Binary Economics: An Overview

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• A B S T R A C T
  Based on "binary economics" this paper suggests that one overlooked way
  to empower economically poor and working people in market economy is to
  universalize the right to acquire capital with the earnings of capital. This right
  (which is rarely identified or discussed in law schools) is presently concentrated less
  than 5 % of the population. The concentration of the right to acquire capital with the
  earnings of capital helps to explain why the poor remain subordinated.
  Foundationally distinct from classical, neoclassical, Keynesian, post-Keynesian,
  monetarist, and socialist economics, binary economics specifically offers a unique
  explanation for the persistence of poverty and the unutilized productive capacity to
  eliminate it. Compared to right-wing, left-wing, and mixed economic strategies,
  binary economics reveals a voluntary, market-based strategy for producing much
  greater and more broadly shared abundance without redistribution. These strategies
  will help to empower and liberate people who are presently economically
  subordinated. Based on objective standards of (1) reasonable, workable assumptions,
  (2) internal consistency, and (3) plausible descriptions, predictions and prescriptions,
  binary economics should be taught wherever right-wing, left-wing, and mixed

  centrist approaches are taught.\

  
  II. THE ALTERNATIVE ECONOMIC SYSTEM
  3 "It is preferable to regard labour, including of course, the personal services of the entrepreneur
  and his assistants, as the sole factor of production, operating in given environment of technique, natural
  resources, capital equipment and effective demand. This is why we have been able to take labour as the
  sole physical unit which we require in our economic system, apart from units of money and of time."
  Keynes, General Theory of Employment, Interest and Money, Harcourt, Brace & World, Inc. (1936) pp.
  213-214.
  3
  Binary economics accepts the classical economics of Adam Smith as set forth in The Wealth
  of Nations, but modifies Smith's analysis uniquely to account for the increasing role of capital in
  production and distribution. Binary economics can be distinguished from Adam Smith's classical
  economics and other economic schools by the following related propositions:
  (1) Labor and capital are "equally fundamental" "independent" or
  "binary" factors of (or "inputs to") production;
  (2) Technology makes capital much more productive than labor; and
  (3) Capital has a strong, positive, distributive relationship to growth, such that
  the more broadly capital is acquired, the more it can be profitably employed
  to increase output. (The principle of binary growth.)
  Productivity and Productiveness: According to Adam Smith, the primary role of capital
  is to increase labor productivity. Karl Marx, Alfred Marshall (widely credited for neoclassical
  economics), and J.M. Keynes did not disagree. Indeed, in his General Theory, Keynes distilled the
  economy to three fundamental, independent variables: time, money and labor and (Like Smith)
  treated capital as a dependent variable.3 In binary economics, capital and labor are equally
  fundamental, independent, or binary variables
  According to the binary view of production, although labor and capital may cooperate (just
  as people may cooperate) to do work, each factor (the human and the non-human) does its own work
  and provides its own "productiveness." To understand the binary approach, it is important to
  distinguish between "productivity" (which is the ratio of the output of all factors of production,
  divided by the input of one factor, usually labor) and "productiveness" (a special focus of binary
  economics, which retrospectively means "work done" and prospectively means "productive
  capacity").
  The "independent productiveness" of labor and capital can be illustrated by considering any
  sort of work. Consider, for example, the work of sawing boards and hauling sacks. A person can
  saw ten boards per hour with a hand saw, and one hundred boards per hour with a machine saw.
  According to conventional economic analysis, compared to working with the hand saw, with the
  machine saw the worker can saw ten times as many boards in the same time: so working with the
  machine saw, the worker is said to have become ten times as productive. In other words, working
  with the machine saw, the worker is said to have ten times the productivity as compared to working
  with the hand saw. But when sawing each board with the help of the machine saw, the worker is
  doing much less work. Per unit of output, the labor contribution to the production of sawed boards
  has decreased. From a binary perspective, the worker is contributing no more than ten percent of
  4 In this context, it should be noted that the "independent" in "independent productiveness" has a
  particular meaning. It requires treating labor and capital as independent variables. As discussant Dr.
