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Binary economics (aka Two-factor Economics) is a theory of economics that endorses both private property and a free market but proposes significant reforms to the banking system. The theory behind Binary Economics was proposed by American lawyer Louis Kelso in The Capitalist Manifesto (1958) which he co-authored with Mortimer Adler. The book's title is an expression of its background in Cold War polemics in opposition to The Communist Manifesto.
Binary economics rejects the claim that Neoclassical economics alone promotes a ‘free market’ which is free, fair and efficient. (e.g., as an interpretation of the classical First Fundamental Theorem of Welfare Economics). Binary economists believe freedom is only truly achieved if all individuals are able to acquire an independent economic base from capital holdings, and that the distribution of ownership rights can "deepen democracy".
Binary economics argues financial savings prior to investment are not required on the basis that the present money supply is mostly created credit anyway. They argue that newly-minted money invested on behalf of those without access to existing cash savings or collateral can be adequately repaid through the returns on those investments, which need not be inflationary if the economy is operating below capacity. The theory asserts that what matters is whether the newly-created money is interest-free, whether it can be repaid, whether there is effective collateral and whether it goes towards the development and spreading of various forms of productive (and the associated consuming) capacity.
Another contrast is that, in evidence-based economics, interest (as distinct from administration cost) is practically always necessary; in Binary Economics theory it isn't (certainly where the development and spreading of productive capacity is concerned). Conventional economics accounts for the observed time value of money, whereas binary economics does not.
Kelso elaborated on his proposals in The New Capitalists in 1961; before teaming up with political scientist Patricia Hetter Kelso to further explain how capital instruments provide an increasing percentage of the wealth and why capital is narrowly owned in the modern industrial economy. Their analysis predicted that widely distributed capital ownership will create a more balanced economy. Kelso and Hetter proposed new "binary" share holdings which would pay out full net earnings as dividends (with exceptions for research, maintenance and depreciation). These could be obtained on credit by those not possessing savings, with a government-backed insurance scheme to protect the shareholder in the event of loss.
Kelso's writings and his attempts to promote them were not well received by academic economists. Milton Friedman said of The Capitalist Manifesto "the book's economics was bad...the interpretation of history, ludicrous; and the policy recommended, dangerous" and recalls a debate where even the moderator Clark Kerr "lost his cool as a moderator and attacked [Kelso's arguments] vigorously". Paul Samuelson, another Nobel Memorial Prize in Economic Sciences winner, told US Congress that Kelso's theories were a "cranky fad" not accepted by mainstream economists, but Kelso's ideas on promoting wider capital ownership nevertheless significantly influenced the passing of legislation promoting employee ownership.
Aims and Programme
The aim of binary economics is to ensure that all individuals receive income from their own independent capital estate, using interest-free loans issued by a central bank to promote the spread of employee-owned firms. These loans are intended to: halve infrastructure improvement costs, reduce business startup costs, and widen stock ownership.
Binary economics is a minority discipline, hard to place on the left-right spectrum. It has variously been characterized as an extreme right-wing ideology and as extremely left-wing by its critics. The ‘binary’ (in ‘binary economics’) means ‘composed of two’ because it suffices to view the physical factors of production as being but two (labour and capital which includes land) and only two ways of genuinely earning a living − by labour and by productive capital ownership. Humans are usually considered as owning their labour, but not necessarily the other productive factor – capital.
Binary economics is partly based on belief that society has an absolute duty to ensure that all humans have good health, housing, education and an independent income, as well as a responsibility to protect the environment for its own sake. The interest-free loans proposed by binary economics are compatible with the traditional opposition of the Abrahamic religions to usury.
Proponents of binary economics claim that their system contains no expropriation of wealth, and much less redistribution will be necessary. They argue that it cannot cause inflation and is of particular importance as more of the physical contribution to production is automated. and that the Binary economics paradigm is particularly helpful in addressing the issue of why developing countries languish. Advocates contend that implementing their system will lessen national debt and encourage national unity. They believe binary economics could create a stable economy.
Productiveness vs. Productivity
Binary productiveness is distinctly different from the conventional economic concept of productivity. Binary productiveness attempts to quantify the proportion of output contributed by total labor input and total capital input respectively, Adding capital inputs to a production process increases labor productivity, but binary economic theory argues that it decreases labor productiveness (i.e. the proportion of the total output with the support of both labor and capital that the labor inputs could have produced alone). For example, if the invention of a shovel allows a laborer to dig a hole in quarter of the time it would take him without the spade, binary economists would consider 75% of the "productiveness" to come from the shovel and only 25% from the laborer.
Roth criticised the shovel example on the basis that the shovel is not a factor of production independent of human capital because somebody invented it, and the shovel cannot act independently: the physical productiveness of the shovel before labour is added to it is zero. Binary economics suggests that even if gains in productiveness result from human innovation they ought to accrue only to those that invest in capital instruments utilising that innovation, in this case the owner of the shovel. Although it may be impossible to dig the hole without some human labor, the binary theory of productiveness maintains the contribution of that physical labour can be calculated simply by calculating the productivity increase resulting from adding capital, and in this case valued at only 25% of the total cost of production.
