Binary Economics and the Case for Broader Ownership
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I. INTRODUCTION
Binary economics simultaneously offers a paradigm for understanding economic efficiency,
growth, and justice that is foundationally distinct from classical, neoclassical, Keynesian, and
socialist economics. It also offers a prescription for establishing a more inclusive, competitive and
democratic private property system, one that universalizes the right to acquire capital with the
earnings of capital.1 Focusing on a great anomaly left unexplained or poorly explained classical,
neoclassical, and Keynesian economics (i.e., the persistence of unutilized productive capacity
in a context in which markets are supposedly becoming more efficient) and left unremedied by
any approach yet applied, binary economics specifically offers both a distinct explanation and
a market-based policy alternative that promises a means to produce much greater and broadly
shared abundance.
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As an economic theory, binary economics holds that broadening individual participation in
capital acquisition with the earnings of capital capital acquisition on market principles has a potent
(but presently untapped) distributive relationship to growth that is not caused by productivity gains
and governmental strategies to redistribute or regulate demand. (This proposition is known as the
principle of binary growth). In other words, the distribution of capital ownership is positively
related to the employment of unutilized productive capacity and growth in important ways not
comprehended by conventional economic theory. Like no other economic paradigm, binary
economics (1) reveals important market connection between unutilized productive capacity and
wealth concentration, and (2) offers new strategies to achieve the goals of efficiency, broadly
shared growth, and economic justice by way of widespread, and eventually universal,
individual, capital ownership.
When judged by the principles underlying scientific understanding, the persistence of
unutilized capacity along side of unmet needs and wants constitutes a major anomaly in
classical and neoclassical theory and a major unresolved controversy in economics as a whole
that has divided that discipline into right-wing, left-wing and mixed centrist approaches, none
of which has coherently addressed and remedied the situation. According to classical and neoclassical
economics, if markets were truly free and efficient (as those theories assume),
unutilized productive capacity is an anomaly that should not persist for long; but it has. In
classical and neoclassical theory, unutilized productive assets should be sold, even at salvage if
necessary. Even before they become partially or totally unutilized, assets not earning competitive
returns for their owners should be sold to those whose rate of return can be enhanced by the
acquisition. But contrary to the theory, the unutilized productive capacity persists.
In response to the Great Depression (when the existence of vast unutilized productive
capacity became a politically undeniable fact), Keynesian economics was introduced as a major
element of government economic policy in the U.S.A. and other Western-style capitalist
economies precisely to deal with the persistence of unutilized productive capacity. As a
consequence, in practical effect, present economic policy in those economies is a mixed
compromise of classical, neoclassical, and Keynesian theory and practice; but none of those
theories (alone or in combination) has satisfactorily explained the anomaly of unutilized
capacity; nor have they provided an effective strategy or institutional environment to employ
the unutilized capacity profitably to promote the full growth potential.
Although they differ in many respects, conventional theories (including classical,
neoclassical, Keynesian) share a common, generally unstated assumption: namely that the
distribution of capital ownership (as distinguished from the distribution and redistribution of
income) has no positive relationship to the employment of unutilized capacity and economic
growth. Binary economics challenges that assumption by assuming that labor and capital are
“independently productive” and reasoning therefore that the distribution of capital ownership has
a potent, positive relationship to the employment of unutilized capacity and growth. Thus,
unutilized productive capacity and suboptimal growth (notwithstanding unmet needs and wants)
and concentrated ownership are not unrelated phenomena, but rather correlative symptoms of
an exclusionary system of corporate finance in which (1) almost all capital is owned by a small
percentage of the population, and (2) almost all capital is acquired with the earnings of capital.
To remedy this situation, binary economic analysis provides an inclusive, voluntary means by
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which people previously excluded from efficient capital acquisition are enabled to acquire
capital competitively with the earnings of capital using the same institutional techniques and
advantages that presently enable well-capitalized people to acquire capital with the earnings of
capital.
Accordingly, by relaxing one unproven (and generally unstated) assumption of
conventional economics (the assumption that the distribution of capital ownership has no
substantial positive relationship to the employment of unutilized capacity and growth that
cannot be comprehended by productivity or the redistribution of income and capital), the
anomaly disappears: As a first-order approximation, unutilized productive capacity and
suboptimal growth are simply the flip side of concentrated ownership. Unutilized productive
capacity, suboptimal growth, and wealth concentration are correlative manifestations of the
fact that capital
(1) is independently productive,
(2) contributes far more to growth than results from its substitution for labor,
(3) routinely returns its investment (or “buys itself”) primarily for a relatively small
group of existing owners while excluding the vast majority of people from the
capital acquisition process and
(4) is thereby prevented from distributing the consumer income that would provide
market incentives to employ its unutilized productive capacity and promote
growth.
