Memo on binary economics to attorneys for women and people of color

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• The opportunity is to secure for growing numbers, and
  eventually all women and people of color, the right to acquire
  capital with the earnings of capital.1 This is a right presently
  enjoyed by all well-capitalized people, which, of course, includes
  some women and people of color, but only a small minority of
  them.
  To understand why this right, which is called “the binary
  property right,” may be of singular importance to women and
  people of color, and also to essentially all poor and working
  people, and why its realization may also be in the interest of
  public corporations and most, if not all, of their shareholders, it is
  necessary for counsel for women and people of color to learn some
  1 As used in binary theory, capital refers to all non-human factors of production
  that can be owned. Thus it includes land, animals, tools, machines, structures,
  patents, copyrights, and other intangibles—anything capable of being owned and
  producing wealth and therefore income. Capital does not include what is sometimes
  called “financial capital,” which binary economics analyzes as a participation in the
  earnings of capital (i.e., a property right in capital). Furthermore, capital does not
  include “human capital,” which binary economics analyzes as a function of labor.
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  2005] MEMO ON BINARY ECONOMICS 1223
  basic principles of a little-understood theory of economics called
  “binary economics.” Binary economics offers a conception of
  economics that is foundationally distinct from the economic
  theories presently employed by government, private enterprise,
  charitable foundations, policy institutes, individuals, and their
  counsel to formulate and evaluate economic policy.2
  As explained more fully below, according to binary
  economics, instituting the binary property right is beneficial to
  women and people of color because it will over time greatly
  enhance their earning power and autonomy by supplementing
  their labor income and/or welfare benefits increasingly with their
  earnings from capital ownership. Instituting the binary property
  right will also benefit public corporations and their shareholders
  because it will provide a stable, growing, broadening, productionbased
  consumer demand that will enable public corporations to
  2 Binary Economics was first advanced by the corporate finance attorney,
  investment banker, and philosopher, Louis Kelso. See generally LOUIS O. KELSO &
  MORTIMER J. ADLER, THE CAPITALIST MANIFESTO (1958); LOUIS O. KELSO &
  PATRICIA H. KELSO, DEMOCRACY AND ECONOMIC POWER: EXTENDING THE ESOP
  REVOLUTION (1986); LOUIS O. KELSO & MORTIMER J. ADLER, THE NEW CAPITALISTS:
  A PROPOSAL TO FREE ECONOMIC GROWTH FROM THE SLAVERY OF SAVINGS (1961);
  LOUIS O. KELSO & PATRICIA HETTER, TWO-FACTOR THEORY: THE ECONOMICS OF
  REALITY (1967). The authoritative and most complete source of writings by Louis
  Kelso can be found on the website of The Kelso Institute. The Kelso Institute,
  http://www.kelsoinstitute.org (last visited Oct. 26, 2005).
  In recent years, binary economics has become a subject of inquiry within the
  socio-economic approach to law-related economic issues championed by the Section
  on Socio-Economics of the Association of American Law Schools at its Annual
  Meeting Programs. See The Journal of Law and Socio-Economics,
  http://www.journaloflawandsocioeconomics.com (last visited Oct. 26, 2005).
  The author has published other works discussing binary economics as a distinct
  paradigm. See generally ROBERT ASHFORD & RODNEY SHAKESPEARE, BINARY
  ECONOMICS: THE NEW PARADIGM (1999); Robert Ashford, The Binary Economics of
  Louis Kelso: A Democratic Private Property System for Growth and Justice, in
  CURING WORLD POVERTY: THE NEW ROLE OF PROPERTY 99–100 (John H. Miller ed.,
  1994), available at http://www.cesj.org/binaryeconomics/binary-cwp1ed.pdf; Robert
  Ashford, The Binary Economics of Louis Kelso: The Promise of Universal Capitalism,
  22 RUTGERS L.J. 3 (1990) [hereinafter Ashford, The Promise of Universal
  Capitalism]; Robert Ashford, Louis Kelso’s Binary Economy, 25 J. SOCIO-ECONOMICS
  1 (1996) [hereinafter Ashford, Louis Kelso’s Binary Economy]; Robert Ashford, A
  New Market Paradigm for Sustainable Growth: Financing Broader Capital
  Ownership with Louis Kelso’s Binary Economics, 14 PRAXIS: FLETCHER J. DEV.
