logs than
necessary for their personal needs to sell them in exchange for the labor of non owners because there are
many forms of work (pleasing to the owners and others) that people might prefer to the heavy work of
hauling logs. Whole new labor markets can arise in which most people will be “free” to express their
preferences and values by working (or not working) but not by owning; and in each of these new
markets, there is capital ownership to be monopolized so that only a few will be able to do work and
express value by owning. In all of these situations, however, non-owners will be “free” to do work for
wages and thereby free to express values by laboring, while being excluded as a practical matter from
the freedom to do work and express values by way of capital ownership.
Competitive market pricing requires
(1) no barriers to entry,
(2) voluntary (rather than coerced) exchange, and
(3) no monopolization of the means of production.
Once it is recognized that labor and capital are independent factors of production and that capital is
increasingly the more productive factor, then it becomes clear that broad, essentially universal, individual
access to capital acquisition is necessary before the presumed theoretical, allocational benefits of
efficient pricing can be fully realized.
From a binary perspective,
Page 21 of 34
(1) the technical relationship used in the theory of marginal productivity that governs
conventional understanding of 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 access to capital ownership.
In other words, the willingness of a laborer to work at given wage depends on his competitive
opportunity to acquire capital with its earnings and then receive its full net return. (But without access
to the same government-supported infrastructure available to the well-capitalized, the opportunity to
acquire capital with the earnings of capital and thereby through ownership to produce goods and express
value is not open to most people as a practical matter.) From a conventional economic perspective, in
terms of its impact on pricing, capital/labor substitution and employment, and factor income shares, the
distribution of access to capital ownership is either irrelevant or of only minor consequence.
VII. APPLYING BINARY PRINCIPLES TO THE USA ECONOMY
The logic underlying the principle of binary growth can be understood and implemented by
considering the three thousand largest companies in the USA, and then focusing on a subset comprised of
prime-credit-worthy companies. Most of these companies exhibit the frustrating essence of unutilized
productive capacity. At diminishing unit costs, they can produce much more of the goods and services people
dearly need and want; but there is lacking the consumer spending power to render more production profitable
even at greatly diminishing unit costs.
Presently through these corporations, almost all new capital is acquired with the earnings of
capital, and much of it is acquired with borrowed money. At the same time, the ownership of this
corporate wealth is highly concentrated so that approximately 1% of the people own 50% of the wealth
and 10% own 90% of the wealth, leaving 90% people owning little or none. Thus, capital returns its
value at a rate reflective of its long-term (suppressed) earning capacity as it buys itself for a small
minority of the population.
If the techniques presently used to enable existing owners to acquire capital with the earnings
of capital were opened competitively to all people then, in an economy with underutilized productive
capacity, the demand for capital investment would increase as its income is increasingly distributed to
would-be consumers with unsatisfied needs and wants. The binary growth potential in this situation can
be understood as a manifestation of the law of supply and demand within a "binary time frame"--the time
expected for well-managed capital to pay for its acquisition costs (a period usually no longer than five
to seven years) and then to begin earning a net income for its owners. In conventional terminology, this
is a time period in which capital investment is variable rather than fixed. Demand for capital goods is
derivative of anticipated demand for consumer goods in a future period. The broader pattern of capital
acquisition in a binary economy will structure more production-based consumer demand in the future
period, and therefore provide market incentive for more capital investment in the earlier period.
Admittedly there would be a gestation period (a period somewhat shorter than the capital cost recovery
period, and determined by the horizon for capital investment planning) before the distributional growth
effects would become noticeable; but as will be explained, their cumulative effect over time may be
remarkably significant.
To acquire capital with the earnings of capital, the rich use
(1) the pre-tax earnings of capital,
(2) collateral,
18 Louis O. Kelso and Patricia Hetter Kelso, Democracy and Economic Power: Extending The
ESOP Revolution Through Binary Economics (1991). For a consideration of binary economics and monetary
policy see Kelso and Adler, The New Capitalists: A Proposal to Free Economic Growth From the Slavery
of Savings (1961). See also Norman G. Kurland, “The Federal Discount Window,” Journal of Employee
Ownership Law and Finance 131 (1998) and Norman G. Kurland, “A New Look at Prices and Money: The
Kelsonian Model for Achieving Rapid Growth Without Inflation,” 30 Journal of Socio-Economics 495
(2001).
Page 22 of 34
(3) credit,
(4) market and insurance mechanisms to diversify and reduce risk, and
(5) a monetary policy intended to protect private property.
By God’s laws, the same institutions and practices that work profitably for well-capitalized people can
also work profitably for all people. Moreover, in an economy operating at less than full capacity, 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 acquisition process.