  Ewang correctly observed, capital in many instances does not operate without people to operate it; and the
  productive input of capital is therefore not in that operational sense independent of labor. Nevertheless,
  there is more than one meaning of dependent and independent. Compared to the conventional economic
  approach of Adam Smith and J.M. Keynes (that treats capital as a dependent variable and labor as the
  only independent) productive variable, the binary approach treats capital and labor as independent (i.e.,
  binary) variables. Thus, with the binary approach, the concept of independent productiveness does not
  negate the fact that in many instances both capital and labor are generally needed to complete specific
  kinds of work, or the fact that labor is needed to conceive of, design, create, operate, maintain, store, and
  repair capital. But the work of conceiving, designing, creating, operating, maintaining, storing, and
  repairing capital is not the work of the capital conceived, designed, created, operated, maintained, stored,
  and repaired. Thus, although it takes a person to lead the horse, the work of leading is not the work of
  hauling. If instead of leading a horse, the leader led ten people each carrying one sack, who would deny
  the independent work (productiveness) of each of the ten human haulers merely because someone is
  leading them? Likewise, although it takes a person to operate the hand saw and machine saw, and no
  boards would be sawed without the worker, it is also true that no boards could be sawed without a saw,
  and there is now automated machinery that can saw a great number of boards in a comparitively short
  period of time with virtually no human input.
  4
  the productiveness that was required to work with the hand saw, and the machine saw is doing
  essentially all of the extra work.
  The independent productiveness of capital is more clearly revealed in the work hauling
  sacks: a person can haul one sack one mile in one hour and is exhausted; (1) with a horse, ten sacks
  can be hauled four times as far (yielding a forty-fold increase in output) and (2) with a truck, five
  hundred sacks can be hauled forty times as far (yielding a twenty thousand-fold increase in output).
  According to the binary perspective, the horse and truck are doing essentially all of the extra work.4
  The Six Powers Capital: Based on its "independent productiveness," capital has six powers
  important to production, distribution, and growth. Capital can
  (1) replace labor (by doing what was formerly done by labor);
  (2) vastly supplement the work of labor by doing much more of the kind of work
  that humans can do,
  (3) do work that labor alone can never do (e.g., people cannot a single board
  without a saw; elevators lift tons hundreds of feet in seconds; airplanes fly;
  scientific instruments unleash forces that create computer chips that cannot
  be made by hand; fruit trees make fruit while all farmers can do is assist in
  the process);
  (4) work without labor (as in the case of washing machines, automatic bank
  tellers, gasoline dispensers, vending machines, automated factories, and fruitbearing
  trees);
  (5) pay for itself out of its future earnings (the basic rule of business investment); and
  (6) distribute the income necessary to purchase its output
  The first four powers concern what might be considered the "real economy" powers of capital; the
  5
  latter two are powers that are most clearly revealed in a private property, market economy with a
  stable credit system protected by a reliable legal system.
  Each of these powers, when actually reflected in production, contributes to growth (including
  mere labor replacement, which produces the same physical output, plus leisure), but only the first
  power directly involves the mere substitution of capital for labor. Thus, although some economists
  and policy advocates use the marginal efficiency theory of neoclassical economics as the foundation
  for (or the primary component of) a general theory of growth, the capital/labor substitution process
  is only one component of growth (operating after the creation of greatly increased productive
  capacity); and from the binary perspective, the wealth enhancing contribution of market pricing and
  resource allocation is severely limited so long as the distribution of capital acquisition remains
  narrow. (See "Productiveness, Prices, Values, and Efficiency," below.)
  Productiveness, Distribution, and Growth: When analyzing how production and
  productive capacity have grown since the first publication of Smith's Wealth of Nations in1776,
  conventional market economics interprets the role of capital as merely facilitative: capital increases
  human productivity, thereby allowing for a rise in output per unit of labor, higher wages, and the
  employment of more labor. According to binary economics, however, in contributing to economic
  growth, capital does much more than increase the productivity of the people who work with it:
  Increasingly capital is doing ever more of the work. The economic imperative is generally to
  produce more with more productive capital and less labor. Although capital may be seen to
  concentrate higher productivity into fewer workers, as the general rule, per unit of output and in the
  aggregate, the primary effect of technological advance is to make capital more productive than labor
  and thereby to replace and vastly supplement the productiveness of labor with ever greater capital
  productiveness.
