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Source link: http://archive.mises.org/4807/binary-economics-paradigm-shift-or-cluster-of-errors/

Binary Economics: Paradigm Shift Or Cluster of Errors?

March 17, 2006 by

Binary economics is a theory of economic growth that places emphasis upon the distribution of capital, writes Timothy Terrell, rather than the quantity of capital or the productivity of labor. But the binary economists’ plan for capital dispersion would produce a massive business cycle. Moreover, the plan is in no way compatible with a free market economy. FULL ARTICLE


Francisco Torres March 17, 2006 at 7:40 pm

Excelent article. I was unaware of this economic theory (the so-called Binary Economics) but its basic tenets are quite absurd and silly. No wonder environmentalists and other crackpots would become fond of it.

averros March 17, 2006 at 8:21 pm

I think a few years of real-life entrepreneural experience must be a mandatory pre-requisite for any economics degree.

That’d clear too much of the bullshit which passes for economics nowadays – in this case, the idea of separability of capital and labor gains in productivity is an obvious kookery to anyone who did as much as run a smalltown bakery.

quincunx March 17, 2006 at 9:27 pm

Hmm, I’m trying to figure out whether binary economics is better than axiomatic economics (http://www.axiomaticeconomics.com/).

Can you even rank crackpots?

Nancy L. Boone March 18, 2006 at 10:12 am

“…[A]nd even family size would be regulated.” This ideology could potentially lead to an absolute violation of human rights such as forced sterilization and abortion, much like that of Communist China! How anyone could possibly find this compatable with the free market is beyond me. (I guess that there are a lot of educated idiots in the world.)

A very informative article, Professor Terrell!

Norm Kurland March 18, 2006 at 9:55 pm

Dear Mr. Browne,

Thank you for your invitation to reply to Professor Timothy Terrell’s critique to binary economics that was published by Lew Rockwell’s von Mises Institute. Let this be an opening response for the benefit of all members of the von Mises Institute. We will later give a more detailed response when time permits.

I happen to share most of the values of the libertarian movement (i.e. the market system and free and open movement of wealth and people for determining just prices, just wages and just profits; limiting the economic power of the state; and preservation of private property in the means of production). So did Louis Kelso, who added the missing ingredient in libertarian philosophy and the neo-classical economics I studied at the University of Chicago — that is, equality of access to the social means (especially productive credit) for every individual to acquire and enjoy the rights, powers and responsibilities associated with private ownership of capital. What most attracted me to Kelso over 45 years ago was that he and Mortimer Adler (who renounced his socialist leanings when he discovered Kelso) in The Capitalist Manifesto (1958) added a triad of market-based principles of economic justice that was missing in von Mises writings and the neo-classical paradigm of economics in the law and economics program at the University of Chicago. Just as lifting unjust barriers to the vote was a key to full democratic participation in the political process, lifting unjust barriers to equal ownership opportunities is the key to full democratic participation in the economic process. Unfortunately, in those years I’ve concluded that most libertarians seem indifferent or blind to these barriers to ownership participation, just as those who were comfortable with the unjust system that excluded blacks and women from the political process were before “one-person, one-vote” changed the pre-existing political paradigm. Having been directly involved in the early 1960s in the movement that lifted voting barriers, I came to recognize that full ownership participation was an even more critical pillar of a free and just society than access to the political ballot. To understand the cultural significance of the Kelso paradigm, I hope all libertarians will take the time to read Kelso’s books (downloadable free at http://www.kelsoinstitute.org) and the platform of the American Revolutionary Party at http://www.americanrevolutionaryparty.us/partyplatform.htm. They offer a practical strategy for delivering economic justice that is so far missing from libertarian ideology.

Based on these preliminary comments on the Kelsonian “big picture” that is attracting increasing support around the world –what those of us in the Center for Economics call the Just Third Way — I can now respond to your request.

Unfortunately, Professor Timothy Terrell has produced an extremely unscholarly critique of Kelso’s binary theory of economics. His opening paragraph is a “cluster of errors” that colors his lengthy attack on binary economics. As I will point out in bold from his first paragraph, Professor Terrell has distorted the meaning of key words and concepts that have been carefully defined by the main proponents of binary economics. Here’s how he opens his attack:

“Binary economics is a theory of economic growth that places emphasis upon the distribution of capital, rather than the quantity of capital or the productivity of labor. Its roots are found in the late 1950s, in the work of Louis Kelso, originator of the Employee Stock Option Plan. Regarded as a paradigm shift by its proponents, binary economics maintains that capital is productive independent of the labor input, and that most economic growth occurs as a result of capital accumulation, exclusive of increases in the knowledge or skills of humans.”

To assist Professor Terrell in understanding the paradigm shift to binary economics, he and the readers of his review can find a useful definition of terms in the glossary at http://www.cesj.org/definitions/glossary.html and in our book Capital Homesteading for Every Citizen, which is downloadable free at http://www.cesj.org.

Here are the “cluster of errors” in Terrells’s first paragraph:

1. The most glaring and obvious error of Terrell to most sophisticated readers is that Kelso invented the Employee Stock Ownership Plan, not a stock option plan. (http://www.cesj.org/definitions/glossary.html#Anchor-Employee-38762). Kelso’s tool is designed and has been applied in over 10,000 U.S. companies to finance investment by employees in new or existing stock in their company on non-recourse credit repayable with future profits. Employee stock options are tools to induce speculation in outstanding securities in the Wall Street gambling casino. Terrell’s mislabeling reveals his commitment to the Wall Street paradigm of monopoly capitalism.

2. Here’s our definition of binary economics to help the reader understand how Terrell clouds the binary economic paradigm:

Binary Economics. The “post-scarcity” theory developed by lawyer-economist Louis O. Kelso in the 1950s. “Binary” means “consisting of two parts.” [Emphasis added for the benefit of Professor Terrell] Kelso divided the factors of production into two all-inclusive categories — the human (“labor”), and the non-human (“capital”). The central tenet of binary economics is that there are two components to productive output and to income: (1) that generated by human labor, and (2) that generated by capital. Classical economic theory, on the other hand, regards all output and income to be derived from labor whose productivity is enhanced by capital.

In contrast to traditional schools of economics which assume that scarcity is inevitable, binary economics views shared abundance — sustainable economic growth and the equitable distribution of future wealth and income throughout society — as achievable. Binary economics holds that broad-based affluence and economic freedom, as opposed to financial insecurity and economic dependency for the many, is made possible through the widespread ownership of constantly improved capital instruments and social institutions to produce more and more consumable goods with less and less input and resources.

Binary economists Robert Ashford and Rodney Shakespeare identify three distinguishing concepts within binary theory — binary productiveness, the binary property right, and binary growth. These components interact and reinforce one another, allowing for maximum rates of sustainable growth within a modern, globalized economy.

Binary economics recognizes a natural synergy, as opposed to an unavoidable trade-off, between economic justice and efficiency within a global free marketplace. Rejecting pure laissez-faire assumptions, binary economics holds that a truly free and just global market requires (1) effective broad-based ownership of capital, (2) the restoration of and universalized access to the full rights of private property, (3) limited economic power of the state (whose main role should be to eliminate special privileges, monopolies and other barriers to equal participation) and (4) free and open markets for determining just wages, just prices, and just profits.

The market theory of binary economics is underpinned by three interrelated principles of economic justice:

1. Participative justice, the input principle which demands as a fundamental human right, equal opportunity for every person to contribute to the production of society’s marketable wealth both as a worker and as an owner of productive assets.

2. Distributive justice, the outtake principle which holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or “just wage”) for each particular type of human contribution to the production of marketable wealth. This principle dictates that the contribution of capital should be compensated by the “just profit” generated by the project or enterprise. (Profit is determined by the market-based rental value of contributed capital assets, or by the gross revenues resulting from market-determined “just prices” less the market-based cost of the factors of production, including labor.)