  STUD. 25 (1998); Robert Ashford, Binary Economics, Fiduciary Duties, and
  Corporate Social Responsibility: Comprehending Corporate Wealth Maximization
  and Distribution for Stockholders, Stakeholders, and Society, 76 TUL. L. REV. 1531
  (2002) [hereinafter Ashford, Binary Economics, Fiduciary Duties, and Corporate
  Social Responsibility].
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  employ their existing productive capacity more fully and
  profitably as well as invest more profitability to achieve greater
  growth.
  To acquire capital with the earnings of capital, wellcapitalized
  people use: (1) the pre-tax earnings of capital, (2)
  collateral, (3) credit, (4) insurance and markets to diversify and
  reduce risk, and (5) a monetary policy intended to protect private
  property. 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.
  Binary economic analysis combines the salient principles of
  the following: (1) the Homestead Acts, which were intended to
  broaden land ownership, (2) the employee stock ownership plan
  (“ESOP”) technique of corporate finance, which uses tax exempt
  limited liability trusts, as fiduciary agents for employees, to
  acquire shares of employer stock with non-recourse credit, (3) a
  market for capital credit insurance, such as that profitably
  provided by the Federal Housing Administration, and (4) a
  return of the Federal Reserve to its original Congressional
  mandate under Section 13 of the Federal Reserve Act to broaden
  access to capital credit by discounting of eligible productive
  private credit.
  Binary economic analysis offers an entirely voluntary means
  that would enable major prime credit-worthy companies to meet
  any portion of their capital requirements while simultaneously
  enabling their employees, customers, neighbors, and others to
  acquire shares in participating corporations with non-recourse
  credit, and pay for those shares with the earnings of the capital
  acquired. The acquired shares would be full-dividend shares of
  the participating companies. The shares would distribute their
  full return (net of reserves for depreciation, research, and
  development to maintain the competitive productive capacity of
  the capital) first to pay the cost of capital acquisition and then to
  provide a capital source of income to supplement wages and
  welfare benefits.
  When representing women and people of color regarding
  their economic interests, counsel should not limit the scope of
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  their representation to exclude advocacy of the right to acquire
  capital with the earnings of capital without their clients’
  informed consent.
  I. A BRIEF CONSIDERATION OF CORPORATE WEALTH AND
  CORPORATE SOCIAL RESPONSIBILITY
  Before presenting an overview of binary economics and how
  it may be used to persuade corporations to act to realize for
  women and people of color the binary property right to acquire
  capital with the earnings of capital, it would be appropriate to
  consider briefly corporate wealth, fiduciary duties, and social
  responsibility.
  As a creature of the state, with strong persona status, the
  public corporation has special advantages for profitably
  organizing the mix of input factors necessary for wealth creation
  and distribution on a massive scale. Indeed, the development of
  corporate law is both a response to, and facilitation of, modern
  economic enterprise. It reflects and shapes economic behavior.
  Major corporations dominate the emerging global economy
  and the economy of virtually every nation. In terms of productive
  capacity, capital ownership, jobs, and environmental impact,
  major corporations tell much of the story regarding economic
  activity. America’s three thousand largest corporations, for
  example, own over ninety percent of the investable assets in the
  United States (excluding residential real estate).3
  But not all people are able to participate effectively in the
  ownership and capital acquisition of those corporations. The
  New York Stock Exchange (“NYSE”) reports that its listed
  securities are owned directly or indirectly by over fifty million
  shareholders, but the median shareholder is forty-three years old
  with a portfolio of less than $15,000 in value.4 Thus, the
  distribution of common share ownership is a bit like the river
  that is two miles wide but mostly a few inches deep. In the
  United States, for example, in approximate terms, 1% of the
  people through their direct and indirect share holdings own 40–
  3 Robert Ashford, The Socio-Economic Foundation of Corporate Law and
  Corporate Social Responsibility, 76 TUL. L. REV. 1187, 1197 (2002).
  4 NEW YORK STOCK EXCHANGE FACT BOOK ONLINE, HIGHLIGHTS OF NYSE
  SHAREOWNER CENSUS REPORTS (1952–1990), http://www.nysedata.com/factbook
  (follow “The Investing Public” hyperlink; then follow “Highlights of NYSE
  shareowner census reports (1952–1990)” hyperlink) (last visited Oct. 26, 2005).