Accordingly, to enable all people and major, prime-credit-worthy corporations to capitalize on the
potent distributive relationship between voluntary ownership-broadening capital acquisition and growth, a
binary economy requires only modest reforms to open the market infrastructure governing corporate finance
so that all people (not merely a minority of the people) are vested with competitive capital acquisition rights
to acquire capital with the earnings of capital.
Combining the salient principles of
(1) the Homestead Acts (intended to broaden land ownership),
(2) the employee stock ownership plan (ESOP) technique of corporate finance, which uses tax
exempt, limited liability trusts (as fiduciary agents for employees) to acquire shares of
employer stock with non-recourse credit,
(3) a market for capital credit insurance (such as that profitably provided by the Federal Housing
Administration), and
(4) a return of the Federal Reserve to its original Congressional mandate under Section 13 of the
Federal Reserve Act to allow for the discounting of eligible productive private credit, 18
binary economic strategies offer an entirely voluntary means that enable major prime-creditworthy
companies to meet any portion of its capital requirements while simultaneously
enabling their employees, customers, neighbors and others to acquire (with non-recourse
credit) full-dividend shares of the participating companies which would pay their full return
(net of reserves for depreciation research and development to maintain the competitive
productive capacity of the capital) first to retire the acquisition loans and then to provide
a capital source of income to supplement wages and welfare benefits.
A. A Model of a Binary Economy.
The dynamic operation of a binary economy can be modeled with six basic institutions:
(1) Prime Credit-worthy Corporations,
(2) Capital Ownership-Broadening Trusts,
(3) Banks,
(4) Private Capital Credit Insurers,
(5) the Capital Diffusion Reinsurance Corporation (the only new entity, modeled after the
Federal Housing Administration), and
(6) the Federal Reserve.
Figure 1 (page 23) shows an ownership-broadening “binary financing” transaction consummated with
the voluntary participation of each of these entities. Figure 1 may be seen as a single binary financing
transaction or the aggregate representation of all such transactions. In a binary economy, in addition to
19 The full payout of capital earnings (which is net of reserves for depreciation, research and
development) is essential to enable poor and working people to acquire capital with the earnings. If the
capital earnings of poor and working people are taxed or retained by the corporation, the capital will not be
able to repay its acquisition cost at a competitive rate and will not distribute needed income to provide for
their needs and support sustained growth.
Page 23 of 34
their usual means of acquiring capital assets (borrowing, retained earnings and sale of shares), primecredit-
worthy corporations could raise the funds to acquire capital assets by selling special full-dividend
common shares to a Capital Ownership-Broadening Trust (for the benefit of employees, customers,
neighbors and others), paid for with a bank loan to the Trust, insured by a capital credit insurer and
reinsurer, and discounted (at a rate of 99.75%) by the Federal Reserve. Once the capital acquisition loan
repayment obligations are met, the full net capital earnings (net of reserves for depreciation, research and
development) would be paid to the binary owners to help enable them to meet their needs and wants and
to provide the basis for increased investment and production.19
Figure 1
General Theory Diagram
Page 24 of 34
B. The Cost of Financing to Participating Corporations and the Binary Owners
Based on the profitable capital credit experience of the FHA, the customary bankers spread, and the
estimated administrative costs of Federal Reserve discounting, the combined cost of binary financing to the
corporation and the beneficiaries will not under most economic circumstances exceed the following:
1. Capital credit insurance 2%
2. Customary banker spread 1-2%
3. Federal Reserve Discount 0.25 %
Total 3.25 - 4.25 %
The reason underlying the low interest rate is that monetized credit does not use existing financial savings
as the source of the loan and thus does not require earning a competitive compensation rate for their use. The
estimated cost of capital credit insurance might be questioned, but it could even be doubled and still provide
a competitive interest rate in many instances
C. Binary Growth in a Binary Time Frame
Figure 2 (page 25) illustrates the distributive, growth-sustaining feature of an ownership-broadening
binary economy. For simplicity, Figure 2 assumes a seven-year cost recovery period for capital investment,
and it shows the number of years of annual acquisitions that will have paid for themselves over time. The
figure assumes that in every year after the implementation of the binary economy, some number, N, of an
economy's largest prime credit-worthy companies have profitably utilized binary financing to acquire in the
aggregate some percentage, X, of their capital investments. Assume also that the capital credit insurance
is properly priced to pay for those financings that fail to repay the acquisition loans so that N and X are
net of those failures. Assume also for simplicity, as a first iteration, that N, X, and the rate of return on
capital remains constant throughout the period.
