The Binary Economics of Louis Kelso

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  The Principle of Binary Growth

  The most remarkable aspect of binary analysis is the principle of binary growth.  Stated perhaps oversimply, the more broadly capital ownership is acquired by individual consumers on market principles, the larger will be the resulting economy. This proposition is either a grand illusion whose underlying fallacy has eluded me and a growing number of scholars throughout the world, or it is one of the most im­portant discoveries of the twentieth century.  Stated more broadly, the theory of binary growth holds that economies grow on market principles, not only with increases in investment and worker produc­tivity and decreases in transactions costs, but also as an independent (and much more potent) function of the distribution of capital acqui­sition on market principles. This proposition is exactly the opposite of the claims of traditional capitalist economic theory. In traditional capitalist theory, economic growth results from increases in pro­ductivity and investment and decreases in transactions costs; but in terms of economic growth, it makes no difference who owns the capital (absent gains in productivity resulting from motivational or other factors). "Redistributing capital," the traditional argument goes, "merely spreads around pieces of the same pie; it does not create a larger pie. And worse yet, it may distort market incen­tives for productivity and efficient resource allocation, and there­fore may result in a smaller pie."

  Yet, intuitively, the binary theory of growth seems to square bet­ter with the facts. On the individual level, it makes a big difference who owns the capital. Generally, it is the difference between being rich and poor. The more capital you own, the greater your ability to participate in the economy both as a producer (owner) and as a con­sumer. Likewise, on the national level, all the world's large econo­mies are capital-rich economies. Both individually and nationally, affluence is the product of capital, whereas jobs and welfare rarely produce more than subsistence. What is true for rich people and na­tions is true for the poor. The more fully each individual provides productive input in the economy not only as worker but as owner, the more fully he or she can participate as a consumer, and the larger the economy will be. Furthermore, as an economy industrializes, the im­portance to the individual of participating in a balanced way in pro­

   

  duction and consumption both as an owner and a worker becomes increasingly important. Likewise, as an economy industrializes, it becomes increasingly important to the economic growth of the entire society that capital is increasingly acquired on market principles by all people, not merely by existing owners, so that its incremental in­come may be used to purchase the incremental output.

  Thus, in binary terms, it matters greatly whether capital acquired competitively on market principles is acquired increasingly by the poor and middle class rather than almost exclusively by a small per­centage of the population. If capital is increasingly acquired by the many poor and middle class people (paid for by its own earnings), and if capital's income is thereafter required to be distributed to the poor and middle classes, they will spend more money on goods and ser­vices, and thereby fuel a larger economy than if the capital were ac­quired by the few rich.  Unlike the poor and middle class who have many unsatisfied needs and wants, the rich will seek to invest their capital earnings, but in an economy characterized by comparatively less consumer demand.

  In short, sustained economic growth on market principles requires that incremental productive power provided by capital must be ac­quired broadly by the masses of people expected to purchase what it produces. If capital acquisition is restricted by a closed private prop­erty system for the benefit of existing owners, the distribution of capital income will be insufficient to support consumption, and growth will be suppressed.

  Binary economics thus provides a conceptually distinct alterna­tive to traditional capitalism and socialism, worthy of serious consid­eration in its own terms. As such it should be explored, not ignored, as a theory of law and economics.

  Binary Economics and Employee Stock Ownership Plans

  Although Louis Kelso has gone generally unrecognized by mod­ern economists in influential positions, he had remarkable success with the United States Congress in fashioning a legislative program for the Employee Stock Ownership Plan ("ESOP"), the vanguard of his system of ownership trusts. The essential Kelsonian feature of the ESOP is its ability to acquire in trust for employees stock in their companies on nonrecourse credit, and to pay for it with the stock's pretax income.¹⁸

  In response to Congressional encouragement, the number of ESOPs has increased substantially in the last decade. The General Accounting Office estimated that there were approximately 4,800

  active ESOPs in 4,700 companies in 1986, covering approximately

  7.1 million employees and $13 billion in assets.¹⁹ According to the National Center for Employee Ownership, in 1993 there were between 9,000 and 10,000 active ESOPs covering approximately 11 million workers with over $60 billion in assets.²⁰

  However, studying ESOPs in the present economic environment is somewhat like studying the first horseless carriages before sys­tems of roads and service were established. Inferences to be drawn from current studies may not be applicable within the context of a binary economy. Analyzing the full potential of ESOPs and other binary financing proposals requires a calculus that adequately re­flects the economic infrastructure designed to support them and the alternative private property rights system on which they are predicted.