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  50% of the marketable securities; 10% of the people own 90%; the
  remaining 90% of the people own the remaining 10% of
  marketable securities; and of that 90%, over half the people own
  none.5
  At the same time: almost all capital is owned by major
  corporations; almost all capital owned by those corporations is
  acquired with the earnings of capital; much of it is acquired with
  borrowed money; and all is acquired with the indispensable
  foundation consisting of a stable property, monetary, credit, and
  market system dependent on government regulation,
  maintenance, protection, and enforcement. In the case of major
  prime credit-worthy companies in the United States, the sources
  of funds for capital acquisition, in approximate terms, are as
  follows: 70% with retained earnings, 23% with debt, and 7% with
  direct issuance of shares of stock.6 Relatively little capital is
  acquired with the earnings of labor. The vast majority of people
  in every nation have little or no participation in the capital
  acquisition of the world’s major corporations.
  The primary purpose of corporate finance is to enable
  corporations to acquire capital before they have earned the
  money to pay for it. Under the prevailing system of corporate
  finance, as corporate assets grow and are continually used to buy
  additional assets with their earnings, they benefit people
  primarily in proportion to existing wealth. Under this approach,
  the rich benefit the most, the middle class benefit less, and the
  poor (“the least of these”) benefit least of all. Looking at the
  economy as a whole, the system offers (1) growing capital
  ownership and most of the best jobs to the well-capitalized, (2)
  the remaining jobs and welfare to others, and (3) goods and
  services to anyone with money or credit to buy them, while the
  negative effects of corporate production are “externalized” so that
  they are borne, to the extent possible, by persons other than the
  corporation and perhaps its privileged investors and employees.
  Those who own little or nothing are offered jobs, welfare, and
  5 See EDWARD N. WOLFF, TOP HEAVY: A STUDY OF THE INCREASING INEQUALITY
  OF WEALTH IN AMERICA 11–12 (1995) [hereinafter WOLFF, TOP HEAVY]; Edward N.
  Wolff, How the Pie is Sliced: America’s Growing Concentration of Wealth, AM.
  PROSPECT, Summer 1995, at 58 [hereinafter Wolff, How the Pie is Sliced].
  6 See RICHARD BREALEY & STEWART MYERS, PRINCIPLES OF CORPORATE
  FINANCE (2d ed. 1984); Lynn A. Stout, The Unimportance of Being Efficient: An
  Economic Analysis of Stock Market Pricing and Securities Regulation, 87 MICH. L.
  REV. 613, 648 (1988).
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  cheaper products as their participation in economic growth, but
  they are effectively denied the governmental policies that assist
  well-capitalized owners in acquiring additional capital with the
  earnings of capital.
  According to many, the advantages of doing business in the
  corporate form, the sheer size and impact of large corporations on
  society, and the attendant concentration of wealth and power call
  for a corporate social responsibility toward those affected by the
  corporation that may, in particular contexts, override the
  fiduciary responsibility to the corporation’s existing shareholders.
  Clearly governments can and do create opportunities for, and
  impose obligations on, corporations that have distributional and
  redistributional consequences. Beyond obligations specified by
  law and regulation, what is required of corporations and
  corporate fiduciaries? In terms relevant to corporate social
  responsibility, the question can be expressed as follows: in
  setting the wealth maximization and distribution goals of the
  corporation, what other interest(s), beyond the interests of the
  residual claimants, who are usually common shareholders, that
  relate to other stakeholders—employees, customers, suppliers,
  neighbors, and others including flora, fauna, and the
  environment—may, should, or must corporate fiduciaries take
  into account? Thus, the debate regarding the existence and scope
  of corporate social responsibility can be cast as a debate
  regarding duties of corporate fiduciaries with respect to the
  maximization and distribution of wealth owned by the
  corporation and the opportunities available to the corporation.
  II. OVERVIEW OF BINARY ECONOMICS
  Binary economics can be distinguished from other economic
  schools by three related propositions:
  (1) Labor and capital are “independent” or “binary”
  factors of production; or in other words, they are
  “independently productive”;
  (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,
  (a) the more it can be profitably employed to increase
  output, and (b) the more an economy (and major
  corporations within the economy) will profitably grow.
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  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, provides its
  own “independent productiveness.” In this context, 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,” which
  retrospectively means “work done” and prospectively means
  “productive capacity.”