A number of remarkable implications flow from the principle of binary growth. One
practical implication is that much of the capital presently owned by America's three thousand
or so largest companies, that historically have returned their inflation adjusted value every five
to seven years primarily for existing owners, could do so even more profitably if all people were
allowed entry into the capital acquisition process by way of competitive capital acquisition
rights. A second implication is that with modest reform of the existing markets for capital
acquisition, in an under-capacity producing economy, substantial growth and more broadly
shared wealth can be achieved without the involuntary redistribution of income or capital.
When judged by the applicable scientific standards (of workable assumptions, internal
consistency and replicable description, prediction and prescription), impartial analysis reveals
that, compared to other economic approaches, binary economics provides (1) a superior
theoretical explanation for the persistence of poverty and economic deprivation and degradation
notwithstanding the unutilized capacity to reduce and eliminate them and (2) a more promising
means to employ unutilized capacity and promote growth profitably for the material benefit of
all people. The binary approach (1) rests on reasonable assumptions, (2) has internal
consistency, and (3) provides plausible descriptions, predictions and prescriptions.
Accordingly, based on widely accepted principles underlying the philosophy of science,
professional ethics, secular morality, and spiritual values, institutions of higher education have
a special responsibility to teach binary economics in most contexts where issues of economic
efficiency, growth, and justice are taught or considered. Professional ethics governing
fiduciaries, advisors and consultants also call for the inclusion of binary economic principles
in the positive or normative analysis of those subjects
2 Paramount Commc’ns, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1989).
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II THE ANOMALY OF UNUTILIZED PRODUCTIVE CAPACITY
Binary economics provides a new understanding and suggests new strategies regarding the
persistence of vast (and many would say growing) unutilized productive capacity in markets that are
supposedly becoming more competitive and efficient. Particularly noteworthy as a matter of public
policy is the unutilized productive capacity of the assets owned by major prime-credit-worthy
corporations. In the USA, for example the three thousand largest corporations own over ninety
percent of its “investable” capital assets. As a matter of policy, this is where an enlightened
approach to corporate economic policy can have its greatest impact on industry, shareholder wealth,
working people, and the well-being of every individual.
There are, of course, different definitions of unutilized productive capacity depending upon the
purpose of economic inquiry; and fiduciaries must carefully consider which definition or definitions
will enable them to fulfill their fiduciary responsibilities..
Mainstream economic analysis generally employs a narrow and frequently documented
“static” approach to unutilized productive capacity that focuses primarily on existing assets and
available labor at a given wage. The presently unemployed portion of each existing or available
factor is the “static unutilized productive capacity” for that factor.
In considering the question of unutilized productive capacity, however, a corporate fiduciary
cannot think merely in terms of existing capital and available labor. A definition of unutilized
capacity which looks only to existing assets and available labor is a limited conception that ignores
the competitive and wealth-enhancing implications of advancing technology, major capital
investment, changes in skills, preferences, and environmental factors and a broader pattern of capital
acquisition over time. This broader time frame—in which technology, major capital investment,
skills, preferences, environmental factors and ownership distribution are variable—is an essential
foundation for much of the corporate planning required of corporate fiduciaries.2 Such a time frame
is certainly not the exclusive domain of neoclassical economic analysis, which generally holds
technology, skills, preferences, environmental factors, and major capital investment constant and
ignores the distribution of ownership.
Thus, from the perspective of corporations and corporate fiduciaries, a central question is:
What business strategy should be pursued to most profitably acquire, employ, and dispose of
corporate assets over time? With respect to those assets, if any substantial amount of unutilized
productive capacity exists and could be profitably employed, corporate profits and shareholder
wealth would increase accordingly.
The question of unutilized capacity is also a central issue for people concerned about the
welfare of economically disadvantaged people and for government policymakers vested with a
responsibility in matters of economic welfare. When there is unutilized productive capacity of an
economy’s major corporations, there is a capacity to provide more basic necessities, such as food,
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clothing, shelter, transportation, and healthcare, and simple comforts and conveniences by way of
greener and more socially responsible industrial processes and practices. The ever-present threat of
plant closings, downsizing, and layoffs can be understood as a reflection of unutilized productive
capacity. Many economic assaults on the environment resulting from destructive production
technologies (that continue despite the know-how to ameliorate or replace them with greener
technologies that people cannot afford), can be understood as reflections of unutilized productive
capacity.