  Say's Law in an Industrial Economy

  Central to the Kelsos' binary analysis is a highly controversial law of classical economics known as Say's Law of Markets ("Say's Law").²¹  Say's Law holds that in a private-property, free-market economy, the production of a given output necessarily generates ag­gregate income sufficient to purchase that output.²²

   

  FIGURE 2 Say's Law as Applied to a National Economy

  Market Value of Goods and Services Produced Aggregate Purchasing  Power Distributed to Participants in Production Gross national product, for a given time period, computed by aggregating all costs of production of goods and services (i.e., payments for labor workers' inputs and capital owners' inputs) into production Income automatically distributed from production to the individuals who participate in production as labor workers or as capital owners or both Equals

   

  For the last two centuries, economists have debated whether Say's Law establishes a principle on which, on an economy-wide basis, sup­ply will create its own demand,²³ and demand its own supply. The Kelsos acknowledge this controversy:

  Economists have been at loggerheads over Say's Law ever since its promulgation in 1803. One of its implications is that the phenomena variously known as depressions, panics, and recessions cannot occur.  But they have occurred, and with ever deepening severity, from the inception of the Industrial Revo­lution. Say's Law has remained a riddle to conventional econo­mists because they approach it with a wrong assumption: that there is only one way that individuals can make productive in­put and earn income-through labor.²⁴

  Unlike anyone before them, however, the Kelsos apply their con­cepts of productiveness and private property rights to Say's Law to derive several conclusions not found in traditional economic analysis.

  "Supply-side" or "trickle down" economists accept Say's Law and recommend government policies to stimulate investment, with the expectation that increased capital investment will create a larger economy, a greater pool of jobs and a larger tax base for welfare dis­tribution.²⁵  Keynesian economists, on the other hand, reject Say's Law,²⁶ claiming that demand is demonstrably insufficient to clear supplies at market prices.

  Contrary to classical and neoclassical theory, Keynesians support their contention by citing endemic unemployment, unsold invento­ries, and unutilized production capacity which manifestly would not persist if supply had created its own demand.²⁷  Many Keynesians advocate a "trickle-up" policy: one that stimulates demand largely through jobs and welfare.

  In its embrace of Say's Law, binary economics takes exception to both approaches, maintaining that questions of consumer supply and demand must be addressed simultaneously in the very process of capi­tal formation and capital transfers.²⁸

  Underlying binary economics, Say's Law provides the fundamen­tal economic restraint and basic logic in a market economy: produc­tion must be financed to generate the consumer income to purchase the consumer goods produced.  Say's Law also provides the formula and requirements for a steady-growth, noninflationary economy that increasingly matches unsatisfied needs and wants with the produc­tive means to satisfy them.²⁹ If mass production is not financed to generate mass consumer purchasing power, vast inflationary and redistributionary measures, accompanied by recurrent booms and busts, must follow, as indeed they have.

  Given binary economic suppositions and logic, a number of propo­sitions follow from Say's law:

   

  (1) An industrial economy must not limit workers' participa­tion in the economy to their productive labor input alone; they must participate through both their labor and owner­ship of capital.

   

  (2) As technology advances, increased productive input of capi­tal must be linked with increased consumer income from capital ownership.³⁰

   

  (3) In an industrial economy, only through broadening capital ownership may consumers "participate in production [on market principles] to an extent sufficient to provide them automatically with adequate purchasing power"³¹ to con­sume what the economy produces.³²

   

  (4) More economic growth will result if capital formation and transfers are financed on market principles to broaden the ownership base, so as to generate the consumer income nec­essary to purchase the consumer goods produced. (This propo­sition is a restatement of the principle of binary growth.)

   

  Economists ignore these imperatives, which in binary economics follow inescapably from Say's Law.  Furthermore, whatever they think of Say's Law, most economists would contest the idea that alternative financing designed to produce alternate ownership distribution will, of itself, create growth. The question of whether broader capital own­ership, financed according to binary principles, will promote substan­tial economic growth, impede growth or leave it unaffected is thus crucial to an evaluation of binary economics.

  Say's Law is important as one of the few points of common refer­ence between Kelsonian and traditional economics.  However, before understanding the binary application of Say's Law and the objections that might be premised on traditional economic theory, one must con­sider concepts of independent productiveness, ownership, insured capital credit and other aspects of binary theory in greater detail.

