Louis Kelso's Economic Vision For The 21st Century


by Norman G. Kurland and Dawn K. Brohawn
(© 2004 Center for Economic and Social Justice.
Updated from the original article published in Owners at Work,
the newsletter of the Ohio Employee Ownership Center, Winter 1999-2000.)

America has crossed the threshold into the 21st century as the most prosperous and powerful nation on the planet. Gazing toward the vast frontier of the global economy, we see a rapidly changing landscape shaped by forces beyond the control of any individual or nation. Space Age technology, global finance, global markets and transnational corporations are impelling us toward an uncertain future.

We as a nation have benefited from modern technology. It has contributed to our economic success in the world. It has lengthened our life spans and shrunk to fractions of a second the transmission of a message or billions of dollars across the planet. The global economy has brought the American consumer a year-round cornucopia of goods from every corner of the world. Competitive forces continue to drive down the price of personal computers, video recorders, and cellular phone systems, putting unimaginably powerful tools of information and communication in the hands of the average citizen. Choice abounds.

But Americans have also seen harbingers of troubles to come: the disappearance of entire sectors of labor as robots, artificial intelligence, and advanced office machines enter the work place. Globalization has encouraged the flight of jobs and capital to lower-wage regions of the world. Blue-collar workers and middle management alike have become targets for corporate downsizing. Today, six Ph.D. computer scientists from India can be hired over the Internet for the price of a comparable American. Thousands of jobs have been lost to a computer chip. Even in the midst of our prosperity most of us feel powerless to control our own futures or unable to find meaning in our current condition.

There is an economic fault line running throughout America and the world which today’s economic gurus seem unable to explain or remedy: the widening wealth and income gap between a tiny rich elite and multitudes of poor in every country (including the United States), and between developed and developing nations. Surrounded by global communications, the global economy, and our global environment, we cannot help but feel the tremors inside and outside our borders. With the growing economic imbalances come bloody conflicts, widespread starvation, international crime and corruption, depletion of the planet’s non-replenishable resources, unconscionable destruction of the environment and systematic suppression of human potential and life-enhancing technology.

Seeing through the chaos of our rapidly changing world, one post-scarcity visionary of the 20th Century, lawyer-economist Louis Kelso, understood the power of technology either to liberate or dehumanize people. Popularly known as the inventor of the employee stock ownership plan (ESOP), Kelso observed that modern capital tools and their phenomenal power to “do more with less” have offered people an escape from scarcity to shared abundance.

As a lawyer Kelso also saw that the design of our “invisible” institutional environment and social tools determines the quality of people’s relationship to technology. Intangibles, such as our laws and financial systems, determine which people will be included or excluded from sharing of access to equal economic opportunity, power and capital incomes.

Access to capital ownership, asserted Kelso, is as fundamental a human right as the right to the fruits of one’s labor. Furthermore, Kelso argued, the democratization of capital credit is the “social key” to universalizing access to future ownership of productive wealth, so that every person, as an owner, could eventually gain income independence through the profits from one’s capital.

Kelso’s Economics of Ownership and Justice

At the heart of what Kelso called “binary economics” is a simple but revolutionary proposition. Kelso stated that people could legitimately create economic value through two (thus binary) factors of production:

  • Labor (which Kelso defined as all forms of economic work by people, including manual, intellectual, creative, and entrepreneurial work, and so-called “human capital”), and
  • Capital (defined by Kelso as anything non-human contributing the production of marketable goods and services, including tools, machines, land, structures, system improvements, and patents).

Capital, in Kelsonian terms, does not merely “enhance” labor’s ability to produce economic goods. (It wasn’t Bill Gates’ labor that accounted for the increase in his wealth in one year’s time from $50 billion to $90 billion; his capital would have kept producing even if Bill Gates were in a coma.) According to Kelso, capital (increasingly the source of economic growth) should increasingly become the source of added property incomes for every person.

Kelso based his ideal market system on the three basic principles of economic justice:

  1. Participation, the input principle. If both labor and capital are responsible for production, then equality of opportunity demands that the right toproperty (and access to the means of acquiring and possessing property) must, in justice, be extended to all. 
  2. Distribution, the out-take principle. Property rights require that income be distributed based on what one contributes to production—one’s labor, one’s capital, or both. Assuming that capital ownership is spread broadly, the free and open market under Kelso’s system becomes the most democratic and efficient means for determining just prices, just wages and just profits. If both sales revenues and all labor costs are set by globally competitive market forces, then profits (the revenues left over after all labor costs are subtracted) represent a market-based return to capital. 
  3. Limitation, the feedback principle (which some Kelsonians call the principle of “Harmony” or “Social Justice“). This principle restores balance between “participation” (input) and “distribution” (out-take) and puts limits on monopolistic accumulations of capital and other abuses of property.