As in the case of corporate fiduciaries acting in the corporate interest, it is in the interest of to
economically disadvantaged people, and the duty of their advocates, focus on the question of
unutilized productive capacity in the broader, what could be called “holistic,” sense that reflects the
real potential to produce and distribute goods and services on a sustainable basis over time. Thus,
in the remainder of this article, unless otherwise specifically noted, “unutilized productive capacity”
includes static unutilized productive capacity and also the broader holistic, fiduciary understanding
of unutilized productive capacity
Taking the assumed perfect efficiency or approximate perfect efficiency of markets as the best
starting point for economic analysis, some people believe that a major economy like that of the USA
and major, prime credit-worthy companies within the economy have little or no unutilized
productive capacity. “If there were an appreciable amount of unutilized productive capacity,” they
argue “it would surely be employed. This is what rational people acting with a profit motive do, and
if people refuse to act rationally in this way they will be driven out of business by others who do.”
But in my experience, many more people do not believe that markets are that efficient and instead
believe that there is substantial and growing unutilized productive capacity.
On this point, a simple thought experiment might be illuminating. Suppose you were king
or queen of the world and could ordain any economic policy as the law of the world, and your goal
were to feed, clothe, and shelter the world, and provide people with the resources to develop
themselves to their highest good. Although you might fall short of your desired goal, would it be
easier to approach your goal now than one hundred, two hundred, or three hundred years ago? And,
to change the hypothetical, if you were still the king or queen of the world and (just as the Pharaohs
loved pyramids) you love unutilized productive capacity. It is not enough for you to have two
closed manufacturing plants in a particular locale (with the lost jobs gone to manufacturers overseas
where wages do not internalize such factors health and retirement benefits, safety and environmental
standards, military costs, and infrastructural benefits of the USA); instead, you prefer to have seven
more such plants. Would it be easier to build seven such unutilized plants today than one, two or
three hundred years ago?
Thus, if asked to determine the facts with due diligence, I predict that the general counsel
of most prime credit-worthy companies would, after consulting with all appropriate experts,
conclude that their companies, even as they determine the need to effect major downsizings, plant
closings, and lay-offs, owned the productive capacity with available capital assets and labor to
profitably increase output by perhaps 10–20%, or more, at lower unit costs if there were only the
customers with money to buy what could be readily produced. This would apply not only to
consumer goods but also to producer goods, so that within existing unutilized productive capacity,
there is the capacity to create even more unutilized productive capacity.
3 See Bill Gerrard, Keynes, The Keynesian and the Classics: A Suggested Interpretation, 105 ECON.
J. 445, 449 (1995) (characterizing the central theoretical task of Keynesian economics as explaining the
outcome of persistent underemployment).
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Of course, not everyone would agree with my prediction, which is based on experience and
anecdotal evidence but no scientific validation. Nevertheless, a lesson from economic history and
the history of economic thought may be instructive. In the Great Depression of the 1930s, society
was faced with a major anomaly that politically could not be ignored: the anomaly of vast unutilized
productive capacity, even in the limited static sense, alongside widespread need and want among
willing and able, but unemployed people. It was a time when passenger trains rolled by with few
passengers able to pay the fares, and freight trains rolled by empty of freight, but carrying people
who were traveling the country looking for work. The persistence of unutilized productive capacity
at that time, and the failure of classical and neoclassical theory to provide government and society
with a satisfactory theoretical explanation or practical solution for the anomaly provided the political
foundation for the recognition of Keynesian economics as a mainstream school of thought.3Unlike
the 1930s, presently unutilized productive capacity is not explicitly a major focus of mainstream
economic and political analysis. Generally, people do not get funding, prizes, or much recognition
for addressing the question of unutilized productive capacity. As a policy issue, unutilized
productive capacity rarely enters the mainstream discussion. Yet in ways important to corporate
profitability, more unutilized productive capacity seems to exist now than in the 1930s. In my
experience, most people believe that the western-style capitalist economies could more nearly feed,
clothe and shelter all the world’s people today than in 1935, despite substantial population growth
since then. Although today’s percentages of static unutilized productive capacity may be far smaller
than the percentages that prevailed in 1935, most people I know believe that in the fuller, holistic
sense of the term, the unutilized productive capacity of major corporations today is far greater than
it was during the Great Depression of the 1930s. Despite neoclassical assumptions of rising costs
and diminishing returns, much of the unused productive capacity is generally marked by diminishing
unit costs and increasing economies of production made unprofitable only by insufficient consumer
demand even at discount prices.