  The Concept of Independent Productiveness

  Both socialist and traditional capitalist theories make a foundational error in their analyses of the productive input of capital and labor. In the last two hundred years, in physical terms, the economies of western na­tions have grown many hundredfold, vastly outstripping previous per capita economic growth. The increasing capacity to produce has been accompanied by an increasing reliance on capital in the productive pro­

  cess.  However, when people interact with capital to form an inseparable product or service, how should its market value-the return on produc­tion-be allocated to the capital and the labor inputs?

  The neoclassical economic approach looks at what labor and capi­tal earn and conclude that their relative returns are a function of the marginal value of their inputs. This approach assumes a more or less competitive market for capital and labor. Yet it is doubtful-given the multiplicity of worldwide political barriers to, and interferences with, the free operation of the laws of supply and demand-whether existing markets are competitive.³³  In traditional economics, the gen­erally accepted conditions for competitive markets include:

   

  (1) barrier-free market entry;

   

  (2) a sufficient number of buyers and sellers so that no single participant can substantially affect the market prices; and

   

  (3) freedom from collusion among market participants.³⁴

   

  Consistent with these conditions, the binary view is that mar­kets for capital and labor cannot be competitive so long as people without capital are effectively restricted from acquiring capital.³⁵ Traditional economic theory, on the other hand, ignores the conse­quences of the substantial barrier that stands between most people and effective participation in the capital markets, and rather fre­quently assumes (inconsistent with these limitations) that capital markets are efficient.

  Traditional economic theory assumes that the most important productive relationship between capital and labor is the one described by the concept of "productivity." Productivity is output per unit of input.³⁶ Economists calculate labor productivity by combining pro­duction of labor and capital with respect to per-hour or per-dollar in­put of labor alone.³⁷  Capital productivity, more usually expressed as the rate of return on investment, may be similarly calculated.³⁸ "Mar­ginal productivity," the first derivative of productivity, expresses the marginal increase in output per additional unit of input. According to neoclassical economic theory, marginal productivity signals to man­agers how much capital and labor to employ in the productive process and thereby to optimize output for any level of available inputs.³⁹  In judging the relationship among capital, labor and production, tradi­tional economists agree that capital increases labor productivity.⁴⁰ Although productivity stands at the foundation of traditional econom­ics, there are serious "productivity measurement problems"⁴¹ which burden the effectiveness of traditional economic analysis.

  In binary terms, the concept of "productivity" as applied in tradi­tional macro-economic analysis is incoherent. It ignores and obscures a more important relationship among labor, capital and production:

  productiveness. Productiveness can be thought of as the quantifica­tion of "independent factor input" of each factor as a percentage of total output of both factors.

  An example will help quantify the conceptual differences between traditional economic productivity and Kelsonian productiveness: A person can dig a hole in four hours by hand. After the invention of the shovel, he can dig the same hole in one hour. In traditional eco­nomic terms, labor has four times the productivity because four times as much work can be performed in the same time period. In binary economic terms, the productiveness has changed from 100% labor before the invention of the shovel, to 25% labor and 75% capital input with the shovel. Thus the Kelso system views the laborer as having only one fourth the productiveness rather than four times the pro­ductivity. Capital has not "amplified labor productivity," which would be the view of traditional economics, but has "replaced labor produc­tiveness" per hole, and therefore requires a reduction in labor's claim on the income earned from each unit of output.

  In traditional economics, productivity is the foundational math­ematical concept for organizing, analyzing and explaining growth and participation in that growth.  In binary economics, productiveness is the fundamental concept, and productivity plays only a second-order role. The productivity concept in traditional economics induces the worker-or the government or labor union acting on his behalf-to compensate for the threatened erosion in his income by demanding more pay for less productive labor input. The productiveness con­cept, however, highlights the worker's need to acquire the capital that has replaced his labor productiveness, in order to preserve and en­hance his earned claim on the increased aggregate output.

  Consider now the example of a company that owns a building with ten manual elevators and employs ten elevator operators to run them.  On a trial basis, the company replaces five of the ten manual elevators with automatic elevators and all operators are put on half­time to operate the remaining manual elevators. Operators must in­put only half as many operator labor hours to maintain the same output of ten elevators available for service. Yet few, if any, econo­mists would conclude, as they might in the shovel example, that the elevator operators are twice as productive. Rather a traditional eco­nomic analysis would consider the elevator operators' productivity to be unchanged because the output of each has not changed with re­spect to the labor input of each.

