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Binary Economics: The New Paradigm. (Book Reviews).

Robert Ashford and Rodney Shakespeare; New York, University Press of America, 1999, 448 pages, plus bibliography

In recent years Robert Ashford has organized sessions on binary economics at the annual meetings of both the Society for the Advancement of Socio-Economics and the American Association of Law Schools. Those sessions have attracted a growing number of participants and have revived interest in the ideas of the late Louis Kelso. This book presents Kelso' s basic arguments as interpreted and extended by Ashford.

Binary economics presents several concepts with the potential to advance socio-economic thought and public policy. One of those concepts is a practical proposal for spreading the ownership of capital in developed economies. The other potentially useful concepts are of a more theoretical nature and make their contribution either by offering different frames of reference for phenomena already modeled by neoclassical economics or by reintroducing concepts that neoclassical and Keynesian economics contain but tend to neglect. I personally find the following three concepts intriguing in that regard--the binary property right, productiveness, and binary economic growth.

Is there a true paradigm difference? In one important respect-the treatment of the goal of economic justice--the two definitely differ. Neoclassical economics has chosen to assume that the serious study of equity or justice is beyond the scope of the paradigm. To be sure, a token gesture is made through the use of the concept of a Paretian Optimum. But a token gesture is all that is found. In contrast, binary economics makes the equity or justice issue the focus of its reason for being. This being the case, the two paradigms should be regarded as complementary approaches to economic policy. One can use neoclassical economics to address efficiency aspects of economic policy. Then, when considering matters of economic justice, one could use binary economics (along with other approaches).

There is an additional complementarity between binary economics and both the neoclassical paradigm and the Keynesian paradigm. Each provides a conceptual framework that can enrich and improve the public policy analyses of the others. Each raises issues which the other two tend to ignore but which must be taken into account since public policy operates within a socio-economic system where all of the issues are interrelated.

A few additional comments are in order with regard to the useful concepts in the binary economic paradigm. First, and probably most useful, is the binary strategy of broadening the ownership of capital through the use of leverage. We have seen this work on a limited scale in the American housing market, in the Employee Stock Ownership Plan movement, and in the wave of leveraged buyouts that struck corporate American in the 1980s. The proposal offered in this book carries the strategy to a new level, but the basic mechanism has a proven track record. I, personally, do not believe that this single strategy will solve a nation's problems of economic justice, but I do believe that some version of this strategy could be a significant part of a complete package of policies dealing with economic fairness.

Second, the concept of a binary property right is a useful notion for dealing with equity issues. The key insight here is the role of leverage in the acquisition of capital. Neoclassical economics frames capital acquisition in terms of savings and investment. This frame of reference tends to end up regarding differences in capital ownership as a justified reflection of differences in the willingness to defer consumption. Once you change the frame of reference and introduce leverage, the justice of differences in capital ownership is more easily called into question.

Third, the concept of productiveness offers economics an opportunity to revisit the marginal productivity theory of labor and capital income. Textbook theory assumes pure competition and uses Euler's theorem to conclude that labor and capital are paid the value of their marginal product. But textbook theory does recognize the possibility of imperfect competition and under those circumstances the theory concludes that the factors do not receive the value of their marginal product. Instead, there is a power struggle over the distribution of economic rent. The neoclassical literature tends to ignore the imperfect competition case in its policy analyses. So a discussion of the concept of productiveness might be a way to bring this topic back to policy discussions.

Fourth, the concept of binary growth challenges economists to revisit the issue of sustainable rates of growth. Binary economics takes what was once called the underconsumptionist view. It regards a higher marginal propensity to consumer as a stimulus to growth. Of course, growth also requires capital formation and hence savings, so that one could argue that higher savings rates will lead to higher growth rates. The challenge is to find the proper balance. Years ago this issue was addressed, with perhaps the most comprehensive theoretical analysis being Paul Samuelson's multiplier-accelerator model. Since then, that approach has not received a great deal of attention. Moreover, in recent decades economic policy literature has tended to move in the opposite direction, stressing higher savings rates as the key to faster growth and citing examples such as Japan, Korea and Germany as examples of how high savings rates and rapid growth go together. The stagnation of the Japanese economy in the 1990s has caused some pragmatic rethinking of this view, with some economists calling for Japan to stimulate consumption and reduce the savings rate. So a debate over the binary growth proposition might be a timely development for mainstream economics.

Finally, binary economics illustrates two key features of the modern socio-economics movement. One is the aforementioned concern with economic justice. The other is the insight that the market system is constrained by a social capsule and that the performance of the economy can be changed by instituting changes in the rules and institutions that comprise the capsule. In other words, public policy doesn't have to replace markets to obtain desired equity results. Instead, policy can consist of changing the rules and letting the market do the rest.

What will come of the ideas presented in this book? When Louis Kelso originally presented these ideas under the name of "Two Factor Theory" he was virtually ignored by professional economists. But an influential politician learned of the ideas, championed them and ended up producing the American employee stock ownership program. Now Kelso' s ideas have been given fresh life by authors Ashford and Shakespeare. It may once again be the case that mainstream economists ignore the ideas or even attack them. The strong binary criticism of neoclassical economics certainly invites that type of reaction. Hopefully, however, forgiving economists will focus on the positive binary propositions and participate in a socio-economic discussion of the binary economic challenge.
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Author:Hattwick, Richard
Publication:The Journal of Socio-Economics
Article Type:Book Review
Date:Nov 1, 2001
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