Kelso used the concept of productiveness to support his theory of distributive justice, arguing that as capital increasingly substitutes for labour..."workers can legitimately claim from their aggregate labor only a decreasing percentage of total output", implying they would need to acquire capital holdings to maintain their level of income. In the The Capitalist Manifesto, Kelso boldly asserted:
"It is, if anything an underestimation rather than an exaggeration to say that the aggregate physical contribution to the production of the wealth of the workers in the United States today accounts for less than 10 percent of the wealth produced, and that the contribution by the owners of capital instruments, through their physical instruments, accounts in physical terms for more than 90 percent of the wealth produced" 
Whilst the increased importance of capital as a factor of production following the Industrial Revolution has long been accepted even by those believing economic value derives from labour such as Marx, Kelso's figures suggesting that value was created almost entirely by capital were dismissed by academic economists like Paul Samuelson. Samuelson asserted that Kelso's had not used any econometric analysis to arrive at his figures, which completely contradicted economists' empirical findings on the contribution of labour. The Capitalist Manifesto did not provide detailed calculations to support Kelso's claim, although a footnote suggested that it was based on a simple comparison with 1850s labour productivity figures.
Employee Share Ownership Plans (ESOPs) are compatible with some of the principles of binary economics. These stem originally from Louis Kelso & Patricia Hetter Kelso (1967)Two-Factor Theory: The Economics of Reality; the founding of Kelso & Company in 1970; and then from conversations in the early 1970s between Louis Kelso, Norman Kurland (Center for Economic and Social Justice), Senator Russell Long of Louisiana (Chairman, USA Senate Finance Committee, 1966 - 1981) and Senator Mike Gravel of Alaska. There are about 11,500 ESOPs in the USA today covering 11 million employees in closely held companies.
Uses of central bank-issued interest-free loans
Binary economics proposes that central bank-issued interest-free loans should be administered by the banking system for the development and spreading of productive (and the associated consuming) capacity, particularly new capacity, as well as for environmental and public capital. While no interest would be charged, there would be an administrative cost as well as collateralization or capital credit insurance.
Proponents of binary economics are dissatisfied with fractional reserve banking, arguing that it "creates new money out of nothing". The supply of interest-free loans would place in circumstances of a move (over time) towards banks maintaining reserves equal to 100% of their deposits; in practice, the large-scale interest-free lending desired by binary economics is compatible with the widespread reduction in money supply that would be caused by increased reserve requirements only if the government takes over the banks' role in credit creation.
Investments eligible for interest-free loans
Public capital investment
Interest-free loans for public capital have been successfully used in Canada, New Zealand and Guernsey. Malaysia is today believed to be experimenting with them.
After 1949 central bank loans were a major factor in the Taiwanese Land to the Tiller program which spread land ownership from the few to the many. This was done without causing inflation and was an overall binary solution because, in various ways the money went into the spreading of both productive and consuming capacity. (One way was by financing the buyout with industrial bonds, thus giving capital to small industries to provide things for the newly empowered farmers to purchase.)
Private capital investment
Ownership of productive (and the associated consuming) capacity, particularly new capacity, can be spread by the use of central bank-issued interest-free loans. Interest-free loans should be allowed for private capital investment IF such investment creates new owners of capital and is part of national policy to enable all individuals, over time, on market principles, to become owners of substantial amounts of productive, income-producing capital. By using central bank-issued interest-free loans, a large corporation would get cheap money as long as new binary shareholders are created.
It is proposed that all large corporations should have to pay out all their earnings all the time (with exception of reserves for maintenance, depreciation, repair and research). Large corporations will then have the option of obtaining interest-free loans on condition that they help to spread ownership. Medium-sized corporations (which would not be subject to the full pay out provision) will be able to have interest-free loans if they spread ownership.
- "The Capitalist Manifesto". Retrieved 2011-02-20.
- Roy Madron & John Jopling (2003) Gaian Democracies
- Michael Rowbotham (1998) The Grip of Death. James Gibb Stuart (1983) The Money Bomb.
- Rodney Shakespeare (2007) op. cit.
- Louis Kelso & Patricia Hetter Kelso (1986 & 1991) Democracy and Economics Power - Extending the ESOP Revolution through Binary Economics
- Friedman, Milton & Friedman, Rose D. Two Lucky People: A memoir, The University of Chicago Press, p.275
- D'Art, Darryl (1992) Economic democracy and financial participation: a comparative study, Routledge p.96
- Robert Ashford & Rodney Shakespeare (1999) Binary Economics – the new paradigm
- Rodney Shakespeare (2007) The Modern Universal Paradigm.
- Robert Ashford (1990) The Binary Economics of Louis Kelso: the Promise of Universal Capitalism (Rutgers Law Journal, vol. 22 No.1. Fall, 1990).