  If half the operators are retained full-time and half are fired, the theoretical productivity of the remaining operators does not change. However, the discharged operators, who retain the same potential productivity as those still on the job, cannot earn a living on this "po­tential productivity" if they remain unemployed. Their former labor

  productiveness has been replaced by capital productiveness. In bi­nary terms the productiveness of "capital workers" (i.e., capital own­ers) has replaced the productiveness of labor workers.⁴²

  When all the operators are replaced by automatic elevators, labor input has been reduced to zero, and the productivity of labor, in tradi­tional economic terms, is infinite. (Productivity is measured by divid­ing output by input;  as the denominator approaches zero, the value of the fraction becomes immeasurably large.)  In Kelsonian terms, the important conclusion is that capital worker input has totally re­placed labor worker input.  For that task, labor productiveness is zero; capital productiveness is 100 percent.

  As new labor-saving technology is implemented within a Kelsonian framework, workers' percentage claim on total output arising from labor's productiveness is reduced because the produc­tiveness of the workers' capital has replaced correspondingly the productiveness of their labor in aggregate production. Demands for higher wages based on "increased productivity" do not obviate the need for workers to participate legitimately in the acquisition of capital that has replaced and supplemented their labor produc­tiveness in today's high technology world.

  While increased capital productiveness may spawn a larger economy and create more jobs, the invariable effect of new capital formation is to replace labor productiveness with capital productiveness.  Consequently, as technology advances, labor workers can legitimately claim from their aggregate labor only a decreasing percentage of total output.

  In terms of independent productiveness, there is no difference in principle between the shovel and the elevator. Each replaces and supple­ments labor productiveness in the same way. The only difference is that automated capital generally replaces and supplements vastly more la­bor productiveness than manual capital.  In binary economics, a shovel, though physically dependent on human labor to realize its productive input, is as independent a wealth producer as the person who digs a hole, with or without the shovel. The shovel is also as economically inde­pendent of the human factor as the automatic elevator. The economic independence of capital productiveness exists without regard to the per­son-hours needed to maintain or operate the capital.⁴³

  To illustrate productiveness over time, the Kelsos use Figures 3A and 3B.

  These charts show increasing capital productiveness and decreas­ing labor productiveness as a percentage of total output. As a result of our closed private property system, which limits capital acquisi­tion to existing owners, Say's Law requires a redistribution of capital income illustrated in Figure 4.

  Thus according to binary economics, capital now accounts for eighty to ninety percent of the total productiveness of any of today's

   

   

  FIGURE 3A Changing Participation of Labor and Capital in Production of U.S. Goods and Services

  1800 1900 20001850 1950 LABOR CAPITAL ACCELERATING ADVANCE OF TECHNOLOGICAL CHANGE Relative Input of Labor Into Production of Goods and Services* Relative Input of Capital Into Production of Goods and Services* 20% 100% 80% 60% 40% 0% 100% 80% 60% 40% 20% 0%

  FIGURE 3B Changing Distribution of Economic Power Among U.S. Citizens

  PLUTOCRACY ECONOMIC DEMOCRACY 1800 1900 20001850 1950 * Estimated on the assumption that the value of productive inputs is measured in reasonably competitive markets. ( Revised in 1993 from original copyrighted diagram by Louis O. Kelso and Patricia Hetter Kelso.) 20% 100% 80% 60% 40% 0% 100% 80% 60% 40% 20% 0% ACCELERATING CONCENTRATION OF CAPITAL OWNERSHIP Relative Input of Labor Into Production of Goods and Services* Relative Input of Capital Into Production of Goods and Services*

   

   

   

  FIGURE 4 Distortions in the Property System of the U.S. Economy in Order to Distribute to Non-Capital-Owners Income Generated by the Production of Goods and Services Through Capital

  CAPITAL WORKER INPUT - 90% - *Transfer payments, mandated increases in minimum wages,   coerced redistribution of progressively more pay for less work input, etc. Thus non-capital-worker income is increased from 10% (value of labor input) to 78% of outtake - a net of 68% coerced redistribution. OUTTAKE OF LABOR WORKERS AND UNEMPLOYED - 78% - LABOR WORKER INPUT - 10% - INCOME EXPANSION INPUT Relative Value of Goods and Services Produced By Labor Workers and Capital Workers (Owners) Estimated on the Assumption of Competitive Markets OUTTAKE Relative Income Shares Received by Capital Workers (Owners) and Labor Workers (Non-Capital-Owners) OUTTAKE OF CAPITAL WORKERS - 22% - Thus, 68% of the value of capital input (90% input reduced to 22% outtake) is redistributed by the system* INCOME CONTRACTION

   

  modern industrialized economies;  but much of that income is neces­sarily distributed to people through inflated wages or welfare pay­ments to maintain consumer demand, as required by Say's Law.