Although beginning slowly, the broadening distribution of capital ownership and income will
increase steadily and thereby provide the basis for binary growth. Each year after the initial cost recovery
period of the most productive capital, more binary capital will have paid for itself and will begin distributing
capital income to members of the poor and middle class. Consistent with the conservative assumption of a
seven-year capital cost recovery period, Figure 2 shows the steady growth in annual capital acquisitions. 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 binary 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 binary owners. In fourteen years, 50% of the
annual capital acquisitions will have paid for themselves, and will have begun paying heir full annual return
to the new binary owners. In the 28th year, 75% of the acquisitions will have paid for themselves; and so on.
In the long run, the linkage between supply (in the form of the incremental productive power of capital) and
demand (resulting from the widespread market distribution of capital income to consumers) approaches
100%. The more binary financing that is undertaken, the greater the distributional growth effects.
In an economy operating at less than full capacity, to maintain market share in the projected growing
economy, producers will have to increase production and productive capacity (more fully utilize existing
capacity and create more capacity). Because demand for capital goods is derivative and anticipatory of
demand for consumer goods, the broader distribution of capital income should be reflected in increased
capital spending within the time frame required to acquire and employ the added capital necessary to increase
production to satisfy the additional anticipated consumer demand. Thus, for example, with a capital cost
recovery period of seven years, and a capital planning investment horizon of five years, increased incentives
for increased capital spending might materialize in the third year.
Page 25 of 34
Figure 2
Percent of
Binary Capital
Acquisitions
that Fully Link
Supply with
Demand
Indeed, the process might start even earlier. First, to the extent that the return on the equity
represented by the binary shares exceeds the debt-servicing requirements, income will be available for
payment to the binary beneficiaries before completion of the capital recovery. Second, to the extent that
consumers feel wealthier by reason of their capital ownership, their marginal savings and consumption rates
will shift towards more consumption even before they begin to receive binary income. Furthermore, the terms
of the loan agreements may provide for increasing partial dividend payments directly to the beneficial owners
as specified percentages of the loans - and shares - become fully paid.
D. Why is the binary infrastructure necessary to manifest binary growth?
Some people may question why, if there is such untapped growth potential in existing capitalist
economies, is the binary infrastructure needed. Some have asked "why does not savings made available for
lending to others not work to employ and ultimately eliminate the unutilized productive capacity?" Earnings
not spent on consumption can be lent to those who will spend it thereby employing the unutilized capacity.
People and institutions are indeed free to borrow; yet the unutilized capacity persists. Neoclassical economics
has no answer for this except to concede that the markets must not be efficient (at least to the extent of
unutilized productive capacity). But this analysis provides no remedy. Keynesian economics seeks to remedy
the situation by redistributing demand. This approach seems to help for a while but massive unutilized
productive capacity still persists. The failure of both approaches is the failure to focus on ownership
distribution and its systemic impact on the demand for both consumer and producer goods.
Page 26 of 34
From a binary perspective savings available for relending does not buy up the unutilized capacity
because
(1) demand for the employment of capital and labor to produce capital goods is derivative of
anticipated demand for consumer goods in a future period; and
(2) concentrated wealth does not promise to distribute sufficient consumer demand on market
principles in the relevant future period to make additional investment sufficiently profitable
in the relevant earlier period.
The USA economy offers
(1) consumer credit (which entices people to acquire what they cannot afford while indirectly
financing capital acquisition for existing owners) and
(2) capital credit for existing owners; and yet the unutilized productive capacity persists.
If binary analysis is correct, those forms of credit merely increase the long-run shortfall in consumer income
by adding to the price of consumer goods while concentrating ownership by excluding non-owners and
minimal owners from competitive participation in the capital acquisition process. The unutilized productive
capacity will persist (and the incentive to create still more capacity will remain sub-optimal) as long as capital
credit and earnings are as a practical matter needlessly restricted to well-capitalized people.
Binary analysis indicates that to be competitive with substantial owners, non-owners and minimal
owners need access to
(1) the full pre-tax earnings of capital,
(2) capital credit insurance, and
(3) the prospect of monetized credit which requires no interest payment for the use of existing
savings.
Once the markets for capital acquisition are opened in this way, participants will be able to capitalize on the
prospects of binary growth in a way that is not practical in the present capital markets. Thus, binary
economics explains
(1) why the freedom to save, lend and borrow do not work to employ the unutilized capacity,
and
(2) how the markets for capital credit can be reformed to make lending an effective means of
employing unutilized capacity by way of voluntary ownership-broadening market
transactions.