3. Harmony, the feedback principle that balances and restores participation and distribution within the economic system. This principle was referred to by Louis Kelso and Mortimer Adler as the “principle of limitation” and by others as “social justice,” as it calls for the restructuring of the economic system to restore participative and distributive justice. TOP^

Binary Growth. Within binary theory, this concept holds that economies grow steadily larger as private capital acquisition is distributed more broadly among the population on market principles. This concept also focuses on the importance of unleashing the unutilized or underutilized capacity of all economic systems to produce in greater abundance. TOP^

Binary Productiveness. This concept states that while humans contribute to economic growth through all forms of labor, capital assets such as machines and technological processes are making an even bigger, ever-increasing contribution to overall output, in relation to that contributed by human labor. TOP^

Binary Property Right. This concept refers to the right of every person to acquire, on market principles, private (individual and joint) ownership of wealth-creating capital assets. TOP^

3. Binary economics is based not on the quantity of capital, as asserted by Terrell. Rather it is based on connecting people through the institution of private property to the quality or productiveness of capital assets. As technology evolves, as visionaries like Bucky Fuller in Utopia or Oblivion and Ray Kurzweil in The Age of The Spiritual Machine, civilization continues to develop “tools” that produce more and more with less and less human energy. Kelso’s binary economics offer principles and logic of a system that would connect all humans to become owners of those tools, while respecting, in fact enhancing, property rights of existing owners.

4. The term “productivity”, particulary when defined as “labor productivity”, has been used by conventional economists like Terrell as a way of attributing the “productiveness” of technological advances (i.e., productive capital assets) to the contributions of labor. The term “productivity” is used by politicians, labor unions, Keynesian economists and advocates of the wage slave status quo as justification for redistributing capital’s productive contributions to non-owning workers and other members of society who are unemployed or underemployed. Such redistribution, however, erodes a basic traditional right of private property, where an owner is entitled to the the market-based value of that which he contributes to the production of marketable goods and services (e.ge. wages for his human inputs and/or profits for his capital inputs). One-factor (i.e., laboristic) assumptions justify artificially and coercively inflated wage rates, which inflate market prices. They also also lead to mercantilist capitalist and protectionist labor interferences with free and open markets in labor rates, based on the counter-productive goal of “protecting jobs” at the expense of American consumers, all in the name of national “full employment” rather than two-factor “full ownership” policies. Binary economists agree with such recognized geniuses in the world of technology as Fuller and Kurzweil that the relative productiveness of labor as been diminishing in the labor-capital mix as creative individuals redesign our technologies. Economists like Terrell have based their notions of distributive justice on their outmoded one-factor paradigm by ignoring this trend that has been accelerating at an exponential rate since the industrial revolution took off about the time of the American Revolution. If America had adopted a Capital Homestead Act instead of the Employment Act of 1946, the minimum wage could have remained at 25 cents an hour but workers would have been receiving more adequate and secure incomes today from dividend checks and Americans industrial jobs would never have been lost under what best-selling author calls “wage arbitrage” to low-wage workers in China, India and elsewhere in the emerging global economy.

5. While binary economists maintain that capital is “independently productive” of labor, they have never suggested that capital can operate without labor or labor without capital. Rather, in binary economics these are the two sweeping categories of input factors to the process of wealth production. They are independent variables in the productive process where each labor (i.e. human) input and each capital (i.e., non-human) input to the labor-capital mix can and should be measured and evaluated through the market mechanism for the market-disciplined, independently determined values of their labor and their capital contributions to the price of whatever goods and services are sold in the market. Obviously, all factors of production are coordinated in well-managed enterprises in an interdependent manner, but each factor can be evaluated independently. Is that too complex for an economist like Terrell to understand? Binary economics is not inconsistent with the theory of prices of Nobel Prize-winner George Stigler that I studied at Chicago.

6. Terrell alleges that binary economics argues that “most economic growth occurs as a result of capital accumulation, exclusive of increases in the knowledge or skills of humans.” This is more evidence that Professor Terrell deserves a “goose egg” for his careless reading of binary writings. I cannot believe he has ever read my paper (he cites it in his bibliography) published by the Journal of Socio-Economics, entitled “A New Look at Prices and Money: The Kelsonian Model for Achieving Rapid Growth Without Inflation”, which is available at http://www.cesj.org/binaryeconomics/price-money.html. This paper reconciles binary economic theory with Say’s Law of Markets. Terrell has the gall to cite that article in his bibliography but never tries to refute it in his paper. How could growth occur without increases in the knowledge or skills of humans? Until robots can reproduce themselves or invent technology advances with no human control, it is absurd for anyone to assert that growth can occur exclusive of human inputs. This is a straw man created by Terrell to attack a threat to his outdated wage slave paradigm.

In closing, here’s how Arthur C. Clarke characterized the four successive stages of response by academics like Professor Terrell to any new and revolutionary innovation like binary economics:

1. It’s crazy!

2. It may be possible — so what?

3. I said it was a good idea all along.

4. I thought of it first.

The Aharonov-Bohm effect, predicted in 1959, required nearly 30 years after its 1960 demonstration by Chambers until it was begrudgingly accepted. Mayer, who discovered the modern thermodynamic notion of conservation of energy related to work, was hounded and chastised so severely that he suffered a breakdown. Years later, he was lionized for the same effort Wegener, a German meteorologist, was made a laughing stock and his name became a pseudonym for “utter fool,” because he advanced the concept of continental drift in 1912. In the 1960s the evidence for continental drift became overwhelming, and today it is widely taught and part of the standard science curriculum. Gauss, the great mathematician, worked out nonlinear geometry but kept it firmly hidden for 30 years, because he knew that if he published it, his peers would destroy him. In the 1930s Goddard was ridiculed and called “moon-mad Goddard” because he predicted his rocketry would carry men to the moon. Years later when the Nazi fired V-1 and V-2 rockets against London, those rockets used the gyroscopic stabilization and many other features discovered and pioneered by Goddard. And as everyone knows, rocketry did indeed carry men to the moon. Science has a long and unsavory history of severely punishing innovation and new thinking. In the modern world such scientific suppression of innovation is uncalled-for, but it is still very much the rule rather than the exception.

Arthur C. Clarke, in “Space Drive: A Fantasy That Could Become Reality,” Nov./Dec. 1994, p. 38.

Milton Friedman in TIME magazine, in a pathetic attempt to marginalize binary economics, claimed Kelso “turned Marx upside down.” Binary economists agree with Friedman. “Own or Be Owned” is Kelso’s response both to Marx and to Friedman.

In Peace, only through Justice,
Norm Kurland
http://www.american revolutionaryparty.us

Francisco Torres March 18, 2006 at 11:30 pm

Binary economics recognizes a natural synergy, as opposed to an unavoidable trade-off, between economic justice and efficiency within a global free marketplace.

Hmm, another excersize in question-begging… What in the world is “economic justice”? Mr. Kurland merely assumes this concept exists in order to conclude a trade-off between it and a free market.

Rejecting pure laissez-faire assumptions, binary economics holds that a truly free and just global market requires (1) effective broad-based ownership of capital,

Considering capital has many manifestations, I wonder if binary economists are not really talking about wealth distribution?

(2) the restoration of and universalized access to the full rights of private property,

“Universal”, meaning, beyond the market, doesn’t it? I knew they were really talking about wealth distribution. Or theft. It is the same concept.

(3) limited economic power of the state (whose main role should be to eliminate special privileges, monopolies and other barriers to equal participation)

There is a hint of naivette in this statement.

and (4) free and open markets for determining just wages, just prices, and just profits.

In a free market, all prices are just prices. What I believe the statement above means is just according with (guess who) binary economicists, maybe on a government payrol (where else?)

RS Weir March 19, 2006 at 1:43 pm

The binary econ claim that capital becomes increasingly productive at the expense of labor productivity is flawed and begs the issue. Capital cannot be productive without labor & vice versa, and is it not labor (human action) that creates capital? Labor and capital productivity are dependent upon one another.