  According to Adam Smith, the primary role of capital is to
  increase labor productivity.7 Karl Marx, Alfred Marshall (widely
  credited for neoclassical economics), and J.M. Keynes did not
  disagree.8 Indeed, in his General Theory, Keynes distilled the
  economy to three fundamental variables—time, money, and
  labor—and treated capital as a dependent variable.9 In binary
  economics, (1) capital and labor are equally fundamental,
  independent (i.e., binary) variables and (2) the primary role of
  capital is to replace and vastly supplement the work of labor
  (“labor productiveness”) with the work of capital (“capital
  productiveness”).
  The “independent productiveness” of labor and capital can be
  illustrated by considering the work of digging holes and hauling
  sacks. A person can dig a hole in four hours by hand and in one
  hour with a shovel (capital). According to mainstream economic
  analysis, with a shovel, labor productivity increases by a factor of
  four. But from a binary perspective, per hole, with the shovel,
  labor is contributing only twenty-five percent of its former
  productiveness, and the shovel is contributing seventy-five
  percent. The independent productiveness of capital is more
  clearly revealed in the work of hauling sacks: a person can haul
  one sack, one mile, in one hour and is exhausted. In the same
  time, with a horse, ten sacks can be hauled four times as far,
  yielding a forty-fold increase in output, and with a truck, five
  hundred sacks can be hauled forty times as far, yielding a twenty
  thousand-fold increase in output. The horse and truck are doing
  7 See ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH
  OF NATIONS 332 (photo. reprint 1981) (Oxford Univ. Press 1976) (1776).
  8 See JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT,
  INTEREST, AND MONEY 213–17 (Harcourt Brace Jovanovich 1964) (1936); KARL
  MARX, CAPITAL 188 (Friedrich Engels ed., Encyclopedia Britannica, Inc. 1952)
  (1887).
  9 See KEYNES, supra note 8, at 213–14.
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  essentially all of the extra work.
  Based on its independent productiveness, capital has six
  powers that are important to production and growth. Capital
  can:
  (1) replace labor by doing what was formerly done by
  labor;
  (2) vastly supplement the work of labor by performing
  much more of the kind of work that humans can do;
  (3) do work that labor alone 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, windmills, automatic tellers, robots, and fruit
  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).
  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 powers of capital contributes to the growth,
  including mere labor replacement, which produces the same
  physical output while liberating the time of workers for other
  activity including leisure. However, only the first power directly
  involves the mere substitution of capital for labor. Thus,
  although some economists, teachers of law and (neoclassical)
  economics, and policy advocates use the marginal efficiency
  theory of neoclassical economics as the foundation for a general
  theory of growth,10 the capital/labor substitution process is only
  one component of growth, operating after the creation of greatly
  10 See e.g., RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 252 (6th ed. 2003).
  “What Adam Smith referred to as a nation’s wealth, what this book refers to as
  efficiency, and what a layman might call the size of the pie, has always been an
  important value . . . .” For a critique of this approach on positive and ethical
  grounds, see Robert Ashford, Socioeconomics and Professional Responsibilities in
  Teaching Law-Related Economic Issues, 41 SAN DIEGO L. REV. 133, 150-52 (2004);
  see also James R. Hackney, Jr., Law and Neoclassical Economics: Science, Politics,
  and the Reconfiguration of American Tort Law Theory, 15 LAW AND HISTORY REV.
  275 (1997).
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  increased productive capacity. Moreover, from the binary
  perspective, the wealth enhancing contribution to efficient
  pricing and resource allocation is severely limited so long as the
  distribution of capital acquisition remains narrow.11
  When analyzing how production and productive capacity
  have grown since the publication of Smith’s Wealth of Nations in
  1776, mainstream 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 input,
  higher wages, and the employment of more labor. According to
  binary economics, in contributing to economic growth, capital
  does much more than increase the productivity of the humans
  who work with it. Increasingly, capital is doing a growing
  portion of the total work. Thus, economic growth is primarily the
  result of increasing capital productiveness rather than increasing
  labor productivity. The economic imperative is generally to
  produce more with more productive capital and less labor.
  Therefore, 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, capital works on both sides of the productionconsumption
  economic equation by providing vastly increasing
  productive capacity and production, and capacity to distribute
  income and leisure. According to binary economists, in a private
  property, market economy, it is the capacity of capital to do much
  11 Frequently, neoclassical economists stress that prices determine distribution,
  but less frequently teach that distribution also determines prices. 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
  “labor theory of value” in practice. 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. Based on human effort alone,
  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. This is another expression of the principle of binary growth. See generally
  ASHFORD & SHAKESPEARE, supra note 2.