  Moreover, because capital is independently productive, it works on both sides of the
  production-consumption economic equation by providing vastly increased
  (1) productive capacity and production, and
  (2) capacity to distribute income and leisure.
  According to binary economists, in a private property, market economy, it is the capacity of capital
  both to do much more work and to distribute much more income and leisure that explains how
  broadening capital ownership promotes greater employment of existing capacity, capital
  accumulation, and growth. Thus, from a binary perspective, growth is primarily the result of
  increasing capital productiveness and the distribution of its ownership rather than increasing
  labor productivity.
  Binary Growth: Noting that present demand for capital goods is dependent on demand for
  consumer goods in a future period, binary economists reason that a voluntary pattern of steadily
  broadening ownership promises more production-based consumer demand in future years and
  therefore more demand for a fuller employment of existing labor and capital and more capital
  investment in earlier years. Thus, a broader distribution of capital acquisition, ownership, and
  income strengthens the promise of capital to pay for itself out of its future earnings, and makes
  profitable the employment of more (and increasingly more productive) capital. Therefore, binary
  6
  economists consider the return on capital is not only related to its scarcity, the wage rate, and the
  interest rate, but also significantly related to the increasing productiveness of capital and the
  distribution of its ownership. Thus, growth is positively related not only to increased labor
  productiveness, increased capital investment, and accelerated technological advance, but is also
  positively related to the distribution of capital acquisition.
  The potent distributive relationship between capital acquisition and growth is called the
  principle of binary growth. As a fundamental economic principle, it is unique to binary economics.
  If valid, the principle binary growth will greatly enhance mainstream understanding of how to
  economically empower poor and working people and thereby promote greater growth. This
  principle therefore requires special attention. The question of binary growth will be explored more
  fully in Part V below.
  It is important, however, to emphasize that the asserted positive relationship between the
  distribution of capital ownership and growth (i.e., the principle of binary growth) is not based on
  the behavioral premise that people will work more productively if they have ownership stake in their
  employer. Although most binary economists accept this behavioral premise as true, this behavioral
  premise (that broader ownership will increase labor productiveness, and therefore cause growth) is
  neither unique to binary economics nor inconsistent with mainstream economics. Rather, the unique
  binary premise is that the promise of broader ownership, in and of itself, will cause the fuller
  employment of existing capacity and greater growth.
  Moreover, if valid, the principle of binary growth does not involve the involuntary
  redistribution of any existing assets in which people have existing property rights. It is the growthenhancing
  promise of broader ownership that gives rise to the voluntary transactions that produce
  the broader ownership and growth.
  The principle of binary growth is unique to binary economics. This distribution-based
  relationship to the rate of return on capital and growth is not revealed by conventional classical and
  neoclassical analysis that assume that the return on capital is a function of only its scarcity and labor
  productivity, but not its independent productiveness and the distribution of its ownership. Likewise,
  Keynesian analysis (which reduces the operation of the economy to time, money and labor) cannot
  yield a conclusion that growth and the return on capital is an independent function of the
  productiveness of capital and the distribution of its ownership.
  Productiveness, Prices, Values and Efficiency: The binary approach to understanding
  production also offers a new perspective on the impact of the broader distribution on price and value.
  So long as most people own little or no capital, most consumer goods and services will be worth
  the work people are willing to do by their labor to acquire them. This is (1) how Adam Smith and
  John Maynard Keynes saw it, (2) the foundation of price theory and (3) in an economy in which
  capital ownership is highly concentrated, "empirically" the "value of labor" and the foundation of
  prices. However, in an economy in which ownership is much more broadly distributed, the value
  of goods and services is not limited to the work people are willing and able to do by way of their
  labor, but also includes the work they are willing and able to let their capital do. Without a horse,
  7
  few sacks are "worth hauling" before the hauler becomes exhausted. With a horse, many more sacks
  are worth hauling; and the economy of sack-hauling will grow as horse (and truck) ownership
  becomes more broadly distributed. Thus people express value not only by the work they do but also
  by the work they let their capital do.