Again learning from history, comparing the political climate during the 1930s to the political
climate today, it seems most reasonable to conclude that when the existence of substantial unutilized
productive capacity is undeniable, the interests of the economically disadvantaged become matters
of much greater concern to the government, private foundations, major economic players in the
economy, and the electorate.
Unfortunately, mainstream economics has no coherent position on unutilized productive
capacity in the holistic sense. Rather than consensus, it provides controversy. It is not even clear
that mainstream economics has a non-controversial way of measuring holistic unutilized productive
capacity. Thus, on the authority of economic theory, there is no sound basis to dismiss the
controversy regarding unutilized productive capacity merely by arguing that reformers have the
burden of proving the existence of unutilized productive in the holistic sense of the term.
Mainstream economics divides into different schools on the existence, extent, and
significance of unutilized productive capacity and what to do about it. These schools offer different
guidance to private corporations and public policy makers. Neoclassical economics assumes perfect
4See Charles R.P. Pouncy, Contemporary Financial Innovation: Orthodoxy and Alternatives, 51 SMU
L. REV. 505, 540–41 (1998) (describing the perfect competition model of neoclassical economics). See
generally Joan Robinson, What is Perfect Competition?, 49 Q. J. ECON. 104 (1934).
510 See Paul Davidson, Post Keynesian Macroeconomic Theory: a Foundation for Successful
Economic Policies for the Twenty-first Century 6–8 (1994) (observing that Keynes argued that
neoclassical economic theories could not account for the persistent unemployment rates of the Great
Depression).
6 11 See generally KEYNES, supra note 8, 23–34 (defining “effective demand”).
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competition and efficiency as the starting point of analysis.4 As previously noted, in the world of
perfect neoclassical efficiency, unutilized capacity (beyond need for peaks in market demand and
an insurance for emergencies beyond the predictable) is an anomaly that should not persist for long.
Unproductive assets should be sold, even at salvage if necessary. Even before they become partially
or totally unutilized, assets not earning competitive returns for their owners should be sold to those
whose rate of return can be enhanced by the acquisition. For those who believe that this logic
describes the ongoing reality experienced in a national economy, there is little or no sustained
unutilized capacity beyond the amount that is efficient to maintain. Plant closings, downsizings,
lay-offs are signs of greater, not less, efficiency. For those who believe markets are efficient or
nearly efficient, there is little or no unutilized productive capacity (including little or no involuntary
labor unemployment) that exists by reason of the market’s failure to distribute sufficient demand for
goods and service.
But to most observers, these conclusions are belied by experience. From many people, I
have heard claims that today there is a growing technological capacity to feed, clothe, and shelter
the world if there were only sufficient income to buy what can be readily produced. However close
to the truth such a claim is in the year 2005, it was less true in 1905, and still less true in 1805.
Based on a conception that confuses a neoclassical theory of marginal efficiency with an
unnamed, theory of growth, so-called free market reforms have been initiated on the national and
international level supposedly to make markets more efficient. Nevertheless, as markets have
globalized and allegedly become more efficient, unutilized productive capacity of the world’s major
corporations has, in the eyes of many people, paradoxically increased rather than decreased. The
neoclassical, generic solution of simply “deregulating” markets, without regard for the remaining
regulated, protected, institutional advantages of private property that enrich some while excluding
others, is, therefore, suspect in this context.
According to Keynesian analysis, there is indeed persistent unutilized productive capacity that
belies the neoclassical assumptions of near-perfect efficiency. Untapped growth potential and
underemployment of labor and capital persist despite classical and neoclassical economic theory to
the contrary.5 Markets are far from perfectly competitive, and their operation results in a persistent
shortfall in “effective demand.”6 “The result is an endemic underutilization of people and resources
that can, at least, be partially corrected by government action.”
7 Keynes, General Theory of Employment, Interest and Money, Harcourt, Brace & World, Inc.
(1936) pp. 213-214.
8 Note that the Keynesian approach is not in harmony with the law of private property,
which sees capital and labor as independent earners, and which necessarily distinguishes between
the distribution and redistribution of income and capital. See Ashford, Binary Economics, Fiduciary
Duties and Corporate Social Responsibility, supra note 2, at 1541.