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  more work and to distribute much more income and leisure that
  explains how the broader distribution of its ownership has a
  positive impact on the fuller employment of productive capacity,
  capital accumulation, and growth.
  III. THE QUESTION OF UNUTILIZED PRODUCTIVE CAPACITY
  When assisting clients to identify and secure their essential
  rights, responsibilities, and opportunities, it is important for
  lawyers to identify relevant issues helpful to clients that have
  been left out of the discussion. From a binary perspective, with
  regard to the interests of women and people of color, one of the
  most important issues generally left out of the discussions on
  corporate governance, fiduciary duties, and social responsibility
  is the question of unutilized productive capacity (“UPC”).
  The recognition that an economy has (or may have) a
  substantial amount of UPC significantly alters the moral and
  practical content of the debate on economic policy. If people
  languish in deprivation in a context where there is no unused
  capacity to produce more, then apart from charity, the moral
  question is whether it is right to compel the redistribution from
  the richer Peter to support the poorer Paul; and the practical
  question is whether such compulsory redistribution will
  positively or negatively affect the amount of future production
  available to Peter and Paul. But if people languish in
  deprivation, when the capacity to produce more does exist, then
  as a practical matter, Paul can at least in theory be enriched
  without compulsory redistribution from Peter; and it is
  incumbent on counsel, other fiduciaries, and all people of good
  will to question the adequacy of existing economic approaches to
  productive capacity and to look for better approaches to economic
  policy related to productive capacity. Thus, binary economists
  believe that by focusing attention on the question of UPC,
  attorneys for economically disadvantaged people will be better
  able to serve their clients.
  There are, of course, different definitions of unutilized
  productive capacity depending upon the purpose of economic
  inquiry, and lawyers must carefully consider which definition or
  definitions will best serve the interests of their clients.
  Mainstream economic analysis generally employs a narrow and
  frequently documented “static” approach to UPC that focuses
  primarily on existing assets and available labor at a given wage.
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  The presently unemployed portion of each existing or available
  factor is the “static UPC” for that factor.
  In considering the question of UPC, 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
  timeframe—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.12 Such a
  timeframe 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, clothing, shelter, transportation, and healthcare,
  and simple comforts and conveniences by way of greener and
  more socially responsible industrial processes and practices.13
  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
  12 Paramount Commc’ns, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1989).
  13 See Ashford, supra note 3, at 1203; Robert Ashford, Binary Economics and the
  Case for Broader Ownership 4, available at http://www.globaljusticemovement.org/
  subpages_online_library/ashford1.pdf (July 20, 2003).
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  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 women and people of color (and
  the duty of their attorneys, other advocates, and advisors) to
  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 UPC and also the broader
  holistic, fiduciary understanding of UPC.
  To some people, the question of the existence of unutilized
  productive capacity, in the broader, holistic sense of the term,
  may be simply a matter of opinion. But in law, like the question
  of valuing a company, it is also a question of fact.
  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 United States 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
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  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 as health and retirement benefits, safety and
  environmental standards, military costs, and infrastructural
  benefits of the United States); 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.
  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.14 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
  14 Ashford, supra note 13, at 2.
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  2005] MEMO ON BINARY ECONOMICS 1235
  thought.15
  Unlike 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, UPC 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 UPC 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.
  So if the question of unutilized productive capacity is of
  importance to economically disadvantaged people, and also to the
  interests of major corporations, attorneys for economically
  disadvantaged people should ask: (1) “Why is unutilized
  productive capacity not a major part of the present discussion?,”
  and (2) “How can unutilized productive capacity be included in
  the discussion in a way that works for the benefit of economically
  disadvantaged people?”
  15 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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  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 capacity in the holistic sense of
  the term.
  In fact, mainstream economics fragments 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
  policymakers. Neoclassical economics assumes perfect
  competition and efficiency as the starting point of analysis.16 In
  the world of perfect neoclassical efficiency, unutilized capacity,
  beyond the need for peaks in market demand and an insurance
  for emergencies beyond the predictable, is an anomaly that
  should not persist for long. In efficient markets, unproductive
  assets are sold, even at salvage if necessary. Even before they
  become partially or totally unutilized, assets not earning
  competitive returns for their owners are sold to those whose rate
  of return can be enhanced by the acquisition.17 Moreover,
  according to neoclassical economics, “as markets become more
  competitive, unutilized productive capacity should decrease, not
  increase.”18 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.19 Plant closings, downsizings, and lay-offs
  are signs of greater, not less, efficiency. For those who believe
  16 See 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).
  17 Ashford, supra note 3, at 1202.
  18 Id.
  19 The history that gave rise to the antitrust laws reveals, however, that vast
  unutilized capacity can also be of great value to a rational, self-interested monopolist
  because it discourages potential competitors from investing the resourses to
  compete. Those enjoying monopoly profits are of course benefited if the existence of
  unutilized capacity never enters the discussions of economic policy.