  Thus, from a binary perspective, (1) the technical relationship used in the theory of
  marginal productivity that governs conventional understanding of the relative employment of
  capital and labor in production and (2) the factor income shares derived from production are
  significantly dependent on the distribution of access to capital acquisition with the earnings of
  capital. In other words, the willingness of a laborer to work at given wage depends on his
  competitive opportunity to acquire capital with its earnings and then receive its full net return.
  (But without access to the same government-supported infrastructure available to wellcapitalized
  people, the opportunity to acquire capital with the earnings of capital and thereby
  through ownership to produce goods and express value is not open to most people as a practical
  matter.) From a conventional economic perspective, in terms of its impact on pricing,
  capital/labor substitution and employment, and factor income shares, the distribution of access
  to capital ownership is either irrelevant or of only minor consequence.
  Competitive market pricing requires (1) no barriers to entry, (2) voluntary (rather than
  coerced) exchange, and (3) no monopolization of the means of production. Once it is recognized
  that labor and capital are independent factors of production and that capital is increasingly the more
  productive factor, then it becomes clear that broad, essentially universal, individual access to capital
  acquisition is necessary before the presumed theoretical, allocational benefits of efficient pricing can
  be fully realized.
  III. BINARY AND CONVENTIONAL ECONOMIC STRATEGIES COMPARED
  Accepting the labor-based, productivity paradigm of mainstream economics, governments
  pursue strategies and policies that facilitate capital acquisition primarily for well-capitalized people
  and jobs and welfare for everyone else. But binary analysis indicates that jobs and welfare cannot
  distribute sufficient consumer income to employ fully employ existing capacity and promote
  sustainable growth unless it is supplemented with the additional consumer income that naturally
  results from the coupling of the increased productiveness of capital with a broader pattern of capital
  acquisition paid for with the earnings of the capital acquired.
  Based on mainstream economics, while government policies facilitate capital acquisition
  with the earnings of capital primarily for well-capitalize people, the mainstream prescription for
  poor and working people to acquire a viable capital estate is to work hard, save, and invest wisely.
  However, binary economists note that the mainstream prescription for capital acquisition is not the
  way most capital is presently acquired in modern industrial economies. In the USA, for example,
  of the trillions of dollars of capital acquired each year, virtually all of it is paid for with the earnings
  of capital, and much of it is acquired with borrowed money. Relatively little capital is acquired with
  the earnings of labor. (See Endnote 6.) The preferred means among the rich to acquire new capital
  is to buy it with non-recourse corporate credit and to repay the acquisition debt obligation with the
  8
  income earned by the assets acquired.
  To acquire capital with the earnings of capital, well capitalized people use (1) the pre-tax
  earnings of capital, (2) collateral, (3) credit, (4) insurance and capital markets mechanisms to
  diversify and reduce risk, and (5) a monetary policy intended to protect private property. No less
  competitive a means is needed by middle class and poor people, who have little or no assets to place
  at risk.
  As explained in Section V, below, the same institutions and practices that work profitably
  for well-capitalized people can also work profitably for all people. Moreover, in an economy
  operating at less than full capacity, if capital can competitively pay for its acquisition costs out of
  its future earnings primarily for existing owners, it can do so even more profitably if all people are
  included in the capital acquisition process.
  IV. THE BINARY PRIVATE PROPERTY SYSTEM
  Although binary economics is premised on a unique theory of production, distribution,
  and growth, it also rests on ancient principles of private property that find expression in the
  Anglo-American common law and in the writings of John Locke.
  Three Foundational Principles: The legitimacy of private property is premised on
  three foundational principles:
  (1) Universal participation,
  (2) Distribution according to production and voluntary exchange, and
  (3) Limitation when required to insure universal participation and distribution
  according to production and voluntary exchange.
  It should be noted that these three principles also express three essential conditions of an
  efficient market.
  Because (1) labor and capital are independently productive variables, (2) technology
  makes capital much more productive than labor, and (3) in every industrial society almost all
  capital is acquired with the earnings of capital, binary economists reason that compliance with
  these private property principles and the conditions essential for market efficiency cannot be
  achieved as long as the vast majority of people are excluded from the process by which capital
  is acquired with the earnings of capital.