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But, in addressing unutilized productive capacity, the Keynesian analysis attaches no special
significance to the distribution of capital ownership. Indeed, Keynes specifically says that in
understanding his approach:
“It is preferable to regard labour, including of course, the personal services of the
entrepreneur and his assistants, as the sole factor of production, operating in given
environment of technique, natural resources, capital equipment and effective
demand. This is why we have been able to take labour as the sole physical unit
which we require in our economic system, apart from units of money and of time,”7
Accordingly, Keynesian analysis attaches no fundamental significance to the distribution of
capital ownership because in Keynes’ model, capital earns no independent income and has no value
apart from labor. (Consequently, Keynesian analysis attaches no fundamental importance to
extending to all people the competitive right to acquire capital with the earnings of capital.)
Further, Keynesian the analysis makes no fundamental distinction between the distribution and
redistribution of income and capital. In light of the law of private property, however, fiduciaries
should be skeptical of an analysis that makes no distinction between the distribution and
redistribution of capital and income.8
Moreover, although Keynesian strategies remain a central element in the workings of every
major economy (witness, for example the vast public expenditures in the USA), many if not most
people would say that unutilized productive capacity persists and is apparently growing in the USA
and most industrial economies. Thus, although Keynesian economics is intended to address and
remedy the problem of unutilized productive capacity, there is reason to doubt its efficacy with
regard to holistic unutilized productive capacity.
For those who recognize its existence, unutilized productive capacity is an important economic
phenomenon that mainstream economic theory has failed to adequately explain or remedy.
Theoretically, the persistence of unutilized capacity challenges the foundation of mainstream
economics. A major aspect of the political, social, and moral debate in Western societies regarding
economic policy is related to the employment of productive capacity, both utilized and unutilized.
The economic and political prospects for greater and more broadly shared prosperity for poor and
working people are limited by mainstream understanding of policies related to utilized and
unutilized productive capacity. It would serve the interest of economically disadvantaged people,
if they and their counsel could discover and advance an approach to unutilized productive capacity
that better serves their interests.
9 H.G. Moulton, The Formation of Capital (1975, 1935) (Originally published in 1935 as
Publication Number 59 of the Institute of Economics of the Brookings Institution).
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When accepted mainstream theories fail to adequately explain or remedy an important
phenomenon, one scientific and lawyerly way to discover better theories is to identify and suspend
one or more of the assumptions that those theories share in common and then to explore the counter
assumptions and their implications. Although they differ in many respects, all mainstream
approaches to unutilized productive capacity share two basic assumptions: (1) the primary role of
capital is to make labor more productive and (2) there is no substantial, fundamental, positive
relationship between the distribution of capital acquisition and the employment of unutilized
capacity and growth. By suspending these mainstream economic assumptions, one is led to two
basic premise of binary economics.
III. THE BINARY HYPOTHESIS REGARDING UNUTILIZED PRODUCTIVE CAPACITY
By relaxing the unproven assumption that capital has no potent distributive relationship to
growth, the contrary binary assumption (that capital has a potent distributive relationship to growth)
provides an alternative explanation for unutilized productive capacity. The binary hypothesis is that
unutilized productive capacity and concentrated ownership are the direct market consequences of
faulty market institutions and practices that:
(1) concentrate capital ownership, by effectively excluding market participation by non-owners
in the process of acquiring capital with the earnings of capital, and
(2) thereby monopolize and suppress the true productive capacity of capital, by preventing
capital from
(a) being acquired more broadly and rapidly, and
(b) thereafter distributing to consumers the income to purchase what can increasingly
be produced by capital.
According to binary theory, if markets were structured to diffuse ownership voluntarily (by enabling
all people to acquire capital with the earnings of capital), then within the time frame of capital
investment projections of major U.S. corporations (usually approximately five years) increasing
consumer demand (more widely distributed through the acquisition of productive capital) will
profitably employ unutilized productive capacity and produce growth.
Demand for capital investment is derivative of demand for consumer goods. It arises in
anticipation of future consumer demand.9 The anticipated future consumer demand, however, must
be sufficient to enable the capital to earn a competitive return (“acquire itself” in at a competitive
rate). From a binary perspective, in an economy with unutilized productive capacity, because capital
is independently productive, its rate of capital cost recovery will increase as it is acquired more
broadly by people with more unsatisfied needs and wants. Expressed in other words, in an economy
operating at less than full capacity, a voluntary pattern of steadily broadening ownership promises
more production based consumer demand in future years and therefore more demand for capital
goods in earlier years.