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  2005] MEMO ON BINARY ECONOMICS 1237
  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,20 socalled
  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.21 Markets are far from perfectly competitive, and their
  operation results in a persistent shortfall in “effective demand.”22
  “The result is an endemic underutilization of people and
  resources that can, at least, be partially corrected by government
  action.”23 But, in addressing unutilized productive capacity, the
  20 See supra note 10 and accompanying text.
  21 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).
  22 See generally KEYNES, supra note 8, 23–34 (defining “effective demand”).
  23 Ashford, Binary Economics, Fiduciary Duties, and Corporate Social
  Responsibility, supra note 2, at 1565.
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  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 a given environment of
  technique, natural resources, capital equipment and effective
  demand. This partly explains why we have been able to take
  the unit of labour as the sole physical unit which we require in
  our economic system, apart from units of money and of time.24
  Accordingly, Keynesian analysis attaches no fundamental
  significance to the distribution of capital ownership because in
  Keynes’s 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, the Keynesian analysis makes no fundamental
  distinction between the distribution and redistribution of income
  and capital. In light of the law of private property, however,
  lawyers should be skeptical of an analysis that makes no
  distinction between the distribution and redistribution of capital
  and income.25
  Moreover, although Keynesian strategies remain a central
  element in the workings of every major economy (witness, for
  example the vast public expenditures in the United States),
  many if not most people would say that unutilized productive
  capacity persists and is apparently growing in the United States
  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 UPC.
  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
  24 KEYNES, supra note 8, at 213–14. See generally JOHN FENDER,
  UNDERSTANDING KEYNES: AN ANALYSIS OF ‘THE GENERAL THEORY’ (1981).
  25 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.
  CP1_ASHFORD 2/6/2006 9:10:03 PM
  2005] MEMO ON BINARY ECONOMICS 1239
  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
  women, people of color, and 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.
  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 premises of binary
  economics.
  IV. THE BINARY HYPOTHESIS REGARDING 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 is the unutilized productive
  capacity of the assets owned by major prime credit-worthy public
  corporations. As a matter of policy, this is where an enlightened
  approach to corporate economic policy can have its greatest
  beneficial impact on industry, corporate and shareholder wealth,
  people of color, women, and generally people who own little or no
  capital.
  As previously noted, looking at the question holistically over
  a period of time required of fiduciaries, binary economists
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  maintain that unutilized capacity is not merely a static ratio of
  existing unutilized capital and labor divided by available capital
  and labor, but also includes the unutilized capacity to create even
  more unutilized productive capacity. Noting that present
  demand for capital investment is dependent on demand for
  consumer goods in a future period,26 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 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, increases the rate of capital
  cost recovery, and makes profitable the employment of more, and
  increasingly more productive, capital along with the labor
  necessary to build, deliver, install, and operate it.
  Thus, by relaxing the unproven assumption of mainstream
  economics (that a broader pattern of capital acquisition has no
  potent, positive, distributive relationship to the profitable
  employment of unutilized capacity and the promotion of growth),
  the contrary binary assumption (that a broader pattern of capital
  acquisition has a potent, positive, distributive relationship to the
  profitable employment of unutilized capacity and the promotion
  of growth) provides an alternative explanation for much
  unutilized productive capacity.
  In other words, the binary hypothesis is that much
  unutilized productive capacity is the consequence of concentrated
  capital ownership. Concentrated capital ownership fails to
  distribute broadly the consumer demand necessary to purchase
  the output of increasingly capital-intensive production.
  Concentrated ownership in turn is the consequence of faulty
  market institutions and practices that:
  (1) effectively exclude most people from 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.
  26 See generally HAROLD G. MOULTON, THE FORMATION OF CAPITAL 37–48
  (1935).
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  2005] MEMO ON BINARY ECONOMICS 1241
  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 timeframe of
  capital investment projections of major U.S. corporations (usually
  five years) increasing consumer demand (more widely distributed
  through the broader acquisition of productive capital with the
  earnings of capital) will profitably employ more unutilized
  productive capacity and produce more growth.