  The competitive right to acquire capital with the earnings of capital: As a matter of
  property law, a binary economy extends to all people "the binary property right" (i.e., the
  competitive market right to acquire capital with the earnings of capital). More particularly, the
  binary property right is the right to acquire capital with non-recourse credit and to repay the cost
  of acquiring the capital with the pre-tax yield of the capital acquired. Strictly speaking, this
  competitive capital acquisition right is a market right, not a welfare right. It is the right to
  participate in a voluntary transaction with one or more willing parties.
  9
  Using Institutional Precedents That Work: Combining the salient principles of (1) the
  Homestead Acts (intended to broaden land ownership), (2) the employee stock ownership plan
  (ESOP) technique of corporate finance (intended to broaden capital ownership by employees
  by using tax exempt, limited liability trusts, as fiduciary agents for employees, to acquire shares
  of employer stock with non-recourse credit, (3) a market for capital credit insurance (such as
  that profitably provided by the Federal Housing Administration to broaden home ownership),
  and (4) a return of the Federal Reserve to its original Congressional mandate under Section 13
  of the Federal Reserve Act (intended to broaden access to capital credit) to allow for the
  discounting of eligible productive private credit, binary economic analysis offers an entirely
  voluntary means that would enable prime-credit-worthy companies to meet any portion of their
  capital requirements while simultaneously enabling their employees, customers, neighbors and
  others to acquire (with non-recourse credit) full-dividend shares of the participating companies
  which would pay their full return (net of reserves for depreciation, research, and development
  to maintain the competitive productive capacity of the capital) first to repay the capital
  acquisition loan obligation and then to provide a capital source of income to supplement wages
  and welfare benefits.
  A Proposal for Instructional Purposes: There are many variations of binary financing
  that can be applied in different contexts. For instructional purposes, Figure 1, below, sets forth
  a structural representation of a single binary financing transaction. It also represents the
  aggregate of all binary transactions within an economy. Figure 1 shows (1) a corporation, (2)
  an ownership-broadening, constituency trust, (3) a lender, (4) a private capital credit insurer,
  (5) a government reinsurer, and (6) the central bank. Corporations eligible to participate in
  binary financing would be prime-credit-worthy companies. In the USA, these eligible
  companies would generally (though not necessarily) number among the three-thousand or so
  largest companies. The implementation of this proposed structural alternative for private capital
  acquisition requires no transactions; but its provides the property rights basis enable market
  participants voluntarily to price the value of broader ownership distribution.
  On the strength of the pledged, anticipated profits of the capital acquired, and marketpriced,
  capital credit loan insurance as a substitute for collateral, the lender loans funds to the
  trust in return for a promissory note. The trust invests in "full-dividend" common stock of the
  corporation at fair market value. With the cash received for the issuance of its stock, the
  company makes the investment and (if all goes according to plan) distribute the income earned
  on the capital investment to the ownership-broadening trust which uses the funds to repay the
  loan obligations and then distributes all net earnings to the beneficiaries. Consistent with
  necessary monetary discipline, the central bank is authorized to discount the trust's outstanding
  promissory note at its administrative cost. Based on experience with present bank loan-service
  charges, insurance charges of the Federal Housing Administration, and the administrative costs
  Federal Reserve, the cost of borrowing to the constituency trust has been estimated at
  approximately at less than 5% per year, consisting of (1) 2% bank service charge, (2) 2% for
  5 Kelso, Louis O., and Patricia Hetter, pp 70-73, 108. (1986). Democracy and Economic Power:
  Extending the ESOP Revolution through Binary Economics. Cambridge, MA: Ballinger Publishing Co.
  6 For example, during the fifteen year period from 1989 through 2003, in the case of major prime
  credit-worthy companies in the U.S.A., the sources of funds for capital acquisition, in approximate terms,
  reveal that annually retained earnings accounted for at least 70% and more usually 80% of the capital
  10
  the capital credit insurance and (3) 1/4% for the central banks administrative costs.5
  Thus, in a binary economy, the logic of corporate finance (which enables corporations
  to acquire capital before they have earned the money to pay for it, and which enables existing
  owners to become richer on future corporate earnings even as they sleep) is extended
  individually on market principles to all people even if they have no savings (or collateral to
  secure credit) to invest.