VIII. THE POSITIVE AND MORAL CONTENT OF BINARY ECONOMICS AND PRIVATE
PROPERTY
In evaluating the benefits and risks of the binary approach, it is instructive to focus on its positive
and normative dimensions and their relation to Christian principles. The proposition that capital has a
potent distributive relationship to growth has both positive and normative content. The positive aspect
is the prediction of measurable incremental growth that will result if the markets are restructured to
broaden capital acquisition according to binary principles.
The most important or compelling normative aspect of binary economics might be perceived of
as, “it is good, just and for everyone to have competitive capital acquisition rights so that they can
acquire capital with the earnings of capital and thereby enjoy a higher standard of living and a life of
greater opportunity.” However, the belief that broader ownership is good or just is by no means unique
to binary economics; and there are other approaches to broader ownership (such as the micro-credit
approach) that are not based on binary principles. Nevertheless, there are several other important
20 “Binary Economics, Fiduciary Duties and Corporate Social Responsibility: Comprehending
Corporate Wealth Maximization for Stockholders, Stakeholders, and Society,” 76 Tulane Law Review
1531 (2002).
Page 27 of 34
normative aspects of the binary approach that are unique to binary economics, that are true, and that have
positive effect on distribution and growth even if one were to believe that capital ownership might be
bad for most people and therefore better kept concentrated. These are discussed briefly below.
A. Greater Abundance Without Redistribution: The Grace of Binary Economics
The deeper moral content is revealed in part by the fact that the greater abundance promised by
binary economics does not require redistribution as is seemingly required by most programs advanced
(on the basis of conventional economic theory) to help the economically disadvantaged. Binary
economists maintain that
(1) the broader pattern of capital acquisition facilitated in a binary economy,
(2) the consequent broader distribution of capital ownership,
(3) the market based incentives for additional investment, employment, and consumption,
and
(4) the consequent growth
are not redistributionary because
(1) all related transactions are voluntary and
(2) no capital income is distributed to its new owners unless and until all financial
obligations of capital acquisition, maintenance, and operation required to produce that
capital income have been paid.
The institution of a binary economy, as described above, does not require ownership-broadening
transactions; it merely opens the financial infrastructure so that ownership broadening financing
generically is more nearly competitive with ownership-concentrating financing. If a credit-worthy
company determines (with requisite shareholder approval) to utilize ownership-broadening binary
financing and therefore sells shares at fair value to a constituency trust for the benefit of new
shareholders for good corporate purpose, it would not be correct to say that the shares were redistributed
from the company’s existing shareholders. In other words, existing ownership does not include the
absolute right to acquire additional ownership, but only the right to acquire it in voluntary exchanges.
Real redistributions do occur when a corporation sells shares to finance growth in contravention of preemptive
rights or other specific claims, or for less than fair value, but not in the general case.20 Opening
the system corporate finance to ownership-broadening financing merely renders more equal and
competitive the opportunities and benefits of capital acquisition (that are well supported and promoted
by government-protected infra-structure) but presently open as a practical matter to only a relative few.
The promised benefits of binary growth and capital ownership for poor and working people are
not achieved by taking anything away from others. All transactions are voluntary. All shares acquired
by the constituency trusts for the beneficiaries are fully paid for by the earnings of the capital acquired.
Dividends earned by the binary shares (used either to repay the loan or to provide capital income to the
stakeholders) will not be paid unless all antecedent costs and prior claims are paid. The earnings
received by the binary owners are earnings of their shares, they are not the redistributed earnings of
others. This is a critical aspect of the normative content of binary economics, which is an essential
condition of the prediction of binary growth.
The increased abundance does not require a redistribution of the ownership of others, just as it
does not require an increase in human labor; it comes from loving inclusion as a manifestation of Grace
in the form of a positive sum game in which everyone can win. Thus, starting with only a few loaves
21 The Second Treatise on Civil Government, John Locke. See Robert Ashford and Rodney
Shakespeare Binary Economics: the New Paradigm, (1999), pp. 336-346.
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and fish, just as Jesus fed thousands without the need for additional human labor to produce the greater
abundance and without coerced redistribution, binary growth does not require additional labor or coerced
redistribution and therefore may be understood as a manifestation of Grace.
B. The Normative Content of Binary Economics
The prediction of growth results without redistribution (based on a positive distributive
relationship between capital ownership and growth) also assumes a normative content to private property
that rests on three principles with deep roots in Anglo-American common law:
(1) Universal participation,
(2) Distribution according to production and voluntary exchange, and
(3) Such limitation as necessary to protect the rights of others and society in general.21
These are the principles that are reflected in the model of a binary economy and its system of corporate
finance as described above.