Kelsonian Macroeconomic Reforms

Democratized access to money, capital credit and credit insurance would become instruments of inclusion, not exclusion, and the means for “procreative” financing of whatever capital the economy needs to move toward prosperous lives for all members of society. Kelso’s monetary, tax and other “Capital Homesteading” reforms would allow us to finance sustainable growth through techniques that offer more universal access to future ownership. (See “The Federal Reserve Discount Window,” Journal of Employee Ownership Law and Finance, Winter 1998, and “A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation,” The Journal of Socio-Economics, Volume 30, 2001, authored by Norman G. Kurland.)

Kelsonian Microeconomic Reforms

Justice-Based Management (JBM) [originally termed “Value-Based Management” or “VBM”] is a Kelsonian system for building and sustaining an ownership culture within the enterprise. Applying principles of economic justice, the philosophy of servant leadership and Kelsonian financing techniques, JBM was conceived as the new management system for the 21st century.

JBM systematically anchors capital and builds ownership into successive generations of employees. JBM also re-orients the operational and governance systems of today’s enterprises from the present top-down, risk-averse and conflict-prone patterns of the wage system, to a system of participatory ownership where risk, rewards and responsibilities are shared among many co-owners. JBM would enable all workers to become reconciled with the realities of global competition. With their labor incomes supplemented by capital incomes, workers could shift a growing portion of their incomes from automatic fixed wage increases (which also increase cost pressures on their company) to more equitable sharing of bottom-line profits.

The role of the labor unions will also evolve as unions move from the economics of conflict to the economics of co-ownership. Unions will regain their original role as a democratic society’s most important institution for advancing economic justice by organizing all non-owners, not just workers, to help get them their fair share of the growing capital pie.

A Capital Homestead Act for America

How can we realize Louis Kelso’s vision for America and the rest of the world? A 21st century counterpart to Abraham Lincoln’s Homestead Act (which was limited to a finite land frontier) would provide every citizen and family with access to future capital and profits in a frontier without boundaries. The Capital Homestead Act is a comprehensive legislative program of Kelsonian tax, monetary, and fiscal reforms to make every citizen a stakeholder in the unlimited technological frontier. (See Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security, by Norman G. Kurland, Dawn K. Brohawn, and Michael D. Greaney, published by Economic Justice Media, 2004; available as a free PDF document from www.cesj.org.)

Facilitated by capital credit and loan default insurance available under “Capital Homesteading” reforms, each citizen will begin to accumulate dividend-yielding shares in (1) the company he works for through an ESOP, (2) the companies he regularly buys from through consumer stock ownership plans (CSOP), (3) a community investment corporation (CIC) to link him to the profits from local land planning and development, and (4) a diversified portfolio of blue-chip growth and other companies he invests in through a Capital Homestead Account (CHA).

A Glimpse of the Future

Envisioning a Kelsonian future where every American has a viable capital ownership stake in a growing economy, we predict:

  • America’s moral leadership will be restored as we set an example for the rest of the world on how to achieve genuine economic democracy and justice for all. 
  • Wealth, economic power and income gaps between the rich and poor will shrink, without present owners being deprived of their property rights. 
  • Sharing profits and control of technology, all people will become empowered, not victimized, by technological change. 
  • Market gluts and “overproduction” will be eliminated, as overall supply is matched by the simultaneous creation of mass purchasing power. 
  • Enthusiastic and productive worker-owners will produce goods and services of the highest quality at lower cost within corporations operating with more democratic accountability, efficiency and equity.
  • Politicians will become more accountable to more economically empowered and independent citizens, who will be less dependent economically on government welfare, subsidies and income redistribution.
  • Personal, family and community life will strengthen as more people gain greater control over their economic destinies.
  • The environment will become healthier as “Capital Homesteading” enables Americans to fund green technologies and non-polluting, “hydrogen age” energy sources that in the past lacked financing for their commercialization.
  • The quality of education and work will radically improve, as technology reduces the need for economic toil, and as more people gain the time and means to engage in lifetime learning and non-paid “leisure work,” enabling them to work creatively for their personal, as well as the common, good and the advance of civilization.
  • A flourishing and peaceful world society will be built upon the decentralization of economic power, and, as in the first American Revolution, the power of government will again subordinate itself to the sovereignty of each human person.

In the 20th century, many lived lives of quiet desperation, struggling from paycheck-to-paycheck, or from hand-to-mouth, with no ownership stake in society’s wealth-producing assets. Most 20th century Americans were limited to a choice between the wage-systems of capitalism and the wage-systems of socialism. Many lost hope that they and their descendants would ever share in the American Dream.

Just as Lincoln provided opportunities for propertyless people in 19th century America to gain a piece of the world’s shrinking land frontier, 21st century Americans will gain their ownership share in the limitless technological growth frontier. In the 21st century, Americans will be given a new choice, a “just third way” opened up by Louis Kelso, an alternative model of development that transcends both Wall Street capitalism and all forms of socialism. Choosing this road will lead America back to its revolutionary roots to a more participatory, unified and empowering “Second American Revolution” and a more just, free and efficient market economy. America will then again serve as “the last best hope of mankind.”

[For original post see http://www.cesj.org/binaryeconomics/kelsovision.htm]