  The establishment of a binary economy is accomplished as a legal matter entirely through
  traditional and largely well-settled means: by the revision of a few national laws related to banking,
  corporations, employment, insurance, and taxation, and by the reliance on traditional corporate,
  trust, financial, and insurance principles and institutions. According to binary theory, the effect of
  these revisions is to extend to all people the competitive right to participate in capital acquisition
  with the earnings of capital on market principles. It is this broadening ownership participation that
  provides the basis for "binary growth," which is explained more fully in Section V below.
  V. BINARY GROWTH:
  The logic supporting the binary property/economic paradigm indicates that the voluntary
  operation of a national binary economy on market principles will provide not only a broader
  distribution of wealth and income, but also substantially more real growth than would a
  traditional economy. As previously noted, because demand for capital investment is dependent on
  demand for consumer goods in a future period, a voluntary pattern of steadily broadening ownership
  promises more production-based consumer demand in future years and therefore more demand for
  investment in earlier years. Thus, a broader distribution of capital acquisition, ownership, and
  income strengthens the promise of capital to pay for itself out of its future earnings, and makes
  profitable the employment of more (and increasingly more productive) capital.
  Eligible Companies: The primary, practical application of the principle of binary growth
  can be understood by considering the three thousand largest companies in the USA, and then
  focusing on a subset comprised of prime-credit-worthy companies. At diminishing unit costs, most
  of these companies can produce much more of the goods and services people dearly need and want;
  but there is lacking the consumer demand to render more production profitable even at greatly
  diminishing unit costs.
  Presently through these corporations, almost all new capital is acquired with the earnings
  of capital, and much of it is acquired with borrowed money.6 At the same time, the ownership
  acquisition. Borrowing accounted for almost all of the rest. Sale of stock as a source of funds capital
  acquisition never exceeded 5% during the period and was negative in most years (meaning that loans and
  retained earnings were used to retire equity stock.) See Richard A.. Brealey & Stewart C. Myers, Franklin
  Allen Principles of Corporate Finance Chapter14, pp 561-563 3rd edition, 2004). Stock Market Pricing
  and Securities Regulation, (87 Mich. L. Rev., 613 at 648, 1988).
  7 Edward N. Wolff, Top Heavy: A Study of Increasing Inequality in America (New York,
  Twentieth Century Fund, 1995) and Edward N. Wolff, "How the Pie is Sliced: America's Growing
  Concentration of Wealth," The American Prospect, No. 22, (Summer 1995), pp. 58-64.
  11
  of this corporate wealth is highly concentrated so that approximately 1% of the people own 50%
  of the wealth and 10% own 90% of the wealth, leaving 90% people owning little or none.7
  Thus, capital returns its value at a rate reflective of its long-term (suppressed) earning capacity
  as it buys itself for a small minority of the population. According to binary economics, if the
  techniques of corporate finance presently used to enable existing owners to acquire capital with
  the earnings of capital were opened competitively to all people then, the present demand for
  capital investment and employment would increase in anticipation of the broadening
  distribution of capital income to poor and working people with unsatisfied needs and wants.
  Projecting Ownership-Distribution-Based Demand: Figure 2, set forth below, illustrates
  the distributive, growth-sustaining feature of an ownership-broadening binary economy. For
  simplicity, Figure 2 assumes a seven-year cost recovery period for capital investment, and it shows
  the number of years of annual acquisitions that will have paid for themselves over time. Figure 2
  assumes that in every year after the implementation of the binary economy, some number, N, of an
  economy's largest prime credit-worthy companies have profitably utilized binary financing to
  acquire in the aggregate some percentage, X, of their capital investments. Figure 2 also assumes
  that the capital credit insurance is properly priced to pay for those financings that fail to repay
  the acquisition loans so that N and X are net of those failures. Figure 2 also assumes for
  simplicity, as a first iteration, that N, X, and the rate of return on capital remain constant throughout
  the period.