  People Are Poor Because They Do Not Own Enough Capital

  Productiveness and its relationship to labor, capital and technologi­cal advance provide a different, more fundamentally helpful explana­tion of why most people are poor in an industrialized economy.  People are poor not because their labor wages are low or nonexistent, but be­cause they cannot acquire the capital that has replaced their labor pro­ductiveness and the additional capital necessary to earn an income that will allow them to consume at a level that amounts to living well.⁴⁴

  Simple logic tells us that as the production of goods and ser­vices changes from labor-intensive to capital-intensive, as it has been doing since the beginning of the industrial revolution, the way in which every consumer in a free, democratic society par­ticipates in production . . . must synchronously change from labor-intensive to capital-intensive.⁴⁵

  The Kelsos note, "If under free-market conditions 90 percent of the goods and services are produced by capital input, then 90 percent of the earnings of working people must flow to them as wages of their capital and the remainder as wages of their labor work."⁴⁶

  If the reader accepts the alternative foundation that productive­ness offers for analyzing the productive input of capital and labor, then to improve the lot of the poor and to provide an alternative to demanding more pay for less work or welfare payments, society must afford a practical means of acquiring the capital whose productive­ness produces an ever-increasing percentage of total societal output.

  Apart from inheritance and gift, traditional economic theory pro­vides one principal means of legitimately acquiring capital: work hard to earn enough from labor to withhold from current consumption, and invest wisely. Binary economics posits that this solution is irrational and ineffective;  the solution is simple but impossible for most people.⁴⁷ Those without capital already have too little consumer income be­cause capital productiveness has overtaken their labor productive­ness. Further withholding by the poor from their consumption will worsen the growth-stifling consumption deficit that results from the concentration of capital ownership.  For sustained growth, Say's Law requires a private-property system that enables people lacking ap­preciable productive capital to acquire it on market principles with­out reducing their already inadequate consumer income. To solve this problem, binary economics turns to another discipline: corpo­rate finance.

  A Democratic System of Corporate Finance

  One cardinal principle of business finance, sometimes referred to as the "feasibility principle," is to invest only in capital that pays for its own acquisition cost in a comparatively short period of time, gen­erally under five years.⁴⁸  Included within the projected income neces­sary to meet the feasibility requirement is an amount sufficient to provide reserves for depreciation, research and development so that worn or obsolete capital can be replaced with new capital.⁴⁹ Thus capital both pays for its acquisition and generates a perpetual, self-financing return.⁵⁰

  To acquire new capital, corporate managers retain earnings, is­sue stock, or borrow money. As traditionally structured, each technique's primary effect is to finance new ownership into existing owners.  Of the three techniques, only debt financing has the sys­temic potential of enabling people to acquire capital without prior ownership of capital.

  To meet their capital needs, large corporations rely most heavily, if not primarily, on borrowed money. Under traditional financing ap­proaches, however, the growth potential of corporate debt is ultimately available only to existing stockholders:  the people with savings to place at risk in the event of business failure.  In effect, the binary approach extends the corporate advantages of debt financing to people who have no savings to place at risk.  It creates an open, democratic system of corporate finance.

  Universal Collateralization Requirement Keeps Most People Poor

  To insure against business failure, commercial lenders require not only that the proposed financing meet the feasibility requirement; they also require some satisfactory form of collateral or guarantee with which the loan may be satisfied to protect the lender against the borrower's failure to meet the feasibility requirement. This almost universal collateralization requirement explains why, to confirm the old adage, it takes money to make money.

  Because existing owners of capital already earn more than they con­sume, the purpose of their incremental production is no longer consump­tion.  Rather, "income in excess of that used for consumption . . . can and will be used only to acquire additional capital productive power, which in turn will produce further excess income, which in turn will be used to acquire further excess capital productive power, etc., ad infinitum," caus­ing a progressive distributional variance with the balance between pro­ducer input and consumer income required by Say's Law.⁵¹ Exclusive reliance on the financing practices that promote this imbalance thwart the goals of economic growth and equal opportunity.