These principles of private property find resonance in Scripture. On the subject of private
property, from Jesus’s words and parables, we learn that
(1) stealing is wrong,
(2) if someone takes your cloak, offer your tunic as well,
(3) people may give their property to whom they will and pay people what they will;
(4) investing, renting, and charging interest is permitted; and
(5) charity and contributions to the temple are holy when done in the right spirit.
Some have contended that the communal practices of the early church in Jerusalem is the call of
Christianity to abandon private property and to establish a communal approach governed by the principle
of “from each according to his ability to each according to need.” However, the community of property
in that instance was entirely voluntary and not required or coerced by the will of other humans, churches
or governments. Jesus left Caesar’s world to Caesar. Nevertheless, for those seeking the Kingdom of
Heaven, Jesus specifically cautions people to use their worldly wealth wisely. More is expected of those
to whom more is given. Those who have access to the institutions that enable them to acquire capital
with the earnings of capital should not hoard it; they may enjoy it with God’s blessing; but they should
also take steps to extend that access to all of God’s children (bearing in mind, of cause, that people who
own little or nothing are certainly among the least of these).
Thus, God’s abundance, promised to those who first seek the Kingdom of Heaven, is enhanced
by loving inclusion. That loving inclusion in the opportunities and responsibilities of life is not satisfied
merely by the redistribution of income (whether voluntary or coerced); full participation in economic
activity requires participation not only by way of labor but also by way of ownership, which should not
be monopolized by a few. It is in the institution of private property (which necessarily includes the right
to keep what you produce and the institution of voluntary exchange) that the full moral responsibilities
of ownership emerge and the full growth-enhancing benefits of inclusion are realized.
Accordingly, based on the foregoing, two Godly principles of private property emerge in a Godly
economy:
(1) inclusive, individual participation in production and
22 Although taxation can be used to redistribute income and capital from those who do not
spend to those who will, taxation of capital earnings also precludes most people from acquiring capital
with the earnings of capital, while protecting and preserving the effective monopoly on capital
acquisitions for the exclusive benefit of well-capitalized people and a very few others.
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(2) the right to chose to keep or exchange what you produce (which can be understood as
the institution of voluntary rather than coerced exchange or redistribution).
Implicit in these two is a third principle: the principle of limitation which can also be understood as the
anti-monopoly or anti-concentration principle. By this principle, the participation of any one or more
individuals, groups, and institutions should not be so great as to preclude others from the voluntary
participation in production and exchange.
No only do the three principles of private property, as embraced by binary economics and
reflected institutionally in a binary economy, have deep resonance in Christian principles; these
principles are also the essential theoretical conditions in classical, neoclassical and Keynesian economics
for free and competitive markets: (1) no barriers to entry; (2) voluntary exchange and (3) limitations on
ownership as necessary to prevent monopolization.
Despite high-sounding rhetoric, however, in present-day capitalist economies, based on
conventional economic theory, these principles are honored primarily in the breach because conventional
economics denies that capital is independently productive and denies that the distribution of its
ownership has a crucial bearing on the expression of value, prices, production, distribution, consumption,
market efficiency, the employment of unutilized productive capacity, and growth. In truth, conventional
economic theory recognizes no imperative
(1) to include all people in the process whereby capital is acquired with the earnings of
capital;
(2) to protect the institutions of voluntary exchange from the distortions in pricing
transactions in markets in which most participants live in economic duress while others
wield monopolized wealth, and
(3) to end the monopoly of concentrated ownership by institutional reforms to enable all
people to acquire capital competitively with the earnings of capital.
In present-day capitalist economies, the economic participation offered to most people is by way of jobs,
welfare, and private charity; ownership is practically available only to the well-capitalized and is not
offered as a practical matter to most people.
Of all the mainstream schools of conventional economics, only Keynesian recognizes that
concentrated distribution adversely affects the full employment of existing capacity and growth; but
Keynesian economics focuses primarily on the distribution and redistribution of income, rather than on
the distribution of rights to capital acquisition (thereby violating the first principle of private property).
Furthermore, Keynesian economics
(1) makes no distinction between the distribution and redistribution of income and capital
(2) does not insist on universal participation in capital acquisition and
(3) imposes no institutional limits on capital acquisition other than forms of taxation of
capital and capital income, which render it essentially impossible for people without
capital to acquire capital competitively with the earnings of capital (thereby violating all
three principles of private property).22
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Of the various economic approaches under consideration, only binary economics honors the three
normative principles of private property. It honors full and open economic participation by opening to
all people the system by which capital is acquired with the earnings of capital. It honors the principle
of voluntary exchange by rejecting the involuntary redistribution as means to broaden participation in
capital ownership. It honors the principle of limitation not by imposing limitations on existing owners
regarding what they can do with their property, and not by taxing or redistributing their income or
capital, but rather by opening to all people the government supported process of acquiring capital with
the earnings of capital.