  Although beginning slowly, the broadening distribution of capital ownership and income will
  increase steadily and thereby provide the basis for binary growth. Each year after the initial cost
  recovery period of the most productive capital, more binary capital will have paid for itself and will
  be distributing capital income to poor and working people. Consistent with the conservative
  assumption of a seven-year capital cost recovery period, Figure 2 shows the steady growth in annual
  capital acquisitions. In the eighth year, the first annual acquisition of capital will have paid for itself
  and will begin paying its full return to the new binary owners. In the ninth year, the second annual
  capital acquisition will be fully paid for and will therefore begin paying its full return to the new
  binary owners. In fourteen years, 50% of the annual capital acquisitions will have paid for
  themselves, and will have begun paying heir full annual return to the new binary owners. In the 28th
  year, 75% of the acquisitions will have paid for themselves; and so on. In the long run, the linkage
  between supply (in the form of the incremental productive power of capital) and demand (resulting
  from the widespread market distribution of capital income to consumers) approaches 100%. The
  12
  more binary financing that is undertaken, the greater the distributional growth effects.
  Maintaining Market Share in a Growing Economy: To maintain market share in the
  projected growing economy, producers will have to increase production and productive capacity
  (more fully utilize existing capacity and acquire more capacity) before binary income begins to be
  distributed to its new owners. Because present demand for capital goods is positively affected by
  anticipated future demand for consumer goods, the broader pattern of capital acquisition and
  resultant broader distribution of capital income should be reflected in increased capital spending
  within the time frame required to acquire and employ the added capital necessary to increase
  production to satisfy the additional anticipated consumer demand. Thus, for example, with a capital
  cost recovery period of seven years, and a capital planning investment horizon of five years, market
  incentives for increased capital spending by producers of consumer goods and services might
  materialize in the third year. Furthermore, market incentives for increased capital spending and
  labor employment by producers of producer goods and services might materialize in the first year.
  Moreover, for additional reasons, the growth process might start as early as the first year.
  First, to the extent that the return on the equity represented by the binary shares exceeds the
  debt-servicing requirements, income will be available for payment to the binary beneficiaries before
  completion of the capital recovery. Second, to the extent that consumers feel wealthier by reason
  of their capital ownership, their marginal savings and consumption rates will shift towards more
  consumption even before they begin to receive binary income. Furthermore, the terms of the loan
  agreements may provide for increasing partial dividend payments directly to the beneficial owners
  as specified percentages of the loans - and shares - become fully paid.
  Demand and Supply In a Binary Time Frame: The logic supporting binary growth is
  best understood within a "binary time frame"--the time expected for well-managed capital to pay
  for its acquisition costs (a period usually no longer than seven years) and then to begin earning a net
  income for its owners. This is a time period in which capital investment is variable rather than
  fixed. Thus, within the context of perhaps a seven to fourteen years, if members of the poor and
  middle classes are enabled to compete with existing owners for the acquisition of corporate
  stock representing the capital requirements of companies worthy of prime credit, they would
  bring to the bargaining table a chip not possessed by existing owners: a pent up appetite for the
  necessities and simple luxuries of life that the rich have long enjoyed from capital income.
  After the acquisition debt obligations have been satisfied, the earnings of capital acquired by
  members of the poor and middle class, if fully paid to them, will create more production-based
  consumer demand than if that capital had been acquired by the rich. If acquired by the rich,
  most of the capital earnings would seek investment opportunities but in the context of weaker
  consumer demand.
  \ The growing capital-based consumer demand generated by binary financing over a
  binary time frame will make more capital investment credit-worthy and profitable. The growing
  capital-based consumer income will also make investment less risky, and therefore more
  insurable, less expensive, and more profitable. Over the same period of time, in a traditional
  economy, with relatively less capital-based consumer demand, capital investment will be riskier,
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  and therefore more expensive, and less capital investment will be credit-worthy and profitable.
  Growth and Broader Distribution Without Redistribution: From a binary perspective,
  the incremental binary consumer income is neither inflationary nor redistributionary. It exists
  only as a result of voluntary transactions and only if the underlying capital has earned income
  sufficient first to return its acquisition cost and then to pay net income to its owners. Any
  incremental consumer income generated in a binary economy is balanced by the antecedent
  incremental production of goods and services of equal value.