Greg March 19, 2006 at 6:09 pm

As a libertarian oriented person, I see merit in binary economics. And from an unexpected angle alluded toward by Norm Kurland. Traditional libertarian economic therories do not deal with how capital, or other property, is distributed from previous eras. It just assumes that the status quo is “about right” and says let the market role. That sounds good until you realize that the current distribution of much property was based on power power who had the power–usually at the point of a gun. Ask Native Americans if a free market existed a couple of hundred years ago as Europeans pushed across the continent seizing land, killing tribes, cheating tribes and individuals, and squatting, yes squatting, on tribal lands. Then one could ask if various other conquered people benefitted from a free market. I think not. Do you say: too bad, the to the victors go the spoils? That sounds primitive. With those thoughts, western Afghanistan is a libertarian paradise–warlords and all. Of course, you could argue, how would one untangle such a knot? The answer is you cannot without resorting to a tyrannical system to make it happen, then watch out for the fraud, waste and abuse! The binary recommendations for capital accounts essentially draws a line in the sand and says: we establish justice, at least in the US, now. I would not dismiss this outright as a crackpot theory.

Dan Parker March 19, 2006 at 6:37 pm

Just a few observations on the above critiques.

FT wrote: Excelent article. I was unaware of this economic theory (the so-called Binary Economics) but its basic tenets are quite absurd and silly. No wonder environmentalists and other crackpots would become fond of it.

Posted by Francisco Torres at March 17, 2006 07:40 PM

DP: Yo Franciso, how to go on showing what a valid basic tenet is. Enviromentalists are indeed crackpots. No need to go into detail about any of this, as we all know how the data can be cooked on such inanities as the lobby against lead based paint and so on.

And congrats on not wasting your time on reading up on the basic tenets of this thing, since they were so well covered by one person obviously hostile to the idea.

And good stuff by Terrell on pointing out how a lack of economic credentials of the proponents of binary economics does not automatically discredit the thesis. Terrell might have gone into more detail on why primary proponents such as Norm Kurland and Norm Bailey attempted to fake their extensive economic credentials, which they listed on the website Terrel linked to.

It would also be worthwhile to investigate those crackpot scientists who backed up the crackpot environmentists on such things as lead based paint.

Averos wrote: I think a few years of real-life entrepreneural experience must be a mandatory pre-requisite for any economics degree.

That’d clear too much of the bullshit which passes for economics nowadays – in this case, the idea of separability of capital and labor gains in productivity is an obvious kookery to anyone who did as much as run a smalltown bakery.

DP: Averos, I am an entrepreneur and and as you can see above, I am obviously hostile to binary economics. Bingo again.

One of my projects is a small self-published magazine, mailed to everyone in the small town I live in. I started out on what is essentially a glorified electronic mimeograph machine (RISO). When I went from 4 pages to 20 after a couple years, I started e-mailing my files into an offset printer in a nearby city (I am now at 32 pages). Anyways, it used to take myself and 3 helpers 4 days to print, fold and collate 4,500 copies. Now the offset printer does 5,250 full colour issues in less than an hour (17 minutes running through the actual print). Being able to afford access to this bit of capitalization led to an amazing productivity increase.

FWIW, I started the magazine because I think the mainstream press informs people about economics and other matters so poorly that they really can’t think about such matters. Villagers from the past cheering on a witch doctor, and modern comments on mainstream economics, by experts and other observers alike, really have a lot in common in my opinion. Sorry to say, this includes the Austrian school of economics, since Austrian economics does not highlight the extremely obvious instability created in a system whereby 95% of money is created as debt at compound interest; with the compounding tending towards exponentialism of course. Very simple engineering concept, known as positive or amplifying feedback

Anyways, no need to go on addressing the other equally well informed critics is there?

And please, if you miss obvious sarcasm, don’t try and cover it up by accusations of me misleading you. You’ve been misled, totally.

“In essence, the present creation of money, out
of nothing by the banking system, is similiar –
I do not hesitate to say it in order to make people
clearly realize what is at stake here – to the creation
of money by counterfeiters, so rightly condemned by law.
In concrete terms, it leads to the same results. The
only difference is that those who benefit from it are
different people.” – Maurice Allais, The Bank of Sweden
Prize in Economic Sciences in Memory of Alfred Nobel –
Laureates, p. 29, The Monetary Conditions of a
Market Economy.

Dan Parker

Binary economists to check out.

Norman A. Bailey, Ph.D.
Dr. Bailey, President of Norman A. Bailey, Inc., is a consulting economist who has worked on international economic and strategic issues for over 30 years, specializing in international debt and monetary affairs. He received his Master of International Affairs and Ph.D. from Columbia University. His clients include governments, corporations, banks, investment firms, trading companies, and consulting, law and accounting firms in four continents. While serving as president of an international investment banking firm he was appointed Professor of Political Science at the City University of New York (Queens).

In 1981 he joined the Reagan Administration as the Director of Planning and Evaluation for the National Security Council. He was later appointed Special Assistant to the President and Senior Director of International Economic Affairs at the White House. Dr. Bailey was a principal author of President Reagan’s Caribbean Basin Initiative and a major force within the White House for encouraging ESOPs in domestic and foreign economic policy, helping introduce such policy initiatives as the Capital Homestead Act and Project Economic Justice. Dr. Bailey speaks five languages and has authored five books and over 130 articles on international politics, economics and business. He served on the board of directors of the Center for Economic and Social Justice and is a senior consultant to Equity Expansion International, Inc. He is a recipient of CESJ’s Soldier of Justice Award.

Norman G. Kurland, President
Mr. Kurland is a lawyer-economist, pioneer of employee stock ownership plans (ESOPs) and a leading global advocate for “the Just Third Way,” a post-scarcity development model that transcends both capitalism and socialism by combining free markets with the democratization of economic power and capital ownership. He serves as President of the all-volunteer Center for Economic and Social Justice (CESJ), a non-profit think tank headquartered in Arlington, Virginia that he co-founded with Fr. William Ferree and other economic and social justice advocates in 1984. Mr. Kurland also founded and heads Equity Expansion International, Inc., an “investment banking firm for the have-nots,” which implements “Just Third Way” strategies around the world to turn non-owners into owners. He is a co-founder of Global Justice Movement.org (based in Canada) and the American Revolutionary Party(.US) launched in April 2005. He has taught binary economics and binary policy reforms in privatization seminars at the International Law Institute in Washington, D.C. In 1985, President Reagan appointed Mr. Kurland as deputy chairman of the bipartisan Presidential Task Force on Project Economic Justice, to promote economic democratization through ESOP reforms in Central America and the Caribbean.

averros March 20, 2006 at 12:35 am

The “binary economics” is completely demolished by the one simple mathematical notion: “linear non-separability”.

There is a very simple proof that function representing productivity of some production (p) with two arguments: quantity of labour (l) and capitalization (c) is non-separable:

In order to dig a (specific) trench we need a shovel and a laborer able to use this shovel. Neither labourer without the shovel, nor shovel without the laborer are capable of digging the trensh.

This is a perfectly realistic example, and was empirically observed over and over and over.

Output of p is the number of trenches dug, and the function p(l,c) evidently is: undefined if l or c are not 0 or 1; l*c otherwise.

l*c (l,c belong to {0,1}) is not linearly separable (i.e. cannot be repesented as sum of some functions f(l)+g(c)).

It follows that any and all deductions from separability of the set of empirically observable productivity functions (which has to include the non-separable p from the example above) are invalid.

There’s no point of arguing about merits of binary economics – it is logically dead on arrival.

One may to argue that there’s only a weak, statistical separability, and so the theory is valid only when numbers are large, but the proof of existence of such separability is totally lacking.

The problem a professional mathematican sees in even the formalized economical theories is that economists (despite some training in applying mathematical methods) commonly fail to do the most important (for a real mathematican) thing: to examine the assumptions. Any conclusion can be derived from a falsehood.

