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The theory of productiveness: a microeconomic and macroeconomic analysis of binary growth and output in the Kelso system [1].

Stephen V. Kane [*]

1. Introduction

What is Productiveness? Does it relate at all to productivity? Why is it important for the Kelsonian analysis? What are its antecedents? What are the similarities to conventional micro- and/or macroeconomic philosophy? Dissimilarities? Is it really a "new" concept, or simply a close-up view of an old concept? Perhaps a panoramic view?

All of these questions pop up in a discussion of this distinctly Kelsonian idea. There really is no parallel to the concept in conventional economics, although pieces of the idea have lain about for a very long time, and are, indeed familiar to economists. The reason why "productiveness" has not been bridged until Kelso, is because it incorporates economic distribution theory into a discussion of production theory.

In conventional economics, the theory of distribution is confined to the question of price determination in factor markets, and to factor shares in income. Prices are the value that markets place on factors for their productivity, or output per-unit of input. Economists generally shun the theory of property distribution altogether, averring that it is a political question. Incorporation of distribution theory into production theory, however, which is what the theory of productiveness does, is never done. For these reasons, it took someone from outside the economics profession, someone like Kelso, who was an investment banker and corporate lawyer, to come up with the idea.

With the proper institutions of distribution, [1] the productiveness theory holds, output is maximized. So far so good. Neoclassical theory doesn't disagree with the proposition that economic production is maximized given free markets and open competition.

The theory of productiveness goes on to assert, however that with maximum output, the technical relationship of capital and labor in the productive process is altered. This is the distributional element introduced, and is where conventional economics drops the subject. The Neoclassical economists would ask: How can the technical relationship of capital and labor be changed, if it's a "technical" relationship? The Kelso response is a distributional response: the technical relationship is distorted because the market for productive capital is not a "free and open market." Unlike the market for consumer credit, which is free and open to all, the market for productive capital credit is restricted to the well-capitalized. The Neoclassicals would respond: The reasons for market distortion related to government intrusion, redistributive taxes, and other social causes, isn't really a topic for economic theorizing--although a topic for analysis of economic effects. To which Kelso would concur: the effect is to distor t the technical relationship of capital to labor in the productive process.

Which leads us full circle. It isn't that conventional economics has nothing to say about productiveness, it's just that their theories are tangential to the production-distribution link that Kelso was trying to forge.

A good entry point for a definition of productiveness is the idea of independent factor productiveness. Here is a revolutionary concept of Kelso's. Independent factor productiveness is a theory of employment of labor and capital, but more especially of capital. Labor employment theory is well-developed in economics. A full branch of labor employment theory in economic thought is well-established in economic literature, in research, and in university academic teaching. Nowhere, however is there a theory of capital-employment economics. [2] The Neoclassical economist would disagree: Microeconomics contains extensive discussion on the employment of capital in the productive process. It is part of the microeconomic theory of production, and how the relative contributions of capital and labor determine their relative use in the productive process.

Kelso' s theory of independent factor productiveness is not inconsistent with this microeconomic interpretation, as we shall see. But this part of the theory, because it incorporates, again the distributional element that is unique to Kelso, resembles labor economics more than a micro production theory, because the theory of independent factor productiveness holds that capital "works," in just the same way as a working person works. In this regard, capital has rights and responsibilities, just as the worker has, although the rights and responsibilities of capital are, of course different. What are these rights and responsibilities?

The first is a right to take its proper place, as one participant among many, in the productive process. [3] That is not the case, Kelso argued, in an economy that greatly attenuates the process of capital formation--employment of capital to, in effect reproduce itself. [4]

An industrial society's inability to maintain high rates of capital formation on a self-sustaining basis was a phenomenon identified by economist John Maynard Keynes, although his interpretation of the underlying reasons were different from the distribution-related reasons offered by Louis Kelso: the underlying cause was, in Keynes' interpretation a desire to hold "... 'wealth' as such; that is for a potentiality of consuming an unspecified article at an unspecified time." [5]

Kelso took Keynes one step further, and proclaimed that only those with access to capital are able to choose whether to participate in production by investing, or consuming, or by doing nothing. Because that choice is not available to the vast majority (who are "only one paycheck away from homelessness" in today's terminology)--employment of a nation's capital will not reflect the choices of nonowners, who, were they to participate in production through capital ownership, would tend to advocate full employment of capital, vigorous capital formation, and substitution of capital work for labor work at every turn.

Don't markets do that now? Kelso would have said NO! When capital is narrowly held, the interests of its owners is to keep it scarce. Keynes himself said that capital's return is a function of scarcity;"... the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive--at least in the physical sense." [6] [emphasis added]

Kelso's work implies that the positive scarcity premium on money is a function of capital's scarcity, and not the other way around! Capital is kept scarce because the narrow ownership base [7] prefers to keep it that way. In addition, Kelso would have disagreed with Keynes on his latter point: capital is less productive if it isn't being used!

Capital's "right to work" for humankind is hindered, in the two-factor interpretation by an antiquated property ownership (or capital distribution) institution. For the study of how its employment is restricted, a labor economics paradigm is, in many ways, better suited than a microeconomics production framework. Here are some examples of topics which might be adapted to "capital employment economics" from labor economics: 1. the economic effect of investment banking federation (or capital banking "unionism") on employment of labor and capital, and on capital formation; 2. Theory of Determination of capital "wages" (or, how the "marginal revenue product of capital" is the firm's demand schedule for capital, holding the labor force constant and assuming a market time frame in which capital is allowed to become variable); 3. Capital employment and the military: the capital economics of military "capital conscription." 4. The personal distribution of capital earnings and labor earnings. Etc. The idea here is no t to introduce frivolity, but to bring home the point that "independent factor productiveness" is a theory which conveys the employment aspect of capital. Whether or not it is valid to compare the human factor with the nonhuman raises deep questions, which have been dealt with provocatively by Kelso and Adler in The Capitalist Manifesto. The sensitive nature of the subject matter perhaps explains why capital has never been treated as a "wage" theory by conventional economics. However, it is an instructive exercise, and something which Kelso might have said could be taken literally.