  Satisfying Collateral Requirements With Capital Credit Insurance

  To satisfy the security requirements that stand as a barrier be­tween most people and the ownership of capital, binary economics proposes a system of commercially insured, and governmentally reinsured, capital credit.To initiate the system, the government would

  establish the Capital Diffusion Reinsurance Corporation (CDRC) to facilitate the provision of private capital insurance and to stand as the insurer of last resort.  In effect, it approaches the problem of busi­ness failure as a casualty loss problem and therefore seeks to insure the business risk at competitive prices. The success of binary propos­als depends on the proposition, yet to be fully explored, that the risk of business failure customarily borne by equity investment can be competitively priced and included in the cost of borrowed capital. If this is feasible, then effective acquisition rights need not be essen­tially restricted to those who already own substantial assets, but can be extended democratically to all.

  Binary economics' recourse to capital credit is not a facile or na­ive reliance on a pyramid scheme of easy credit policies associated with subsidized financing for consumption or for any particular busi­ness purpose. On the contrary, credit is available for any capital needs, as determined by private firms, but only for self-financing investment that meets standards of market discipline required for all financially sound capital investment.⁵²  If the investment fails, there is no in­come for the beneficiaries.

  Nor is the binary approach an attempt to undermine incentives to encourage efficiency, industry, cooperation, competitiveness and inventiveness.  On the contrary, binary economics would extend capi­tal credit to reinforce incentives for all such human input. But even operating optimally such incentives cannot inspire human input or yield labor earnings beyond the limits of its economically productive input. Thus given the import of productiveness, insured capital credit is simply the only means yet proposed to enable people without capi­tal to acquire capital on market principles so that within a binary time frame,⁵³ increasing consumer income is distributed to balance increasing capital productiveness as required by Say's Law.

  Because binary financing does not resort to traditional equity investment, it cannot require such investment to assume any of the risk of business failure associated with binary financing. Thus the practical efficacy of binary financing programs depends on the proposition that the risk of business failure, customarily borne by traditional equity investment, can be commercially insured. To facilitate the provision of private insurance, the specifically estab­lished Capital Diffusion Reinsurance Corporation (CDRC) would stand as a reinsurer and the insurer of last resort. In answer to objections to such a governmental assumption of responsibility, the Kelsos have argued that with reference to the financial well-being of the top two thousand or so United States companies, since the New Deal, the federal government has already assumed the risk of their aggregate failure. Witness the governmental response in bailing out two such "too big to fail" companies": Chrysler Corpo­

  ration and Continental Bank. The major differences are that the risk is presently indirectly mediated politically by monetary, tax­ing and fiscal policies rather than explicitly as a market decision under the binary approach, while the government promotes the financing of new productive capacity so that it is owned by people with few, if any, unsatisfied needs and wants. The binary proposal does no more than capitalize the risk already assumed by the gov­ernment, and facilitate its pricing and financing on market prin­ciples, for the productive and consumption needs of all.

  In 1986, the Kelsos estimated the insurance costs in the range of two percent. Shortly before his death, by reason of the deteriorating economic conditions, he increased this estimate to the range of five percent. Any particular estimate is of course debatable, and the ques­tion is worthy of serious study. As a corollary to the binary growth effect, however, binary logic suggests that much capital formation fails to proceed on a self-financing basis because of a systemic failure to distribute to consumers enough earnings from capital. Thus the fi­nancial feasibility of capital credit insurance must be judged consis­tently with the prospects for binary growth.

  Binary Growth in Binary Time Frame

  To explore the long-term dynamics of binary growth, it is helpful first to focus on a time horizon of ten years and to assume a competi­tive capital cost recovery period of five years. The ten-year horizon may then be bifurcated into a "binary time frame" consisting of two five-year segments. Because the beneficiaries of binary financing can­not begin to spend their binary income until after the capital has paid for its acquisition cost, new capital financed in the first year will not produce spendable capital income for its beneficial owners until the sixth year; but thereafter, it will produce that income indefinitely.⁵⁴ The new capital formation of the second year will produce an addi­tional increment to the beneficiaries' income in the seventh year, and so forth.  By the tenth year, five full years of binary financing will be providing the full payout of the equity return to the beneficiaries. By reason of their higher marginal spending rate, more of the additional income earned by the new owners (who have many unsatisfied con­sumer needs and wants) will be spent on consumption than if the income had been earned by existing owners (who have few, if any, such needs and wants).