MCP2012 April 20, 2011 at 9:30 am

With all due respect, as your comment here is not without some merit, as far as it goes, it would seem to overlook (or at least severely over-discount to the point of practically completely overlooking) the capability(s) and prospect(s) of sophisticated robotics and system-wide flexible, integrated cybernation. If one has a sufficiently sophisticated, intelligent, autonomous robot, then that’s all that is, at least in-principle, required to get that trench dug, or tooth pulled or filled, or heart operation performed, for that matter. The advent of such sophisticated robotics (1) is already to a great extent upon us, and will continue to evolve/develop socio-techno-economically over the next several yrs, and (2) blurs, at least to some extent, the conceptual distinction between capital and labor. Just sayin’… ;-)

In addition to the works of Kelso and Kurland, see the work of robotics and artificial intelligence pioneer James Albus. (And of course this doesn’t even take into account to eventual attainment of full-blown nanotechnology.) See also the work of: Hans Moravec, J. Storrs Hall, and the late Christopher Evans.


Your friendly neighborhood anarchist-cum-Kelsonian/Albusian-Hayekian (with a not-inconsiderable amount of Bucky Fuller, Murray Bookchin, Jacque Fresco, and F.M. Esfandiary thrown into the mix as well…just for good measure) ;-)

averros March 20, 2006 at 1:03 am

Dan Parker wrote:
One of my projects is a small self-published magazine, mailed to everyone in the small town I live in. I started out on what is essentially a glorified electronic mimeograph machine (RISO). When I went from 4 pages to 20 after a couple years, I started e-mailing my files into an offset printer in a nearby city (I am now at 32 pages). Anyways, it used to take myself and 3 helpers 4 days to print, fold and collate 4,500 copies. Now the offset printer does 5,250 full colour issues in less than an hour (17 minutes running through the actual print). Being able to afford access to this bit of capitalization led to an amazing productivity increase.
Besides new equipment and software (which are capital) you needed expertise to actually use them, and to spend some time installing and configuring them.

That’s labor, and it is not separated from the capital in the example above.

I think the problem with labour-input analysis is generally that it assumes only a lump (undifferentiated man-hours) or broadly-defined categories.

Instead, the capital (in terms of real goods) and labour are always in lock-step. To use some kind of capital you need matching kind of labour.

So, if there are no idle excesses of capital or labor, they’re always matching 1:1. If you need to increase one, you need to increase another.

Now, two different kinds of capital can be used to produce the same kind of output – but the labour required is different. In some cases the difference is minor enough that the same person can produce different labour, and in this case it looks like “just adding capital” increases output.

But even a cursory familiarity with any real-life production illuminates the fact that dramatical increases in productivity require dramatically different kinds of labor. Robot programmers instead of assembly-line workers. Backhoe operators instead of unskilled laborers. Typists instead of scribes.

Thus, speaking about lumped-together quantity of labour at the input is absolutely meaningless, as it misses that the labor is differentiated by education – and so misses the whole labor and capital expenditures needed to acquire that education. A robot programmer may write a right program for the robot to displace a dozen of workers – but he had to spend years in the college to learn programming first. And that involved such inputs as capital (building, computers, etc) and labor (teachers). The capital cost of the robot itself is trivial compared to the cost of acquiring right skills.

MCP2012 April 20, 2011 at 9:45 am

In addition to my comment on your comment immediately above, we should note that robots are already to a partial extent self-programming and self-correcting, which is to say that much of their programming is evolved during a process of exploring and learning about their environment(s) and circumstance(s). We need a political economic theory of sophisticated A.I., and yet we have little in this regard (and darn-near zero from the “Austrians”…)

Many if not most jobs could already, with off-the-shelf tech, be either themselves cybernated or utterly obviated. (By which I mean that many if not most jobs, including some ‘professions’, could in principle already go the way of the human elevator-operator; but our current socio-economic institutions, admittedly far from “kosher” by “Austrian” standards, to be sure, can’t really cope effectively with such techno-economic implications—which is precisely why capital (i.e., robot) ownership **diffusion** is arguably so important, if not imperative. Yet we arguably also run into current-techno-economic path-dependency problems—not even to mention, let alone, the egregious problems caused by the central-banking cartel.) All this goes way, way beyond anything even remotely dreamed-of (much less seriously contemplated and dealt-with) by Mises and/or Hayek (and, at least in some respects, leaves Hayek’s “Ricardo Effect” analysis, for example, not so much “in the dust” as it were, but merely superfluous. Just sayin’… ;-)

curious george March 20, 2006 at 1:51 am

Question: Is Binary economics a theory of how people deal with scarcity or something abstract? Or is it a theory of how to make people happy (“society better off through government policies) ? If it is the latter, then I have another question.

What happens if someone (like myself) does not want to participate in this thing called Binary Economics?

When someone argues against a libertarian or advocates a “new” economic/government system they can never win. A libertarian only does things voluntarily, but when someone advocates a new system they can never get past the question of what happens to people who don’t want to participate. And from what I gather Binary Economics is a “new” economic/government system to make people “better off”.

MCP2012 April 20, 2011 at 10:02 am

I very, very much empathize (if not, indeed, sympathize, with what you say. But there are various other “curious” issues lurking in the background. How ’bout restitutional redistributive justice? Even Nozick (the ASU Nozick, anyway) conceded that restitutional/rectificatory justice is a rather thorny issue. Yet Nozick didn’t have much to say about it, at least not in detailed prescription (cf. the discussion of this in Jonathan Wolff, *Robert Nozick*). James J. Sadowsky came close to the precipice in an essay appearing in the anthology, *Property in a Humane Economy* (the title of which I can’t recall…sorry), but then shied-away from really delving into this issue. Arguably, each American household has been ripped-off (through inflation, fraudulent misadministration of the income tax, regulation, etc.) to the tune of at least hundreds-of-thousands of dollars (especially in terms of today’s inflated-joke-of-a-dollar), if not not indeed millions. A broadly Kelsonian (or, at least in some respects, quasi-Kelsonian) approach may or may not be the best approach toward a just (i.e., broadly Barnettian restitutional) REdistribution of wealth, but at least it starts-up the conversation for this issue… just sayin’


Lambert Simnel March 20, 2006 at 8:32 am

From the article and various comments posted concerning binary economics, I am not convinced that it should be classified as “crackpot.”

First, of course, the detractors seem much more concerned with being clever than accurate — the old “Harold Hill” approach: “If you can’t dazzle ‘em with your dexterity, baffle ‘em with your bullshit.”

Second, I don’t see where those individuals opposed to binary economics have gone to a primary source, and rely on a series of misstatements from an obviously hostile witness to form their opinions.

Third, the comment by Averros bothers me. Being somewhat familiar with algebra, calculus and analytic geometry, I am acquainted with the concept of multiple independent variables in an equation. You cannot have a linear equation without two independent variables; they must each have a discrete identity, although they combine to form a single linear relationship. The “contribution” of each variable is clearly defined in the equation. Similarly, “labor” and “capital” are independent variables in the “production equation.” As independent variables they each have a clearly defined and discrete contribution to make to the end result — the linear production relationship. Nothing would be produced without both labor and capital, but how they combine and in what proportion differs from industry to industry, from company to company, and changes radically as technology (capital) advances.

Fourth, a number of comments draw premises from out of thin air. Curious George, for example, asks two questions — which he then proceeds to answer and draw conclusions without having any data on which to base his answer. It is pure speculation.

Finally, there seems to be a substantial level of discomfort with the idea of “justice.” Perhaps this is rooted in a tacit acceptance of Ayn Rand’s concept that selfishness, not justice, is the highest temporal virtue. The definition of justice is “suum cuique,” “To each his own,” while selfishness looks only to one’s self. Ultimately, positing selfishness as the highest virtue, might makes right, thereby obviating all choice for everyone except the strongest … and then only so long as he does not turn his back on the weak, lest they organize, become thereby stronger, and destroy him.

Binary economics, on the other hand, is based on the inherent dignity of each human being — an assumption that everyone has an analogous capacity to acquire and develop virtue. To support each individual’s acquisition and development of virtue, each person must have the right to acquire and possess private property, together with meaningful access to the means of becoming an owner. As such, binary economics deserves much more than a shallow “publish or perish” article by a desperate academic who doesn’t bother to get basic facts correct, or flip comments made to justify an ill-considered or thoughtless comment.

Paul Marks March 20, 2006 at 8:43 am

The reason stuff like this is popular is because people see an economy where there is little saving going on – but which seem to be prospering.