C. Love and the Highest Form of Charity.
The philosopher Mimonides declared that the highest form of charity is that charity that ends the
need for charity. Jesus taught that it is not the amount that is given before the alter, but the spirit in
which it is given. Charity can certainly be an expression of love for one’s neighbors, but not when the
opportunity to end the need for charity is needlessly withheld. The person who gives fruit while
needlessly excluding the recipients from the opportunity to graciously acquire a share of the fruit trees
does not manifest the quality of love that Jesus preached. Indeed, Jesus specifically criticized privileged
people who laid unnecessary burdens on others.
IX. CHOOSING AMONG PARADIGMS ON CHRISTIAN PRINCIPLES AND SCIENTIFIC
PRINCIPLES: ADDRESSING UNUTILIZED PRODUCTIVE CAPACITY
Based on Jesus’s teaching that God’s Word is proven by its effect, Christian faith includes a belief
that integrating Christian principles into economic understanding and economic choices will lead to a more
Godly economy. Jesus’s teaching on the need for a solid, dependable foundation calls for a reexamination
of widely accepted (i.e., mainstream), fundamental, economic assumptions and a paradigm-neutral
consideration of other economic approaches based on different assumptions that are presently excluded from
mainstream scholarship. Therefore, one way that the integration of Christian principles into economics can
improve economic teaching, scholarship and practice is to help people realize the need to re-examine in a
rigorous way the underlying assumptions of the various economic paradigms that shape public policy and
private decision-making in a major way.
From a Christian perspective, the existence of unutilized productive capacity along side of vast unmet
needs and wants is an alarming symptom of human institutions working contrary to God’s will. Jesus taught
that God’s loving grace, and not human capacity, is the source of true abundance. He gave specific
instruction on the importance of loving one’s neighbors and providing for the least of these. He revealed an
enhanced abundance that comes from loving inclusion. This loving inclusion is not satisfied by those who
give fruit when they can easily enable those without fruit to acquire fruit trees of their own.
A. The Choice of Paradigms
This article has discussed the major economic paradigms that presently dominate mainstream thinking
and has advanced the binary economic paradigm as one more consistent with Christian and scientific
principles. To address the question of unutilized productive capacity in ways that best serve people, those
in positions of responsibility should consider the fundamental assumptions and principles underlying these
approaches:
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1. The classical and neoclassical paradigms (that assume that [a] unutilized capacity and
suboptimal growth are anomalies that will eventually disappear with the progressive
deregulation of the free market’s “invisible hand” and [b] the concentration of ownership is
not an obstacle to the profitable employment of unutilized productive capacity and to greater
growth);
2. The Keynesian paradigm (that [a] recognizes the existence of unutilized productive capacity
and the market’s failure to distribute effective demand, but [b] assumes that the concentration
of ownership is not as fundamental to solving the problem as the distribution and/or
redistribution of income, and [c] offers solutions that make no fundamental distinction
between distribution and redistribution of income and capital in its policies offered to
achieve a fuller employment of resources and greater growth); and
3. The binary paradigm (that [a] assumes that capital and labor are independently productive,
[b] reasons from that assumption that the distribution of capital ownership is positively
related to the profitable employment of unutilized capacity and to economic growth and
therefore [c] sees concentrated ownership as a main cause of persistent unutilized capacity
and a major barrier to the profitable employment of unutilized productive capacity and to
greater economic growth, [d] insists (as the law of private property insists) on making a
critical distinction between the distribution and redistribution of income and capital, and [e]
provides voluntary ownership-broadening solutions (not dependent on redistribution) to
distribute more broadly the market demand needed to employ more unutilized capacity
profitably and promote greater economic growth).
For many years, although policies based on the classical, neoclassical, and Keynesian economic approaches
(and on a mix of the three) have been repeatedly tried by governments, recommended by consultants, and
taught by teachers, the underlying anomaly of unutilized productive capacity amidst great unsatisfied needs
and wants remains. In contrast, the binary alternative has never been tried, is almost never advanced,
considered or recommended by those in an effective, responsible position to implement it or draw
constructive attention to it, and is only rarely taught to students. The conscientious integration of Christian
principles into economics may result in according binary economics the attention it deserves.