  This broad-based incremental consumption will fuel a demand for greater investment, and therefore a larger economy, than would be financially feasible if capital had been traditionally financed. If traditionally financed, the capital would have earned its income for

  people with few, if any, unsatisfied consumer needs and wants, who would thus seek more investment opportunities, but in the context of weaker consumer demand. Viewed from a ten-year perspective, more consumer demand and therefore more growth will materialize over the ten-year period to the extent that new capital formation and capi­tal transfers are financed on binary principles rather than with tra­ditional collateralization requirements. In binary terms, the incremental consumer demand giving rise to the growth is not infla­tionary because it is linked through property rights to the production of goods and services of equal value. Consumer income for the binary beneficiaries is limited at all points by the antecedent earnings of the underlying capital.⁵⁵

  If one extends the time horizon to twenty and fifty years, one sees a basis for sustained, non-cyclical economic growth.⁵⁶ This basis for growth continues to increase indefinitely as more capital is financed on binary principles. This is a growth connection that is not the re­sult of the increased productivity of any particular workers, nor of increased investment or technological gains, nor of reduced transac­tions costs, nor of any other traditionally advanced basis for growth. It is a long-run self-sustaining connection between production, owner­ship, consumption and growth that exists in a binary time frame. It is unique to binary financing, and is at the heart of the binary private property solution for the economic well-being of the poor and middle class, without taking from the rich.

  Viewed in a binary time frame, the effect of the program is to finance the basis for both increased supply and demand. In this sense, binary economics offers an economic strategy fundamentally distinct from both the right-wing, supply-side, trickle-down strategies and the left-wing, demand-driven, Keynesian governmental approaches of taxing, fiscal, and monetary policy. Binary economics is neither a right-wing nor a left-wing theory. It rejects both approaches because, in their long-run analyses, they make the fatal error of disassociating production and consumption. To achieve sustained economic growth, the basis for production and consumption must be simultaneously financed within an appropriate binary time-frame for economic plan­ning.

  Thus, in utter conflict with traditional economic thinking, accord­ing to binary economics, in the long run, it matters greatly whether capital bought competitively on market principles is acquired increas­ingly by the poor and middle class rather than almost exclusively by a small percentage of the population. Therefore, one important mes­sage of binary theory to those concerned with the welfare of all people, is that it may matter greatly whether our private property system restricts acquisition rights to the existing owners or extends them universally to all people.

  Binary Growth Is Not Traditional Redistribution

  When exploring the implications of binary growth, one should note a number of remarkable features regarding binary growth and bi­nary income. First, in an economic sense, if it exists, binary growth is not redistribution, at least not in any traditional sense. In compre­hending the binary long-run approach to growth, one must under­stand the source of the incremental consumer demand. It only exists if the underlying capital has paid for its acquisition costs and then produces additional income. In any year, binary income is paid as dividends to its beneficiaries only if in that year the underlying capi­tal has produced goods and services equal in value to the income dis­tributed. To the extent of aggregate binary growth in any year, binary income is not compensation for labor, including human capital; and it is not income redistributed from the productive input of others (ei­ther as workers or owners). Further, to the extent of aggregate binary growth in any year, it cannot be fairly said that the provision of in­sured capital credit for binary beneficiaries has crowded out existing owners of their rightful investment opportunities (which they might have enjoyed under the present closed property system) because the binary growth investment opportunities would not have materialized but for the binary property system. Moreover, all of the transactions will have occurred voluntarily by principals and agents acting on be­half of private companies and their traditional and binary sharehold­ers. Any binary income is likewise wholly the result of voluntary transactions in response to market forces. Thus to call the benefits of binary growth, if any, "redistribution," as that term is traditionally conceived, is a fundamental misnomer.

  The fact that the long-run capital-based binary income, if any, is not redistribution in any traditional economic sense has important economic, political, and jurisprudential implications. Most significantly it disposes of all the volumes of literature against traditional redistri­bution on grounds that it is a distortion of the efficiency of market forces. If valid, binary growth uniquely eliminates the supposed con­flict between efficiency and distributive justice. The binary growth generates market-based capital income that replaces and supplements