  For example, within a period of perhaps five to fourteen
  years, if members of the poor and middle classes are enabled to
  compete with existing owners for the acquisition of corporate
  shares representing the capital requirements of companies
  worthy of prime credit, these poor and middle class people would
  bring to the corporate finance bargaining table a chip not
  possessed by existing owners: a pent up appetite for more of the
  necessities and simple luxuries of life that richer people enjoy.
  After the capital has paid for itself, 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. If that capital had been
  acquired by existing owners, its income would have been courted
  for additional investment, but in the context of less consumer
  demand. Compared to the investment opportunities that would
  have existed without the prospect of a broader pattern of capital
  acquisition, the broader market distribution of capital acquisition
  and income generated in a binary economy will create greater
  investment opportunities for existing owners as well as for the
  new binary owners.
  Therefore, mainstream economic theory can be enhanced by
  considering the return on capital not only as a function of its
  scarcity, the wage rate, and the interest rate, but also as a
  function of the increasing productiveness of capital and the
  distribution of its ownership. The resultant distribution-based
  (binary) growth is not caused by increased human productivity,
  capital deepening, or accelerated technological advance. It is
  specifically the result of the broader distribution of capital
  acquisition. This distribution-based relationship to the rate of
  return on capital and growth is not revealed by classical and
  neoclassical analyses which assume that the return on capital is
  a function of only its scarcity and labor productivity. Likewise,
  Keynesian analysis, which reduces the operation of the economy
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  1242 ST. JOHN’S LAW REVIEW [Vol. 79:1221
  to time, money, and labor, cannot yield a conclusion that growth
  and the return on capital are independent functions of the
  productiveness capital and the distribution of its ownership.
  With its labor-based, productivity analysis, mainstream
  economic strategies rely on 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 alone cannot distribute sufficient consumer income
  to employ existing unutilized capacity and promote sustainable
  growth without the additional consumer income which would
  naturally result from the increased productiveness of capital and
  a broader pattern of capital acquisition.
  V. APPLYING BINARY PRINCIPLES TO THE UNITED STATES
  ECONOMY
  The logic underlying the principle of binary growth (i.e.,
  capital-ownership distribution-based growth) can be understood
  and implemented by considering the three thousand largest
  companies in the United States, and then focusing on a subset
  comprised of prime credit-worthy companies. Most of these
  companies exhibit the frustrating essence of unutilized
  productive capacity. At diminishing unit costs, they can produce
  much more of the goods and services people dearly need and
  want. However, the consumer spending power to render more
  production profitable even at diminishing unit costs is lacking.
  As noted above, presently, almost all new capital is acquired
  with the earnings of capital, and much of it is acquired with
  borrowed money. The ownership of this corporate wealth is
  highly concentrated so that approximately 1% of the people own
  40–50% of the wealth and 10% own 90% of the wealth, leaving
  90% of people owning little or none. Thus, capital returns its
  value at a rate reflective of its long-term (suppressed) earning
  capacity as it buys itself for a small minority of the population.27
  If the techniques presently used to enable existing owners to
  acquire capital with earnings of capital were opened
  competitively to all people, then in an economy with
  underutilized productive capacity, the demand for capital
  investment would increase as its income is increasingly
  27 Wolff, How the Pie Is Sliced, supra note 5. See generally WOLFF, TOP HEAVY,
  supra note 5 (discussing the disparate increase in wealth along class lines).
  CP1_ASHFORD 2/6/2006 9:10:03 PM
  2005] MEMO ON BINARY ECONOMICS 1243
  distributed to would-be consumers with unsatisfied needs and
  wants. The binary growth potential in this situation can be
  understood as a manifestation of the law of supply and demand
  within a “binary timeframe”—the time expected for wellmanaged
  capital to pay for its acquisition costs (a period usually
  no longer than five to seven years) and then to begin earning a
  net income for its owners. This is a time period in which
  technology, capital investment, and the distribution of ownership
  are variable rather than fixed. Because demand for capital goods
  is dependent on anticipated demand for consumer goods in a
  future period, the broader pattern of capital acquisition in a
  binary economy will structure more production-based consumer
  demand in the future period, and will therefore provide market
  incentive for more capital investment in the earlier period.
  Admittedly, there would be a gestation period (a period
  somewhat shorter than the capital cost recovery period and
  determined by the horizon for capital investment planning)
  before the distributional growth effects would become noticeable,
  but as will be explained, their cumulative effect over time may be
  remarkably significant.