- Robert Ashford & Rodney Shakespeare (1999) op. cit;
- Time Magazine, June 29, 1970.
- Louis Kelso & Patricia Hetter Kelso (1967) Two-Factor Theory: the Economics of Reality.
- Rodney Shakespeare & Peter Challen (2002) Seven Steps to Justice.
- Norman Kurland, Dawn Brohawn & Michael Greaney (2004)Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security.
- James S. Albus (1976) Peoples' Capitalism - The Economics of The Robot Revolution.
- Sofyan Syafri Harahap (2005), Accounting Crisis. William Christensen Search for a Universal Paradigm: Making Justice Live For All International Conference on Universal Paradigm of Socio-Scientific Reasoning, Asian University of Bangladesh, 2005.
- A notable lecture on this matter was given by Ing. B.J Habibie (former President, The Republic of Indonesia) at the international conference Islamic Economics and Banking in the 21st Century, Jakarta, Indonesia, November, 2005. The former President, a successful aircraft engineer, well understands the potential of technology to create wealth. See also Thoby Mutis (1995) Pendekatan Ekonomi Pengetahuan dalam Manajemen Kodedeterminass.
- Mark Douglas Reiners The Binary Alternative and the Future of Capitalism available at Center for Economic and Social Justice.
- Robert Ashford Louis Kelso’s Binary Economy (The Journal of Socio-Economics, vol.25, 1996).
- Timothy D. Terrell Binary Economics: Paradigm Shift Or Cluster of Errors? Ludwig von Mises Institute.
- Timothy P. Roth, (1996) A Supply-Sider’s (Sympathetic) View of Binary Economics, Journal of Socio-Economics 25 (1) pp. 58–59.
- Kelso, Louis (1958) The Capitalist Manifesto, Random House, p.87
- Kelso, Louis (1958) The Capitalist Manifesto, Random House, p.110-11
- Kelso, Louis (1958) The Capitalist Manifesto, Random House, p.53
- Louis Kelso Karl Marx: The Almost Capitalist (American Bar Association Journal, March, 1957).
- William Greider (1997) One World, Ready or Not: The Manic Logic of Global Capitalism.
- Norman Kurland (1998) The Federal Reserve Discount Window — www.cesj.org
- John Tomlinson (1993) Honest Money. Joseph Huber & James Robertson Creating New Money. Peter Selby (1997) Grace and Mortgage.
- Rodney Shakespeare & Peter Challen (2002) op. cit.
- John Medaille (2007) The Vocation of Business: Social Justice in the Marketplace.
- Shann Turnbull (1975/2000) Democratising the Wealth of Nations and (2001) The Use of Central Banks to Spread Ownership. Jeff Gates (1999) The Ownership Solution and (2000) Democracy At Risk.
- Norman Kurland (2001) Saving Social Security at www.cesj.org.
- Albus, James S.(1976) Peoples’ Capitalism - The Economics of The Robot Revolution.
- Ashford, Robert & Shakespeare, Rodney (1999) Binary Economics - the new paradigm.
- Ashford, Robert Louis Kelso’s Binary Economy (The Journal of Socio-Economics, vol. 25, 1996).
- el-Diwany, Tarek (2003) The Problem With Interest.
- Gates, Jeff (1999) The Ownership Solution.
- Gates, Jeff (2000) Democracy At Risk.
- Gauche, Jerry Binary Modes for the Privatization of Public Assets (The Journal of Socio-Economics. Vol. 27, 1998).
- Greenfield, Sidney M. Making Another World Possible: the Torah, Louis Kelso and the Problem of Poverty (paper given at conference, Columbia University, May, 2006).
- Kelso, Louis & Kelso, Patricia Hetter (1986 & 1991), Democracy and Economic Power - Extending the ESOP Revolution through Binary Economics.
- Kelso, Louis & Adler, Mortimer (1958), The Capitalist Manifesto.
- Kelso, Louis & Adler, Mortimer (1961), The New Capitalists.
- Kelso, Louis & Hetter, Patricia (1967), Two-Factor Theory: the Economics of Reality.
- Kurland, Norman A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation.
- Kurland, Norman; Brohawn, Dawn & Michael Greaney (2004) Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security.
- Miller, J.H. ed., (1994), Curing World Poverty: The New Role of Property.
- Reiners, Mark Douglas, The Binary Alternative and Future of Capitalism.
- Schmid, A. Allan,(1984), “Broadening Capital Ownership: The Credit System as a Focus of Power," in Gar Alperovitz and Roger Skurski,eds. American Economic Policy, University of Notre Dame Press.
- Shakespeare, Rodney & Challen, Peter (2002) Seven Steps to Justice.
- Shakespeare, Rodney (2007) The Modern Universal Paradigm.
- Turnbull, Shann (2001) The Use of Central Banks to Spread Ownership.
- Turnbull, Shann (1975/2000), Democratising the Wealth of Nations.