Mainstream economic theory and practice (which consist primarily of a mixture of classical,
neoclassical and Keynesian principles) are premised on
(1) an assumption of scarcity,
(2) a homocentric conception of production that ignores or trivializes the independent, growthenhancing
work of the non-human contributions to production, and
(3) an analysis that
(a) accepts as inconsequential a highly concentrated pattern of ownership that excludes
most people from viable capital ownership no matter how hard they work and
(b) denies that enabling all people to acquire capital with the earnings of capital will
help to employ unutilized productive capacity and produce growth.
Like Christianity, binary economics rests on principles of abundance that results from
(1) non-human creation and
(2) the voluntary inclusion of all people in the opportunities and responsibilities of life
including ownership.
Accordingly, compared to mainstream economic thinking, binary economics offers an approach more
consistent with the core teaching of Jesus.
Binary economics is also more consistent with scientific principles. Impartial analysis based on the
scientific principles [that require of any theory
(1) workable assumptions,
23 “Binary Economics, Fiduciary Duties and Corporate Social Responsibility: Comprehending
Corporate Wealth Maximization for Stockholders, Stakeholders, and Society,” 76 Tulane Law Review 1531
(2002)
24 Id. See also “Memo On Binary Economics to Attorneys for People of Color and Women Re:
What Else Can Public Corporations Do For Your Clients?,” 79 St. John’s Law Review 1221 (2005)
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(2) internal consistency and
(3) replicable description, prediction, and prescription) indicates that binary economics]
fares better than any mainstream economic theory in addressing the persistence of unutilized productive
capacity alongside of unmet needs and wants in markets that are supposedly becoming more competitive.
Starting with assumptions that recognize the independent productive and distributive powers of capital,
binary economics with internal consistency
(1) describes how unutilized productive capacity and suboptimal growth persist in markets
that are supposedly becoming more efficient,
(2) predicts their persistence until the markets are opened to broaden capital ownership
voluntarily, and
(3) prescribes concrete steps that can be taken to broaden ownership voluntarily in ways the
will help to employ unutilized productive capacity and promote growth.
When compared to the scientific foundation underlying conventional economics, as a matter of scientific
principles, the theoretical and empirical foundation for the binary paradigm (along with the correlative
obligation to learn and teach it) is already well established. It simply needs to be recognized.
The conscientious integration of Christian principles into economics, particularly when
reinforced by scientific principles, can greatly enhance practical economic understanding especially
regarding
(1) corporate finance,
(2) corporate social responsibility,
(3) government responsibility, and
(4) the teaching of economics.
These are discussed briefly below.
B. Duties of Corporate Fiduciaries, Advisors, and Government Officials
If one wants to have a major impact on economic policy, it is well to consider the opportunities
available to major prime-credit worthy corporations and government policy regarding them. Such
corporations own most of the capital in virtually every economy and are in a good position to exercise some
substantial measure of corporate social responsibility regarding the opportunities available to them.23
The principle of binary growth suggests that these corporations can increase the profitability and
value of their assets if they begin to take practical steps to broaden the ownership of their common shares to
include their employees, consumers, neighbors, and others. The fact that, with modest reforms of the system
of corporate finance, a corporation can meet its capital requirements at several points or more below prime
interest rates, while simultaneously broadening its ownership base, is inherently of special interest to the
corporation.24 As a legal matter, the availability of such financing presents a responsibility to corporate
directors, officers, and other fiduciaries including lawyers.
Anglo-American law makes clear that corporate fiduciaries owe their primary wealthmaximizing
duties first and foremost to the corporation and only secondarily to the shareholders. From
the corporation’s perspective, the purpose of corporate finance is to enable a corporation to acquire
25 “The Socio-Economic Foundation of Corporate Law and Corporate Social
Responsibility,” 76 Tulane Law Review 1187 (2002).
26 Memo On Binary Economics to Attorneys for People of Color and Women Re: What
Else Can Public Corporations Do For Your Clients?,” 79 St. John’s Law Review 1221 (2005)
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capital before earning the money to pay for it. From the corporate perspective, the opportunity to
acquire needed capital at its lowest cost and the opportunity to increase corporate wealth by broadening
ownership are corporate opportunities that cannot be disregarded by fiduciaries consistent with their
fiduciary duties. Generally fiduciaries are legally required to disclose such information to officers and
directors who (if they believe that including employees, customers and others in prospective capital
acquisition planning is in the best interest of the corporation) would be legally required to recommend
it to the shareholders for their consideration. Similar ethical obligations of disclosure also apply to
financial and economic advisors. If binary financing might benefit both the corporation and the
shareholders, then they should certainly be informed of that fact. Similar obligations of disclosure and
positive action also apply to government officials charged with the responsibility to improve the