  As previously noted, to acquire capital with the earnings of
  capital, well-capitalized people use: (1) the pre-tax earnings of
  capital, (2) collateral, (3) credit, (4) market and insurance
  mechanisms to diversify and reduce risk, and (5) a monetary
  policy intended to protect private property. The same
  institutions and practices that work profitably for wellcapitalized
  people can also work profitably for all people. In an
  economy operating at less than full capacity, if capital can
  competitively pay for its acquisition costs out of its future
  earnings primarily for existing owners, it can do so even more
  profitably if all people are included in the acquisition process.
  Accordingly, to enable all people and major prime creditworthy
  corporations to capitalize on the potent distributive
  relationship between voluntary ownership-broadening capital
  acquisition and growth, a binary economy requires only modest
  reforms to open the market infrastructure governing corporate
  finance so that all people, not merely a minority of the people, are
  vested with competitive capital acquisition rights to acquire
  capital with the earnings of capital.
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  1244 ST. JOHN’S LAW REVIEW [Vol. 79:1221
  A. A Model of a Binary Economy
  The dynamic operation of a binary economy can be modeled
  with six basic institutions: (1) Prime Credit-Worthy
  Corporations, (2) Capital Ownership-Broadening Trusts, (3)
  Banks, (4) Private Capital Credit Insurers, (5) the Capital
  Diffusion Reinsurance Corporation (the only new entity, modeled
  after the Federal Housing Administration), and (6) the Federal
  Reserve. Figure 1 shows an ownership-broadening “binary
  financing” transaction consummated with the voluntary
  participation of each of these entities. Figure 1 may be seen as a
  single binary financing transaction or the aggregate
  representation of all such transactions.
  In a binary economy, in addition to their usual means of
  acquiring capital assets (borrowing, retained earnings, and sale
  of shares), prime credit-worthy corporations could raise the funds
  to acquire capital assets by selling special full-dividend common
  shares to a Capital Ownership-Broadening Trust for the benefit
  of employees, customers, neighbors, and others, paid for with a
  bank loan to the Trust, insured by a private capital credit insurer
  and government reinsurer, and discounted at a rate of 99.75% by
  the Federal Reserve (with 1/4 of one percent reflecting its
  estimated administrative cost). Once the capital acquisition loan
  repayment obligations are met, the full net capital earnings (net
  of reserves for depreciation, research, and development) would be
  paid to the binary owners to help them meet their needs and
  wants and to provide the basis for increased investment,
  employment, and production.28
  28 The full payout of capital earnings (net of reserves for depreciation, research,
  and development) is essential to enable poor and working people to acquire capital
  with the earnings. If the capital earnings of poor and working people are taxed or
  retained by the corporation, the capital will not be able to repay its acquisition cost
  at a competitive rate and will not distribute needed income to provide for their needs
  and support sustained growth.
  CP1_ASHFORD 2/6/2006 9:10:03 PM
  2005] MEMO ON BINARY ECONOMICS 1245
  General Theory Diagram
  Figure 1
  B. The Cost of Financing to Participating Corporations and the
  Binary Owners
  Based on the profitable capital credit experience of the
  Federal Housing Administration, the customary bankers spread,
  and the estimated administrative costs of Federal Reserve
  discounting, the combined cost of binary financing to the
  corporation and the beneficiaries will not, under most economic
  circumstances, exceed the following:
  (1) Capital Credit Insurance 2%
  (2) Customary Banker Spread 1–2%
  (3) Federal Reserve Discount 0.25%
  Total 3.25–4.25%
  The reason underlying the low cost of financing rate is that
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  1246 ST. JOHN’S LAW REVIEW [Vol. 79:1221
  monetized credit does not use existing financial savings as the
  source of the loan and therefore does not require compensation
  for their use. The estimated cost of capital credit insurance
  might be questioned, but it could even be doubled and still
  provide a competitive cost of financing in many instances.
  C. Binary Growth in a Binary Timeframe
  Figure 2 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. It shows the number of years of annual
  acquisitions that will have paid for themselves over time. The
  figure assumes that in every year after the implementation of the
  binary economy, some number, N, of an economy’s largest prime
  credit-worthy companies voluntarily 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. For simplicity, as a first iteration, the
  figure also assumes 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 members of the poor and middle class. Consistent with
  the c