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For example, within a period of perhaps five to fourteen years, if members of the poor
and middle classes are enabled to compete with existing owners for the acquisition of corporate
shares representing the capital requirements of companies worthy of prime credit, these poor
and middle-class people would bring to the corporate finance bargaining table a chip not
possessed by existing owners: a pent up appetite for more of the necessities and simple luxuries
of life that richer people enjoy. After the capital has paid for itself (repaid its acquisition debt
obligations) the earnings of capital acquired by members of the poor and middle class, if paid
to them, will distribute more consumer demand than if that capital had been acquired by the
wealthy. Had that capital been acquired by existing owners, its income would have been
courted for additional investment, but in the context of less consumer demand. In an economy
operating at less than full capacity, compared to the investment opportunities that would have
existed without the availability of ownership-broadening market mechanisms, the broader
market distribution of capital and income generated in a binary economy will create greater
investment opportunities for existing owners as well as for the new binary owners.
10 People first adopt paradigms, and then perform their theoretical and empirical analysis.
Thomas Kuhn, The Structure of Scientific Revolutions (2nd ed. 1970).
11 Aristarchus of Samos, in a remarkable insight, first proposed the sun-centred solar system
in the third century AD. For Aristarchus? work, see T.L. Heath, Aristarchus of Samos, the Ancient
Copernicus (1913).
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IV. BINARY ECONOMICS AS A DISTINCT PARADIGM
A. On Paradigms
A paradigm is a way of understanding. Major new paradigms change the way people
understand reality.10 Sometimes they dispel illusions and establish the foundation for major new
discoveries. Every day, billions of people see the sun rise and the sun set, but what they see is a
grand illusion built on a faulty paradigm resting on the false assumption that the sun and planets
travel around the earth. Some principles that were difficult to understand by almost everyone in one
era can be taught to grade school children in the next. When the earth-centered paradigm was
replaced with the sun-centered paradigm, the foundation was laid for the discovery of Newton’s
laws (which make no sense in an earth-centered solar system) and all of modern science.11
It is important to note, moreover, that alternate paradigms need not be mutually consistent
to be useful. Sometimes paradigms complement and supplement understanding, as exemplified by
the distinct conceptual contributions to physics made for example by Newton, Planck, Heisenberg,
and Einstein. Sometimes paradigms conflict and are yet informative of different aspects of the
“same” reality, as in wave theory and particle theory, which are both used to describe the properties
of electrons. Indeed, much economic theory and practice make use of conflicting neoclassical,
Keynesian, behavioral, institutional and other models often to explain the same behavior. Binary
economics should not therefore be excluded from the array of conceptual tools used to
understand economic behavior merely because its premises conflict with conventional theory
or because it explains supposedly the same economic behavior in a fundamentally different way.
Whatever one thinks of the neoclassical and Keynesian paradigms, binary economics will provide
important insights regarding the persistence of unutilized productive capacity and how it might be
profitably employed to reduce economic deprivation while benefitting everyone.
B. The Binary Economic Fundamentals
As an economic theory, three related principles can be used to establish binary
economics as a paradigm distinct from conventional economic theory:
(1) labor and capital are independently productive;
(2) technology makes capital much more productive than labor, and
(3) capital has a potent distributive relationship to growth such that the more broadly capital
is acquired the more profitably it can be employed to increase output.
Thus, binary economics derives its name from the premise that capital and labor are independent (or
“binary”) factors of production. Although they cooperate together (just as two people cooperate
12 Note the choice of the word “automobile” (i.e., self-moving”) to express in words the
independent productiveness of the then marvelous “horseless carriage.” In the context of the prevailing
economic theory, objections to the binary concept of independent capital productiveness have sometimes been
expressed by observations like “capital is not an independent producer because it takes the person to operate
the capital.” However, even though motor cars then did not generally drive themselves without a driver,
people thought of them as “self-moving” and therefore independently productive, no less than the horse
whose work it replaced and vastly supplemented with work of its own.
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when working together), each factor does its own work, has its own productive capacity, and
demonstrates its own “independent productiveness.”
By conceiving of capital as “independently productive,” binary economics provides a
different paradigm for understanding the relation of capital and labor to increased production
and greater abundance? In comprehending this relation, the central concept of conventional
economic theory (that capital makes labor more productive) can be illustrated by the example
of sawing ten boards in one hour with a hand saw as compared with sawing one hundred boards
in an hour with an electric saw. The conventional approach views the human factor as the most
fundamental factor of production, and capital as a dependent factor that can be employed to
make labor more productive. After all it takes the person to operate the saw, whether manual
or mechanical.
However, from a binary perspective, human labor is much more dependent on the nonhuman
factor than the other way around. The sun shines and rain falls without human effort.
