Louis Kelso was a visionary in the field of economics. He developed/pioneered the idea of Binary Economics as a new way of understanding capital and its role in industrial production and the production of wealth, and was the originator of Employee Stock Ownership Plans. He subscribed to a ‘non-conformist’ form of capitalism that believed in a capitalist society where ownership was widely distributed throughout society, and co-authored The Capitalist Manifesto with philosopher Mortimer Adler, which highlights many of his main economic theories.1
Kelso’s theory of Binary Economics is based on the principle that in order to increase wealth in capital, one must have capital.2 Clearly the problem this presents in the traditional economic model for capitalism is that the poor and working class have no wealth and generate little income, thus income from labor goes directly to the cost of living leaving them little to no opportunity to expand and grow capital. This, Kelso argued, is the paradigm of the traditional economic model: "The trouble with today's techniques of finance is that they're designed to make the rich richer. None are designed to make the poor richer. That's why the poor are poor. Because they're not rich."3
Binary Economics states that with the continual modernization of labor, the percentage of work performed by machines, or systems, is increasing and thus the role of capital in production, the actual percent of work being performed by capital, is increasing as well. The principle difference between mainstream and binary approaches to economic growth is the way in which capital is dealt with. “According to binary economics, the primary role of capital is to do a growing portion of the work and distribute a growing portion of the income earned from production.”4
Kelso’s theory, of course, is different from mainstream economics in terms of how it conceives of capital and labor and their role in production. “Conventional wisdom says there is only one way to earn a living, and that’s to work. Conventional wisdom effectively treats capital (land, structures, machines, and the like) as though it were a kind of holy water that, sprinkled on or about labor, makes it more productive. Thus, if you have a thousand people working in a factory and you increase the design and power of the machinery so that one hundred men can now do what a thousand did before, conventional wisdom says, ‘Voila! The productivity of the labor has gone up 900 percent!’ I say ‘hogwash.’ All you’ve done is wipe out 90 percent of the jobs, and even the remaining ten percent are probably sitting around pushing buttons. What the economy needs is a way of legitimately getting capital ownership into the hands of the people who now don’t have it.”5
And with that, Kelso set out to devise a program that would make available capital ownership to those who did not previously have access to it: the poor and working class. He came up with (in 1956) the idea of an Employee Stock Ownership Plan (ESOPs) that would allow employees to access capital before they actually have it (using their future income to invest in stocks for long-term savings). His goal in creating this new type of capital generation was to give workers the same capacity for savings that wealthy people already have by giving them access to increased capital without them having to use their salaries (which for most workers is not possible due to cost of living).
In theory, ESOPs instill ownership in workers and full accountability in management and ownership. In mainstream ideas of economics, introducing a machine to the production process means increased per-unit productivity which in turn raises the overall profit margin. This raises the bottom line for the company and means greater profits; the problem is there is no guarantee that the worker will benefit whatsoever from this improvement. The excess capital will most likely be reinvested in the company or reused to absorb and offset other costs. But if the employee has a share of the company, if he literally owns a percentage of the business, he would benefit in two ways: a) he would benefit directly from a rise in stock prices, and b) he would have more influence into company decisions-- management executives would be more accountable to the worker in the decisions they make.
This proposal was intended not only to benefit the individual worker and his family but also the economy and society as a whole. “Once poor and working people are empowered to acquire capital with the earnings of capital just as wealthy people do (1) poor and working people will grow more prosperous by increasingly earning more spendable income from their ownership of capital, (2) credit-worthy companies will more profitably (a) employ their productive capacity and (b) invest in more productive capacity, and (3) the economy will grow more quickly.”6
ESOPs are by no means a ‘pie in the sky’ concept thrown around by economists—today they are used by thousands of companies around the globe. Data from the 2006 General Social survey show that “20 million Americans own stock in their company through a 401(k) plan, ESOP, direct stock grant, or similar plan, while 10.6 million hold stock options. That means that 17% of the total workforce, but 34.9% of those who work for companies that have stock, own stock through some kind of benefit plan, while 9.3% of the workforce, but 18.6% of those in companies with stock, hold options.”7 In 2005 there were 9,225 companies with ESOP programs in the US, the total growth of assets in ESOP plans in 2005 reaching $600 billion. 8
As part of his legacy in the field of Economics and specifically his work in developing the concept of Binary Economics, the Kelso Institute was created as a resource and tribute to the works of Louis Kelso and the continuing work in the field of Binary Economics. For more information on Kelso’s ideas and policies, visit: www.kelsoinstitute.org.
1Kelso, Louis O. and Mortimer J. Adler. The Capitalist Manifesto. New York: Random House, 1958.
2 The term ‘capital’ here is defined as anything non-human that can be owned and/or employed to do work. ‘Binary’ refers to having two ways of earning income through work: labor and capital. (from: “Binary Economics: The economic Theory That Gave Rise to ESOPs,” Owners At Work, Winter 2006/2007 Issue).
3 Quoted from the “Kelso Institute” website: www.kelsoinstitute.org. (originally from ‘Louis O. Kelso, San Francisco Examiner & Chronicle, 1978’).
4 Ashford, Robert. “Binary Economics: The Economic Theory That Gave Rise to ESOPs.” Owners At Work. Vol. XVIII No. 2. Winter 2006/7, p. 13.
5 From www.kelsoinstitute.org/quotes.html (originally from ‘Louis O. Kelso, Journal Asset Based Finance, 1982’).
6 Ashford, p. 12/13.
7 Statistics from The National Center for Employee Ownership website: http://www.nceo.org/library/widespread.html. March 2, 2007.
8 From The National Center for Employee Ownership website: http://www.nceo.org/library/eo_stat.html. March 2, 2007.