economy.25
C. Responsibilities of Advocates for the disadvantaged.
The responsibilities raised by the prospects of binary growth also extend not only to Christians
who, if they love Jesus will heed his admonition to care for the least of these, but also to advocates for
all those disadvantaged whether those advocates are motivated or charged with a duty based on
religious, but non-Christian consideration, and/or non-religious considerations. This would include
advocates for people who are included in such categories women, minorities, children, the disabled, and
the poor.26
D. Responsibilities of Teachers - The People Have a Right to Know.
Just as it is the professional responsibility of corporate directors, institutional fiduciaries, financial
advisors, and government officials to inform their shareholders, clients, and constituencies of all of their
wealth-maximizing opportunities, so too it is the responsibility of teachers - especially tenured teachers - to
teach with full disclosure that reveals all the relevant analysis, insights, opportunities, and concerns.
Presently there is no single conventional school of economics that provides non-controversial
explanations and effective solutions for persistent unutilized productive capacity. Nevertheless,
economists and other academicians routinely teach classical, neoclassical, and Keynesian economic
principles about which they are either skeptical or in disagreement in theory or in practice. To be fair
to their students and other citizens, responsible teachers teach the theories and doctrine and explain their
skepticism or disagreement. The people have a right to know.
To be included in the curriculum, theories require sufficient theoretical and empirical foundation.
In addressing the well-documented anomaly of persistent unutilized productive capacity, both
theoretically and empirically, binary economics rests on a foundation more consistent with observable
facts than classical and neoclassical economics (which so profoundly shape conventional economic
theory and political economy, but which have no explanation or solution for the persistence of unutilized
productive capacity). Binary economics provides an explanation for persistent unutilized productive
capacity that is different from Keynesian economics (one that assumes that capital is independently
productive and has a potent distributive relationship to growth) and a different systemic solution (one
that relies on private property and voluntary transactions in more open markets rather than the
governmental redistribution of demand). Unlike Keynesian economics, binary economics makes a
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fundamental distinction between the distribution and redistribution of income and capital, which renders
it more consistent with human behavior, private property principles, and the voluntary exchange
principle of free markets. On what principled basis are classical, neoclassical, and Keynesian economics
taught and binary economics excluded? Certainly not on grounds of a lack of theoretical and empirical
foundation. If teachers are either skeptical or in disagreement with binary economics in theory or in
practice, they should teach the binary principles (just as they teach classical, neoclassical, and Keynesian
principles) and explain their skepticism or disagreement. The students have a right to know. Students
deserve full disclosure regarding the relevance of binary economics to course, program and degree
offerings. Schools and teachers dedicated to Christian principles have a special calling with respect to
economics which should not be neglected.
X. CONCLUSION
Binary Economics offers (1) important new insights regarding the persistence of widespread unmet
needs and desires of billions of people along side of the unutilized productive capacity to fulfill those needs
and desires, and (2) reveals opportunities for achieving enhanced growth and more broadly shared economic
prosperity by way of voluntary, ownership-broadening market transactions. Compared to the classical,
neoclassical, and Keynesian economic approaches, impartial analysis reveals that the binary approach is more
consistent with both scientific and Christian principles. When compared to conventional economics with
respect to the criteria of
(1) reasonable assumptions,
(2) internal consistency, and
(3) plausible descriptions, predictions and prescriptions, binary economics is more consistent
with the principles of science.
When compared to conventional economics with respect to Christian principles of
(1) Grace,
(2) God as the source of good,
(3) abundance,
(4) loving inclusion, and
(5) individual participation in the opportunities and responsibilities of life,
binary economics is also more consistent with Christianity as taught by Jesus.
Based on widely accepted principles underlying the philosophy of science, spiritual values,
professional ethics, and secular morality, institutions of higher education have a special responsibility to teach
binary economics in most contexts in which issues of economic growth, efficiency and justice are taught or
considered. The people have a right to know. The contexts include course segments, courses, certificate
programs, majors and degree programs in economics, political science, sociology, business
administration, philosophy, history, theology and law. In law schools for example, rigorous exposure
to binary economics is necessary to enable lawyers to help people to identify and secure their essential
rights and responsibilities. Professional ethics governing other professional occupations and academic
disciplines also call for the inclusion of binary economic principles in contexts where the positive and
normative analysis of issues would otherwise be significantly influenced by one or more conventional
approaches to economics. People and institutions dedicated to Christian principles and those dedicated to
helping the economically disadvantaged should give binary economics the attention it deserves and encourage
others to do the same.