  By financing the ownership of productive capacity for people with substantial unsatisfied
  needs and wants (essentially most people who presently earn little or no current consumer
  income from capital ownership), participating companies may satisfy their projected
  credit-worthy capital requirements while simultaneously encapitalizing their employees
  consumers, neighbors, and others, thereby establishing a long-run self sustaining basis for
  growth. This is a growth that does not require anyone to work harder or smarter. It is not
  caused by an increase in capital investment, advancing technology, or any other traditional basis
  for growth. It is not the result of a redistribution, because it only materializes from the broader
  pattern of capital acquisition generated by the voluntary operation of the binary economy that
  enable all people to acquire capital with the earnings of capital.
  Thus, although the reforms indicated by binary theory may be criticized as an unwise
  intervention in the market, the binary approach may be more fairly viewed as an opening of the
  capital markets to all people; and a strong case can be made that a binary economy will operate
  more openly and efficiently on market principles than any existing economy.
  VI. THE NATURE OF THE BINARY GROWTH QUESTION
  It is important to understand that the question of whether or not the principle of binary
  growth is valid is not a question of value, but rather a question of fact: either there is a substantial,
  positive relationship between the broader distribution of capital ownership and growth or there is
  not. Whether a broader distribution of ownership or greater growth is good or bad, just or unjust,
  or environmentally sustainable or not, may be debatable; but such questions are distinct to the
  antecedent question of whether or not the pattern of capital acquisition has a substantial positive
  relationship to growth. In principle, this question of fact is empirically resolvable, but to do so
  requires the establishment of a real economy based on binary property rights, and that has yet
  to happen. But time is long overdue for teaching, theoretical research and modeling of the basic
  binary concepts.
  8 "I came to appreciate the critical importance of the theory of (binary) capitalism; and....I felt
  that its revolutionary insights and program should be briefly summarized in the form of a manifesto
  addressed to all Americans who are concerned with the future of a democratic society....and with a
  twentieth century interpretation of everyone's right to life, liberty and the pursuit of happiness....It was
  with these discoveries in mind that I persuaded Louis Kelso to engage with me in writing The Capitalist
  Manifesto." (The Capitalist Manifesto, Mortimer Adler's Preface at ix, xvii).
  14
  VII. CONCLUSION
  Binary economics presents an unusual challenge to educators. Its promise of
  distribution-based growth may be a grand illusion whose logical or practical fallacy has eluded
  a growing number of scholars and citizens throughout the world, or it may be one of the most
  important new concepts to emerge in the twentieth century.8 It offers to harness technology
  more fully by providing a voluntary market means to employ existing capacity and future
  capital more profitably and to achieve a level of sustainable growth and distributive justice
  beyond conventional understanding.
  One of the most important purposes of education (and one of the highest roles of the
  lawyer, economic advisor, and government official) is to assist people (and society) in
  identifying and securing their essential opportunities, rights, and responsibilities Based on
  mainstream economics, people are given no reason to believe that greater economic growth and
  more broadly shared prosperity may be achieved voluntarily by opening the system of corporate
  finance so that increasing numbers and eventually all people can acquire capital with the
  earnings of capital. Although very few multi-millionaires fail to invest in a viable portfolio of
  America's three thousand largest companies, the vast majority of people are not taught and
  therefore have no understanding that they too might have a legitimate interest in participating
  in that capital acquisition in a way that might be profitably realized voluntarily on market
  principles.
  When judged by the epistemological rigor of the hard sciences, the binary approach:
  (1) is a distinct paradigm of market economics;
  (2) rests on reasonable assumptions (at least as reasonable as those that
  support mainstream economic theories);
  (3) is internally consistent;
  (4) has descriptive and prescriptive power at least as good as that based on
  mainstream economic theories; and
  (5) offers special promise to achieve a market basis for sustainable growth
  that will systemically help poor and working people everywhere without
  redistribution
  As such, binary principles should be taught to students in important contexts in which the
  conventional wisdom regarding the role of labor and capital in production, distribution,
  efficiency and growth is explicitly taught as part of the positive or normative analysis With an
  understanding of binary economics, people will be in a better position to comprehend their
  economic, political, ethical, moral, and other personal choices; and as educated professionals
  they will also be in a better position to assist others regarding such choices.
  Figure 1 - General Theory Diagram
  15
  Figure 2
  Linking Supply With Demand Through Broadening Ownership
  Percent of
  Binary Capital
  Acquisitions
  that Fully Link
  Supply with
  Demand