It is not even a denial of the importance of capital goods – it is the believe that not consuming (i.e. real savings) is not needed in order to finance investment.

Credit bubbles can take the place of real savings – accept, of course, they can not (credit bubble booms lead to busts).

As for “economic justice” this is leaving economics and going into ethics – but let us go there.

“Justice” is “hands off”. It is not some “distribution” of income or wealth.

It is not just for a poor man to steal from a rich man – and it is not just for someone else (such as a President or the majority of the Senate or House of Representatives) to steal from rich people to give to poor people.

By the way it ALSO causes economic damage (not economic gain).

Justice is a “cold” virtue, it is not about “charity” or “compassion”. Someone may argue that Justice is an overated virtue (or even not a virtue at all). But it is not acceptable to take the WORD justice and use it to mean the opposite of what it means.

The fact that many philiosphers have done this (from Plato to John Rawls) does not stop it being wrong.

What is mine is mine and what is yours is yours. It would be nice for rich people to give money to me (a poor person), but it is not “justice”, “economic” or otherwise (the usual prefix is “social” rather than “economic” anyway – no less absurd, but let us keep the language straight).

As for using force or the threat of force (taxation – i.e. extortion)to MAKE rich people give me money, this is an obvious example of INJUSTICE not JUSTICE.

Paul Marks March 20, 2006 at 8:46 am

“belief” not “believe” of course.

No doubt my wonderful typing has shown itself in other ways.

Brian Drum March 20, 2006 at 9:07 am

Is not trivially simple for any person, if he/she so pleases, to become an owner of capital?? All that is required is to SAVE. Wow, as if by magic, the person is now a ‘capitalist’! It’s a miracle! But wait, what happens if they save again??? They have EVEN MORE CAPITAL!! I am always amazed to witness the extent to which people will go to try to avoid/deny such a fundamentally simple concept.

Lambert Simnel March 20, 2006 at 10:32 am

Ironically, the above postings are precisely what I was talking about; quod erat demonstrandum. While anyone is free to state his opinion, when he begins stating what other people have said, he really should go to the original source and make certain that they actually said it. An unwillingness to read the original sources suggests an unwillingness to assume the responsibilities of being an adult.

Further, I find certain of the comments contradict what I always assumed was a pillar of libertarianism, id est, that private property is a natural right. What I see is an essential misunderstanding of the institution of private property, as well as the derivative institutions of money and credit.

Actually reading two sources would be extremely useful before further pontifications or declarations of infallibility are posted.

Regarding the necessity of saving before investing, the 1935 classic THE FORMATION OF CAPITAL by Dr. Harold G. Moulton is extremely interesting in its analysis of how capital is financed. I believe that Moulton’s book called forth Lord Keynes’ 1936 GENERAL THEORY, his near-hysterical attack on classical economics.

With respect to private property, Louis Kelso’s article, “Karl Marx, the Almost-Capitalist,” makes for interesting reading. It can be found at, http://www.cesj.org/thirdway/almostcapitalist.htm

Paul Marks March 20, 2006 at 11:17 am

Some libertarians believe in “natural rights” or “natural law” and some do not (they are utilitarians or whatever)

But no libertarian believes being GIVEN property is a natural right.

And more than health care or education are “natural rights”.

Some people are born rich and some people (such as me)are born poor.

It would be nice if some rich person (or several rich people) gave me lots of money – but I have no “right” to it.

As for Karl Marx – the five chapters in the first Volume of Murry Rothbard’s “An Austrian Perspective on the History of Economic Thought” are a good examination of his thought.

Oddly enough the binary economics people might like part of Rothbard’s thought – the Lockian theory of property (not to be confused with a Labour Theory of Value – which neither Rothbard or Locke supported).

To Rothbard, to rightfully own something one must mix one’s labour with it (or inherit it or buy it, or whatever, from someone who has done – or got from…….).

This is one of the (many) parts of Rothbard’s thought that I take issue with.

I see no reason why I have to cut down trees in order to own them.

If I had the money to buy an area of virgin rain forest it would be mine – regardless of whether I or anybody else mixed their labour with it.

There should be no need to destroy a thing in order to own it.

Rightful occupation is enough for original ownership – and the occupyers can sell.

Of course even theft (in the distant past) does not invalidate title. If I own a house it does not matter that my distant kinsman stole the land it is built on in the year 1170 (or some such date) – I did not steal the land, and the original owners are long dead (so the land is mine).

Not that I own any land (or house) of course – but there we go.

Paul Marks March 20, 2006 at 11:20 am

“Any more” not “And more” – and no doubt other stuff.

Anybody what my dyslexia and dyspraxia as a present?

Lambert Simnel March 20, 2006 at 11:21 am

Eheu, fugaces, o tempora, o mores. Verbum sapienti: tolle lege, tolle lege.

Paul Marks March 20, 2006 at 11:30 am

Oh no Lambert is hitting us with Latin – so he must be right.

Seriously I should have learned Latin – I found some blue books in my old school (in a decayed corner of a library) and they had Latin on one page and English on the facing page.

I also found some green books (Greek on one side, English on the facing page).

I was so proud of myself for reading these books (the thinkers of the Classical World) – it did not occur to me that I was a arsehole (because, of course, I could have used them to teach me some Latin and Greek when my brain was still young enough for such work).

I went to a government school, which meant that I had to fine an old lady in a village near me to help me learn to read in the first place (Mrs Williams was her name).

But I could have done a lot more for myself than I did.

Paul Marks March 20, 2006 at 11:34 am

“an” not “a”, “find” not “fine”.

Preview things before you send them Paul.

Yancey Ward March 20, 2006 at 11:42 am

If I understand the binarists ideas, then they are fundamentally at odds with libertarianism.

As Brian Drum has pointed out, it is already possible for anyone to accumulate capital by the simple act of saving.

If the binarists are to be believed, then why not simply redistribute capital by force? The method outlined in the binarist’s own paper is essentially theft through the process of inflation- those without obtain first use of new money, buying capital from those with before the money’s value is decreased. Why the subterfuge when direct appropriation accomplishes exactly the same result?

Also, on reading some of the available on-line material referenced by Terrell, it is clear that his analysis of it is quite thorough. Indeed, once the redistribution of capital is complete, the only means of maintaining the equality is through coercive government action. Since people will differ on their utilization of their capital stock (some will do so profitably, while others will not), will still differ on the value their labor inputs (hours worked, output produced, etc.), then it is clear that some will not only consume more than others, but do so while at the same time accumulating more capital than others-again leading to inequality in the long run. The only way around this reality is government coercion- the taking of any excess income above what will have to be an arbitrary designated level of consumption. This is not libertarian, and it certainly does not respect property rights, regardless of what it’s defenders assert.

Greg March 20, 2006 at 11:43 am

So, if my buddies and I come in and shoot and kill people and seize their land, destroy any means of resistence, then we start to build a city for “our people” since I have now mixed my labor with the land, it is now mine. Correct? Too bad sucker!! At least until the next group comes along, kills us, runs the survivors off the land, destroys any resistence, and builds their city…My main claim to control is if I can hold out for a long enough period of time. Are you saying history doesn’t matter?

May the strongest dog, or group of dogs, win??

Brian Drum March 20, 2006 at 11:52 am

If I had the money to buy an area of virgin rain forest it would be mine – regardless of whether I or anybody else mixed their labour with it.

Who would you buy it from Paul? If it is not owned then why are you paying for it? Why not just issue a decree and say it is yours?? Someone, somewhere has got to do something with it before it can be called property. And no this doesn’t mean you have to chop it down. Surely a native living in the rainforest has a just property claim to the land on which he lives.

Curious George March 20, 2006 at 12:07 pm

Curious George does not ask questions that he already knows the answer to. My question was whether Binary Economics is a GOVERNMENT POLICY or not. This is a very important question.

Curious George thinks it is a government policy, hence, if it is implemented then it must be ENFORCED. So, regardless of whatever merit this theory has, it is completely voided by the fact that people must be coerced into participating. If this were not the case then people would voluntarily be doing this already and we would have no need to even discuss this matter, other than as an academic exercise.