With help from the sun, rain, and earth (and countless worms and other organisms) vegetation
produces oxygen, food, and medicines; animals produce food and medicines, do other work, and
provide other benefits. Physical structures and materials support and protect us. Humans make
contributions to the process, but their capacity is limited and mostly made by learning to unleash
and guide the far greater, independently productive powers of the non-human contributions that
are available by discovering and employing the natural laws of creation.
A good example of the independent productiveness of capital (and a better illustration
of the relationship between capital, labor and increased production) are revealed by the work
of human transportation. Walking can be good exercise and fun; but when it is done for reasons
other than its intrinsic worth (as work), it is generally more productive in many contexts, to
employ a horse or automobile to do most of the work in transporting people. The horse is
capital and is definitely independently productive. It does its own work, even though it must
be guided by a person. The same is true of an automobile.12 Another example is seen in the
work of hauling logs: a person can haul one small log one mile in one hour and is exhausted;
(1) with a horse, five logs can be hauled twice as far in half the time (yielding a ten-fold
increase in output) and (2) with a truck five hundred logs can be hauled forty times as far
(yielding a twenty thousand-fold increase in output).
In terms of “productiveness” (which retrospectively means “work done” and
prospectively means “productive capacity”), the horse, automobile, and truck do much more
than increase the productivity of the human who rides, leads, and drives them; the horse,
automobile, and truck are doing most of the extra work. Looking at how production and
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productive capacity has changed since 1776, in countless aspects of work, binary economists
maintain that increased production (growth) is primarily the result of increasing capital
productiveness rather than increasing labor productivity. According to the conventional
perspective, the most important function of technology is to make labor more productive.
However, from a binary perspective, it is much more important to recognize that technology
makes capital much more productive than labor. As would be measured by their value in truly
efficient markets, a basic strategy in capital investment is to produce more, at lower cost, with
more productive capital and less labor. The primary role of capital therefore is both to replace
and vastly supplement labor productiveness with increasing capital productiveness rather than
to increase labor productivity. Furthermore, capital works on both sides of the economic
equation with vastly increased
(1) productive capacity and production, and
(2) capacity to distribute income and leisure.
In a private property, market economy, it is the capacity of capital both to do much more work
and to distribute much more income and leisure that explains how the distribution of its
ownership has a positive impact on the employment of unutilized capacity, capital
accumulation, and growth.
C. Six Powers of Capital
Once it is recognized that capital is independently productive, then its independent
powers can be understood and employed consistent with their full economic potential. In
reality, capital does far more than make labor more productive, facilitate labor specialization,
and enable the profitable employment of more workers. Increasingly, capital is doing
proportionately ever more of the work.
Based on careful observation, capital reveals six independent powers. Specifically,
capital can
(1) replace labor (doing what was formerly done by labor);
(2) vastly supplement the work of labor by employing capital to do much more of the
kind of work that humans can do (such as the greatly increased hauling that can
be done employing horses or trucks);
(3) do work that labor can never do (e.g., elevators lift tons thousands of feet in the
air; airplanes fly; scientific instruments unleash forces that create computer
chips that cannot be made by hand; fruit trees make fruit while all farmers can
do is assist in the process);
(4) work without labor (as in the case of washing machines, automated machines,
robots, and wild fruit-bearing trees);
(5) pay for itself out of its future earnings (the basic rule of business investment); and
(6) distribute the income necessary to purchase its output (the logic of double-entry
book-keeping and an expression of Say’s Law of Markets).
The first four powers concern what might be considered the “real economy” powers of capital; the
latter two are powers that are most clearly revealed in a private property, market economy with a
stable credit system protected by a reliable legal system. Each of these ways of contributing to
13 Keynes, General Theory of Employment Interest and Money, pp. 131-141, 217.
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growth (including mere labor replacement, which produces the same output as before, plus
leisure), is significant, but only the first directly involves the substitution of capital for labor
(marginal or otherwise). Thus, although some economists and policy advocates use marginal
efficiency theory as the foundation for a general theory of growth; in fact the capital/labor
substitution process is only one component of growth (operating after the creation of greatly
increased productive capacity) and its wealth-enhancing contribution to efficient pricing and
resource allocation is limited for reasons discussed below.
D. Binary and Conventional Growth Theories Compared: The Importance of
Ownership
The binary assumption that economic growth is primarily a function of increasing capital
productiveness and its distribution stands in conflict with Adam Smith’s basic paradigm for
growth which is grounded in the notion that capital makes labor more productive and enables
the profitable employment of more workers. This productivity principle is central to
neoclassical economics, except that neoclassical theory technically speaks only to efficiency
(the efficient employment of people and resources to produce desired goods and services) and
not explicitly to economic growth. (Conscientious economists acknowledge that the theory of
neoclassical efficiency is not a theory of growth. Everyone could be slowly starving to death
on a doomed planet orbiting a dying sun, and yet every transaction might be neoclassically
efficient. Nevertheless, frequently the principles of neoclassical efficiency are falsely advanced
as a de facto theory growth and distribution in the realms of political economy and politics, and
in the policies of major economic and financial institutions that facilitate capital acquisition
primarily for existing owners.) Likewise, in advancing his General Theory in which, apart from
time and money, the unit of labor is the sole physical unit, Keynes explicitly characterized his
approach to full employment as founded on a “productivity theory” of capital, which he builds
on the productivity theory of wages advanced by Alfred Marshall.13 In all these conventional
approaches to growth, the distribution of ownership is irrelevant unless it affects labor
productivity.
E. The Supply of Capital and The Principle of Binary (Ownership-Distribution-Based)
Growth
To repeat for emphasis, the principle of binary growth holds that capital has a potent
distributive relationship to growth such that the more broadly capital is acquired the more
profitably it can be employed to increase output. This principle follows from the premises that
capital is independently and has (relative to labor) a vastly greater capacity to do work and distribute
income.
Although resting on a normative conception of private property (to be discussed later), the
principle of binary growth is a factual proposition rather than an assertion of value. The principle
is generally true, false, or not subject to being verified or falsified, whether or not it is good, just,
or holy for more or all people to be able to acquire capital with the earnings of capital.
14 Keynes, General Theory of Employment Interest and Money, pp. 213.
Page 15 of 31
The principle of binary growth departs from the market analysis of Adam Smith and all
who followed him. Smith understood the value and price of capital to be a function of labor
productivity and the supply of capital; for Smith, the distribution of capital ownership was of
no particular significance regarding it price or value unless it affected labor productivity. His
analysis reveals no recognition that the market distribution of capital ownership (from very
narrow to very broad) could also affect its value and price. The principle of binary growth also
conflicts with Keynes’s understanding of growth and full employment. As noted, Keynes
attached no fundamental significance to the distribution of capital as a determinant of
employment, growth, prices, or value. Like Smith, Keynes did not consider that the distribution
of capital ownership could directly affect its rate of accumulation or value. Indeed, Keynes
explicitly excluded the productive and distributive effects of capital from his analysis:
“For the only reason why an asset offers a prospect of yielding during its life
services having a value greater than its initial supply price is because it is scarce;
and it is kept scarce because of the rate of interest on money. If capital becomes
less scarce, the unutilized yield will diminish, without its having become less
productive – at least in the physical sense.”14
Thus, Keynes contended that capital is valuable because it is scarce and scarce because it must
compete with the interest rate on money, and not because it has real productive and distributive
capacity of its own. For Keynes, the real productive capacity of capital is not represented as a
fundamental, independent variable in his model, which is a fancy way of saying it is
fundamentally irrelevant.
But binary economists contend that (1) capital is independently productive and (2) the
real productive and distributive power of capital is the most fundamental determinant of its fullpotential
contribution to its growth (accumulation), earning capacity, and value. The realization
of the full potential of capital productiveness is significantly dependent on the market structure
that determines the distribution of its ownership. Capital is kept scarce by hoarding and
suppressing its true productive capacity, thereby making it more expensive to acquire. From
a binary perspective, Keynes got it backwards: the liquidity premium of money is a result (rather
than the primary cause) of the scarcity of capital (note that for individuals, the percent of cash to
total wealth generally decreases as total wealth increases), which is in turn the result of
institutional barriers and monopolistic preferences that exclude most poor and working people
from acquiring capital with the earnings of capital to finance the fuller employment of people
and resources necessary to satisfy more fully their unmet needs and wants.
Because demand for capital is derivative of demand for consumer goods, broader
ownership (in an under-capacity producing economy) will produce increasing demand for both
consumer and capital goods, thereby increasing capital investment and accelerating rather than
decreasing its rate of return despite its increasing supply (or as Keynes might say, despite its
“decreasing scarcity”). Thus, rather than assuming an irrelevant status as in Keynesian,
15 A. Smith, Wealth of Nations, (1776, Random House ed. 1937), pp. 30-37, 50.
16 Keynes, General Theory of Employment Interest and Money, Harcourt, Brace & World, Inc.