PS I apologize for the run on sentences. Also, I agree with the other points about savings, but I thought these points should be made as well.

Paul Marks March 20, 2006 at 12:26 pm

Oh come on now people.

You know I did not say that if I stole something it was mine – I said that if I inherited property (which I have NOT by the way) that people had stolen centuries ago, it was still mine (“historical usurpation” I believe is the Roman law term).

If you think I am wrong then off you go and find some Indian tribes to give your land to.

As for the Virgin rain forest – remember I said that rightful occupyers had the ownership (and the right to sell).

I though it was supposed to be me who had the defects – not you people.

As a matter of fact a British person just bought a lot of land in Brazil for the express purpose of preserving it – are you saying that if does not cut down the trees he does not own the land? Some loggers would like that view of property law, but……

As for the binary economics people. Well without going to the orginal source (life is too short for this forty year old – so I suppose I am not an “adult” or at least not accepting “adult reponsibilities”), I guess they are saying that it tends to be less difficult for a rich man to save than a poor man.

Of course the rich man may have more responsibilities than the poor man (one reason that it is not practical to objectively compare the utility of two different people, but let us say that I accept that (for the sake of argument).


So some people have more money AND some people find it less difficult to save than others.

Again – SO WHAT?

Life is not “fair”. And efforts (by government) to make it “fair”, just make things worse.

If you think that you know some talented person who would make better use of your inherited property than you do – then give it to them. Do not give government the power to play games (the results are not good).

Paul Marks March 20, 2006 at 12:34 pm

In case I have still not made myself clear – YES the “rightful occupyers” in the areas of the Rain Forest that have Indians are the Indians.

I can see some typing mistakes above – but I am not going list them.

Lamber Simnel (a.k.a., John Gault II) March 20, 2006 at 12:39 pm

The art of missing the point has achieved a new low, unfortunately. I don’t see where a single point made by the proponents of binary economics has been answered with anything other than glib catch phrases or hasty generalizations — by individuals who insist that they don’t have to know what someone actually said before presumably refuting it! Evidently I shall have to rethink my position on Libertarianism, or at least the rather flaccid and anti-intellectual support for it offered here.

Brian Drum March 20, 2006 at 1:30 pm

As a matter of fact a British person just bought a lot of land in Brazil for the express purpose of preserving it – are you saying that if does not cut down the trees he does not own the land? Some loggers would like that view of property law, but……

But who did he buy it from? The government of Brazil?? But how can the government of Brazil claim ownership of hunderds of thousands of acres of the land, many of which no human has probably ever set foot on. Is this not the same as selling parts of the moon??

Francisco Torres March 20, 2006 at 2:16 pm

The art of missing the point has achieved a new low, unfortunately.

Looking at statements such as the following, I wonder who is missing the point here:

To support each individual’s acquisition and development of virtue, each person must have the right to acquire and possess private property, together with meaningful access to the means of becoming an owner.

Exactly what is “development of virtue”, and what does that have to do with adquiring property? And what is a “meaningful” access to the means of becoming an owner? Doesn’t the market already provide a person with valid means to adquire things?

This is why my comments went to the point: binary economicists are simply justifying expropiation, so people can develop “dignity”, or “virtue” as you put it. THAT is the point.

Lambert Simnel March 20, 2006 at 2:27 pm

Alas, Mr. Torres, you will not find one word in binary economics advocating or justifying expropriation in any form. You are, alas, alack, missing the point by raising a straw man. Again, it would be beneficial to read what binary economists actually say rather than assume that you already know when you clearly do not.

Brian Drum March 20, 2006 at 2:28 pm

binary economicists are simply justifying expropiation

Or more strongly: trying to justify expropriation.

a la Hoppe, any attempt at such justification is demonstratably doomed to failure, or in other words: impossible.

Yancey Ward March 20, 2006 at 2:38 pm

“Expropriation”, ah, there is the word I was looking for!

Yancey Ward March 20, 2006 at 2:45 pm

Lambert Simnel,

It is you and the earlier Binarists who have not advanced arguments on this forum. The earlier counters to Terrell’s essay consisted of pointing out that he thought the theory ridiculous and so couldn’t be considered.

You wrote that the Binarists don’t advocate expropriation. Really? Then how are they going equitably distribute capital? What if a large capital owner refuses to sell his capital in return for the government created financing, preferring, instead, to collect its future income and to leave it to his heirs? How are they going to insure that inequality doesn’t reemerge due to the inequitable distribution of human talent and skills?

Lambert Simnel March 20, 2006 at 2:51 pm

Hmm? Mr. Ward, your questions are answered in full in the cites given. If you would take the time to read the material before offering comments on it, you would discover that your objections and questions are answered in full. For example, you appear to insist that binary economics is based on confiscation and redistribution of existing wealth. This is untrue. I cannot “prove” this by citing Prof. Terrell’s paper, however, because he got his alleged facts wrong. Please go to the original sources and find out what proponents of binary economics actually say, not what you think they say. Don’t you think that’s fair?

Brian Drum March 20, 2006 at 3:01 pm

Here are two quotes from a brief perusal of the ‘masterful’ call to revolution: The Capitalist Manifesto. I’m not sure how these statements can be reconciled with a right to property. Right to property means that my justly acquired property can NOT be taken away by force. It does not mean that I am entitled to a share of someone else’s property becasue in my opinion they have more than they ‘need’. So it is a negative right. I right to KEEP not a right to receive (or really, STEAL).

Through preventing men from adding an increment to their income which they do not need, by doing subsistence work where their doing so would deprive others of their only opportunity to participate in the production of wealth, government can drive home a truth that all men in industrial societies must learn. Kelso “The Capitalist Manifesto” p221-222

Yes, yes. Men must be prevented for adding to their income because it would be more than they “need”. So this is what binary ‘economists’ mean by property rights. You can have as much as we say you can have. Now I get it.


Since everyone has a right to property in the means of production sufficient for earning a living, no one has a right to so extensive an ownership of the means of production that it excludes others from the opportunity to participate in production to an extent capable of earning for themselves a viable income; and, consequently, the ownership of productive property by an individual or household must not be allowed to increase to the point where it can injure others by excluding them from the opportunity to earn a viable income.

Kelso, Capitalist Manifesto p68

Here again we have the joys of Kelsoian expropriation. Yes, yes. Everyone needs the same amount of ‘capital’. No more, no less. Why would anyone not want to live in the ant colony world of equality enforced by the barrel of a gun?

Brian Drum March 20, 2006 at 3:07 pm

And also,

It should be the policy of a completely capitalistic society to encourage the acquisition of viable capital holdings by a maximum number of households, but at the same time to discourage capital holdings from growing to monopolistic
size. Consequently, it would seem essential that this policy be reflected in the establishment of personal income tax rates. Graduated rates might be designed to rise steeply at the point where any increase in income would represent a monopolistic capital holding.
Kelso, CM p222

Now come on. Income taxes are simply and unequivocally a form of expropriation. Taking what is not yours by force is S-T-E-A-L-I-N-G! At least call it what it is.

Greg March 20, 2006 at 4:56 pm

Here is one of the problems. Government has already stuck its grubby paws into the affairs of humanity. To claim that any action by a given government is now and today aggression is to fail to recognize that government has, since the cave days, contaminated the situation. Government now sets the rules of the game including rules on capital and labor. Those rules are set by those with enough power to control the system and they spend a great deal of money and energy to make sure they hold on to it. “He who controls the spice, controls the Universe!” (Sorry, I had to say that) Could it be that: They who control capital, control…well (fill in the blank)? Some might say that there is no group who controls the society. Yes, they do, they are Rs and Ds. Binary economics could be a way to address a matter we have been unable, or unwilling to address. We, especially in the West, tend to assume that market forces have been the principle forces at play for a very long time. One need only look to our southern neighbor to see a crass example of power by those who can grab and keep it.

ns March 20, 2006 at 4:57 pm

Q to Brian Drum:

Suppose, I would like to acquire title to a piece of desert land (currently unowned), with an openly annonced goal of speclation: I expect a new road will be built close to my lot, and I will sell it for a profit.

Which of the following would give me a legitimate title:

- flying a helicopter over the land ?
- spraying the land with water (from the said helicopter)? Do I need to spray it once or once per year? And what’s the minimal amount of water required?
- planting a tree and claiming title to all currently unowned land within 1 mile from the tree? Planting 3 trees and claiming title to all land within the triange?
- surrounding the land with a fence? with landmines? protecting it with some other device (a robot), without actually doing any work on the land?
- paying an architect to prepare a project of a house to be built on the land? (note: without actually intending to build the house)
- pubishing a postcard with a photo of the land?
- or- once I’ve announced the land if for speculation, not use, I can’t get any title?

I’m not trolling, just really trying to understand – what’s the minimal amount of labor that needs to be mixed with a virgin land in order to acquire a title?

And does the intent matter, according to the libertarian tradition?

Norm March 20, 2006 at 5:55 pm

Terrell assumes that accumulated savings is necessary for non-owners to become owners of new or transferred capital assets. In other words, there is no taking away of property rights of current owners of their existing assets. Terrell demonstrates that he knows little about banking theory or credit. I don’t mind if I’m not understood. I do mind if I’m misunderstood, especially by closed-minded people. Here’s an excerpt from a paper on money at http://www.cesj.org for open-minded libertarians to read to gain a better understanding of binary economics:

What is Money?

The money and credit creation process is not as mysterious as most people assume. To understand it, we must first ask the question, “What is money?” Economists have traditionally answered that it is: (1) a medium of exchange, (2) a store of value, (3) a standard of value, and (4) a common measure of value. As a lawyer-economist concerned with the impact of contracts and property on the economic system, Louis Kelso delved even further into the nature of money.

Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. (Two-Factor Theory: The Economics of Reality, Louis O. Kelso and Patricia Hetter, Random House, 1967, p. 54.)

The process of money creation using a central bank (such as our Federal Reserve System) is neither mysterious nor occult. The system was designed to allow the creation or destruction of money as needed by the economy, so that there would never be too little (resulting in deflation) or too much (causing inflation).

* * * * * *

“Pure Credit”: An Untapped Source of Low-Interest Credit to Build Market Power into Consumers Based on Broadened Ownership of New Capital

“Where will the money come from?” is a common reaction to those encountering the Kelsonian theories for the first time. For example, according to the Economic Report of the President, the United States economy adds about US $2 trillion annually in new productive assets, structures and infrastructure in both the private sector and the public sector. This amounts to about US $7,000 annually per man, woman and child in America. None of this need be owned by government. As things now stand, this economic growth is financed each year on the most part in ways that create no new owners. (See statistics at This is the ultimate in anti-democratic finance.

The temptation for a transforming economy, faced with the need for reform and restructuring, is simply to copy the economic structures and policies of the United States. While the economy of the United States has been very successful in comparison with many others in the world, merely copying America’s current system would be a serious mistake. The United States is based on democratic political principles, yet the economic principles embodied in the American welfare state today have features that act un-democratically to exclude people from full participation in economic life.

The question transforming economies face is, “How can we finance our future capital needs through inclusionary techniques, that is, in ways that expand the role of the private sector, and enable ordinary citizens to accumulate enough savings to purchase growth capital and gain the right to share profits as owners?” The answer is “pure credit.” “Pure credit” is a civilized society’s ultimate weapon in the war against unjust concentrations of wealth and economic power. This power already exists, at least in principle, in the hands of the directors of any country’s central bank. Pure credit is only waiting to be used for meeting the country’s projected capital needs and for democratizing the ownership base of the new economy in the process.

“Pure credit” is based upon the legal concept of “promise” and the enforceability of contracts, two main ingredients of a free and orderly economy. Pure credit is nothing more than the power of people (including legal associations of people, like corporations) to contract freely with one another under a system of law which enables everyone affected by the contract to enforce his rights and claims over property under the contract. It involves elements of volition as well as control. It is limited only to the extent that people, their associations, and government itself make promises they cannot keep. Since promise is the “glue” that holds society together and determines how confidently people view the future, the making and breaking of promises determines whether that society is strong or weak, orderly or disorderly, growing or disintegrating.

Credit is a social phenomenon. Control over money and capital credit will determine the nature and quality of a country’s future industrial frontier as well as its future ownership distribution patterns. Because credit is so essential to participation in a free market economy and to the acquisition of private property, a denial of capital credit amounts to a denial of one of the most fundamental of human rights, the right to own and accumulate private property.

In a society where the ownership of productive capital is so crucial to freedom and human happiness, discriminating among citizens as to who has access to capital credit constitutes as gross a violation of equal protection of the laws as discrimination in access to the ballot. Capitalist countries provide capital credit to the rich and ever more burdensome consumer credit to propertyless workers. Transforming and developing economies have the opportunity to reverse this situation and, in the process, become more democratic than the plutocratic Western “democracies”!

How credit is used, to whom it is made available, and the purposes for which it is used, are proper subjects of governmental policy. The “social costs” of maintaining an efficient credit system – for example, interest charges on commercial bank credit – and who will pay those costs, are also legitimate subjects of governmental regulation.

When the “full faith and credit” of a government stands behind the nation’s currency and the demand deposits in the commercial banking system, this involves “pure credit” in the ultimate sense. The central bank, one of society’s most important social technologies, by controlling the total volume of currency and commercial bank credit needed to facilitate economic transactions, controls the direction of private enterprise. The central bank also has the power to be “lender of last resort” in many situations, if that becomes necessary.

When the central bank, as an instrument of government, misuses its money-creating powers, inflation results, and there occurs a breach of one of government’s most important “promises” to its citizens, that the value of the currency will remain constant. When government does not keep this basic promise to its people, debts are jeopardized, property is arbitrarily redistributed among debtors and creditors, and the other promises that hold society together become difficult to keep. “Trust” is gone. As one nineteenth century economist observed:

Confidence and credit are only moral elements in society; they may be said to be, to a great extent, mere matters of opinion; yet their importance in the production and distribution of wealth is so great, that the whole machinery of material production is kept at work, disordered, or paralyzed, according as these principles act in a healthy manner, irregularly, or not at all. [I]f credit and confidence should be from any cause destroyed, all these resources seem to have lost their virtue, and general distress prevails. Let confidence and credit be restored, and the whole system is immediately set in motion again, and in a very short time general prosperity returns.

If they are the source of the problem, government and the central bank – government’s main instrumentality for controlling the costs and volume of “pure credit” extended through the commercial banking system – are also the source of the solution to economic inequities. The central bank can play the central role in restructuring future ownership patterns of the economy, while leaving the actual allocation of credit in the hands of commercial bankers.

In The Formation of Capital, Harold G. Moulton, former president of The Brookings Institution in Washington, DC, laid the theoretical foundation for Kelsonian “pure credit” monetary policies. Dr. Moulton pointed out that economic growth did not have to depend exclusively on past accumulations of savings, and that there need not be a tradeoff between expanded consumption and expanded investment. Dr. Moulton pointed out that demand for capital goods is a derived demand, that it is derived from demand for consumer goods, and the latter depends on consumption incomes.

Hence, concluded Dr. Moulton, forcing people to reduce their consumption to purchase new capital assets was counter-productive – it reduced the viability of that investment and other investments, which ultimately depend on consumer demand. He then posed the question, “Where could funds be procured for capital purposes if consumption was expanding, and savings declining?” Most economists assert there can be no growth without savings, that is, unless consumption is reduced. Dr. Moulton answered his own question by stating that funds to finance the formation of capital could be obtained

From commercial bank credit expansion. Such expansion relieves the possibility of shortage in the ‘money market’ and enables business enterprises to assemble the labor and materials necessary for the construction of additional plant and equipment.

The real limits to expanded bank credit, Dr. Moulton added, were physical ones: unused capital resources and raw materials, an unemployed work force, unutilized plant capacity, and ready markets for new capital goods and new consumer goods. His study of one of the fastest growth periods of American economic history, 1865 to 1895, revealed that bank reserve requirements remained relatively constant, while the volume of commercial bank credit outstanding rose substantially. At the same time, price levels actually declined for the period by about 65%.

Dr. Moulton also demonstrated that, even in periods of great business activity, productive energies are normally underutilized; there is always some slack in the system. Dr. Moulton proved that there can be rapid growth without inflation. Yet by keeping to established economic paradigms, an economy can experience rising prices alongside recession, as was graphically demonstrated in the American economy in 1974. Dr. Moulton’s conclusion is worth noting:

[T]he expansion of capital occurs only when the output of consumption goods is also expanding; andthis is made possible by the [simultaneous] expansion of credit for production purposes.

Unfortunately, Dr. Moulton failed to carry the connection between expanded bank credit and expanded capital creation to the next logical step: the expansion of the base of capital ownership and capital income distributions as a new, more direct, and more efficient source of mass buying power to absorb future outputs of final consumption goods. Louis Kelso fortunately picked up where Harold Moulton left off, giving transforming economies the opportunity to start their new structures off in the right direction from the very beginning.

averros March 20, 2006 at 6:04 pm

Lambert –

First, of course, the detractors seem much more concerned with being clever than accurate — the old “Harold Hill” approach: “If you can’t dazzle ‘em with your dexterity, baffle ‘em with your bullshit.”

Let me restate it: you cannot find valid counterarguments to what the “detractors” (already an emotionally-charged label) say, so you resort to the plain old ad hominem.

I advanced an argument for the fundamental logical inconsistency of the Binary Economics theory. You may refute it by finding where exactly it is wrong (and then I may either agree that I was mistaken, or try to address the deficiency). If you cannot find any gap in the logic of my argument, then you have no other choice but to accept it, at least provisionally, if you have any intellectual honesty.

(And, no, independence of variables is not the same as separability, sorry, take a look in any decent book on calculus).

ns March 20, 2006 at 6:22 pm

< >

The prices of computers (in dollars) goes steadily down during the last 10 years – deflation!
The price of oil goes up – inflation!
Any measure of (de/in)flation depends on the (arbitrary) weights of these prices.

That is, either:
- The system is broken
- There is simultaneously too much and too little money
- Words inflation and deflation do not make sense
- The economy does not care, and the purpose of the system is something else.

ns March 20, 2006 at 6:23 pm

My prev post started with this quote:

The process of money creation using a central bank (such as our Federal Reserve System) is neither mysterious nor occult. The system was designed to allow the creation or destruction of money as needed by the economy, so that there would never be too little (resulting in deflation) or too much (causing inflation).

Paul Edwards March 21, 2006 at 12:34 am


Great quotes! I think they sum it up: Kelso’s theory is a weird variation of socialism with a fascist flavor under a pretense of free market advocacy. Kelso’s following comments really give it away:

“Through preventing men from adding an increment to their income which they do not need…”,

“government can drive home a truth that all men in industrial societies must learn…”,

as well as

“the ownership of productive property by an individual or household must not be allowed to increase to the point where it can injure others…”

and finally

“it would seem essential that this policy be reflected in the establishment of personal income tax rates.”

all clinch it. It is statist to the core, anti-free market, egalitarian and given its inherent meddling in the market and government’s mandate to drive home truth to all men of industrial society, would seem to be ripe to spawn fascism. Yuk.

Lambert Simnel March 21, 2006 at 6:21 am

I think I see the basic problem here. Superficially simply a matter of mere semantics, it goes much deeper. There appears to be a rejection of the idea of the common good — that there is some “good” that all human beings have in common that define us as human. The word “common” itself is instantly re-defined as “collective,” and “collective” as “socialist.” In essence, there is an implicit denial of Aristotle’s claim that “man is a political animal.” All institutions — including language and private property — become purely subjective, and suffer re-definition at will, there being nothing common to which to “anchor” meaning itself.

Nevertheless, the fact of institutions is rooted in human nature. Human choice (or lack thereof) results in the structuring of specific institutions. How an institution is structured, however, must reflect a respect for essential human nature — natural law. Otherwise, that particular institution will promote or acquiesce in behavior or social conditions that inhibit or prevent moral behavior and development on the part of the individual human beings within that institutions, and from there to the surrounding society. That is, flawed institutions undermine the social order, and prevent or inhibit individuals from acting in a manner consistent with their own human nature.

Rejecting the idea of the common good, or even any good common to all humanity, such as language, means that the one rejecting the concept will lack the tools to undertand what any other human being says. A case in point are the quotes given above. Any reference to a proper role of government is taken as fascism; any mention of an institution is understood as socialism. Not agreeing on the meaning of words or concepts, there is no basis for communication; words become mere meaningless sounds or non-symbols.

In short, nothing I could write will convince anyone of anything if, as demonstrated above, my words and those of the proponents of binary economics are instantly re-defined to mean whatever the listener or reader chooses them to mean.

Brian Drum March 21, 2006 at 8:01 am


You’re second paragraph is exactly right. However, the policy that Kelso is recommending stands in opposition to human nature and natural law. There is no ‘common good’. Who would decide what it was? Values are subjective to the individual. The collective/society/blob is not a moral agent. It is not a real being and thus has so essence. It can not have values or make choices.

By advocating the limitation by force of an individual’s amount of property, or stealing such property via taxation you are advocating institutionalized expropriation. In order to maintain that this respects property rights, you are the one that must redefine property rights.

The exercise of control, maintained by force or the threat of force, over an individual and/or their property by a late-comer/non-owner is, by definition, socialistic. I maintain that there is no proper role for aggression in society, so yes, any reference to such a role will be considered an appeal to socialism.

You seem to be unwilling to offer any arguments or defend ‘binary economics’ in anyway, other than simply offering citations. Please understand that you are writing on libertarian blog. Would you not suspect for people to be hostile to your calls for state enforcement of property limits, redistribution via inflation, and punative taxation??

Now I am sure that your response will be something along the lines of that I have redefined all kinds of terms, etc., and that I am misunderstanding Kelso and should consult some citations that you will provide. Well, the thing is I did look at Kelso. I provided several quotes from his call to revolution. You have not offered one ounce of argument to support his scheme, but have instead waved your hands and stated that I don’t understand.

In closing I will offer you some of your own medicine. Please refer to the following sources:

And thousands more here.

Yancey Ward March 21, 2006 at 9:00 am

Lambert Simnel,

Oh, I had read some Kelso and also some of the links provided by Dan Parker (who, by the way, needs to learn how to properly use HTML tags for hyperlinks). The essence of the plan is credit expansion, which is inflation, which is theft by indirect means. Norm Kurland has the mistaken belief that capital goods may be called into being by money creation alone. This, of course, ignores the fact that the people who would be creating these capital goods must still eat food, wear clothing, buy gasoline, and buy all of the other final consumer goods, all of which have to be produced by others, but not consumed by those others- in other words, these new capital goods really do have to be funded by prior real savings, not money creation.

Secondly, as Brian Drum has already posted, the originator of this bizarre “theory” clearly envisioned the state limitation of income above an arbitrary amount. Indeed, the plan outlined by Kelso, Kurland, and others sees large capital trusts that are nominally owned by everyone, but that allow no individual freedom to increase or decrease his share of the assets and income. This is not ownership by people, but ownership by government. Indeed, the very same result that you and others advocate could be accomplished more directly by having the government take over ownership of all capital and simply write equal checks to everyone with the income taken in every month.

The only thing any of you seem to have correct is that credit expansion is inappropriately used today, by elites, to increase the elite’s wealth. The solution to this problem is not to make it even bigger and more pervasive.

In summary, this nonsense is just Marxism/Socialism masquerading as Capitalism.

Yancey Ward March 21, 2006 at 9:14 am

Sorry, it was Norm Kurland himself who made the bad links, not Dan Parker.

Brian Drum March 21, 2006 at 9:30 am

The only thing any of you seem to have correct is that credit expansion is inappropriately used today, by elites, to increase the elite’s wealth. The solution to this problem is not to make it even bigger and more pervasive.

I guess it’s “If you can’t beat’em, join’em.”

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