So Kelso's theory of productiveness touches upon many separate pieces of economic theory. Table 1 summarizes these.

Kelso's theory has parallels to the economics of public finance: how social costs are absorbed, and by whom because of the restricted access to productive capital markets. As a microeconomic theory of production-distribution, the theory of productiveness implies that it is important who owns productive property if property is capable of producing an ever-greater relative proportion of "consumer-useful" products. [8] As a theory of capital employment, productiveness incorporates ideas generally attributable to labor economics. And as a theory of distribution, an analogy can be drawn between the macroeconomic analysis of income and expenditure in the Keynesian system, especially the concept of the "marginal propensity to consume," and its representation as an endogenous variable of national income in the income-expenditure model, similar to a possible Kelso interpretation that distribution is an endogenous variable d of income (Y). More will be said about the income-expenditure analogy in the last section of t his paper.

With this discussion in mind, we now turn to a graphical interpretation of the Kelso productiveness theory. Fig. 1 begins the analysis.

Two isoquants (iso- meaning "same" and quant meaning "quantity") are drawn in Fig. 1. Each isoquant connects all labor and capital combinations capable of producing the same quantity of final output for a firm (either Qo or Q1 in this example). The slope of the isoquant is called the "Marginal Rate of Technical Substitution (MRTS)," defined in the following manner:

MRTS = [delta]K/[delta]L = -MPL/MPK

Isoquant curves are convex from the origin. The slope of a convex isoquant falls in absolute value as labor is expanded, because the marginal products of inputs change. [9] Each time labor is substituted for capital, the input proportions vary; more labor is combined with less capital. From a point A, on isoquant Qo the marginal product of labor (MPL) falls as more labor is used in the production process (movement along the isoquant to point B). Similarly, for an increase in capital (movement from B back to A along the isoquant) capital's marginal product (MPK) falls, and the MRTS ratio of marginal products rises. In Fig. 2 a "constant returns to scale" production function in the Isoquant format has been drawn.

Increasing both labor inputs and capital inputs by a factor of two results in an exact doubling of output, which defines a constant returns to scale production function. We could just as easily show increasing (or decreasing) returns to scale. If, for example, we rename isoquant 2Q as 3Q, we have increasing returns to scale: doubling of inputs more than doubles output (to 3Q). Similarly, if isoquant 2Q is renamed 1.5Q, decreasing returns to scale are evident: doubling of capital and labor inputs increases output by only half as much as before.

Economist Louis Kelso was interested in scale effects, particularly with respect to how they operated since the earliest dawn of industrialization. He thought that technological advance led to a steady increase in the ability of an industrial economy, with each successive round, to produce steadily more. Not only was this the result of relative changes in the technological mix of labor and capital in the productive process, it was the result of the growing size, or scale of economic activity. Absence of a logical property system, to tap the growing output potential, or productiveness of capital, resulted in a relative overemphasis on the importance of labor in the production process, which led to the diminished use of capital. Capitalists were satisfied with this arrangement, because capital was kept scarce, and consequently earned profits.

In a microeconomic sense, productiveness concerns production costs as they relate to the choice of the labor-capital "mix" used in production. Given the optimization condition:

MPL/w = MPK/r

the firm will choose factor inputs based on output from those inputs per dollar spent. Fig. 3 presents the optimization condition in graphical form.

The isoquants of Figs. 1 and 2 say nothing about how much the firm will choose to produce. Rather, they help explain how the firm will combine productive inputs given a cost of production. The cost constraint in Fig. 3 is drawn as a downward-sloping curve with a constant slope, called an isocost line. The isocost curve describes how much a given work force (L) and capital (K) will cost, given their market-determined factor prices. The equation of the isocost line is:

C = wL + rK

Total production cost C is equal to total capital cost (quantity of capital used K multiplied by its rental rate r) added to total labor cost (total labor employed multiplied by the prevailing real wage). Rearranging, we get:

K = C/r - w/rL

Eq. (3): Equation of the Isocost Line

The line's y-intercept is the point at which all costs are capital costs (C/r). The slope of the isocost line, (-w/r) is the ratio of factor prices: the line will become steeper or flatter as the absolute value of the rate increases or decreases. This is important for the Kelsonian analysis, because Kelso thought that inaccessibility to capital (the distribution side of the theory) resulted in a distortion in the relative prices of labor and capital.

In Fig. 3 the isocost line is tangent to the isoquant at (-w/r) = -MPL/MPK. This represents optimal use of the factor inputs. This firm will use K1 units of capital and L1 labor services to produce Q1. It wouldn't be rational for the firm to use anything but this optimal combination to produce Q1. If it chooses to use more labor, then MPL will fall with increased employment. Consequently, the absolute value of (-w/r) will exceed the output from the added workers. The firm can maintain output and add to profits by cutting employment. If the firm attempts to use more capital, MPK will fall, and the cost of employing the additional capital will exceed the output used. The isoquant, therefore represents a technical relationship between capital and labor: specifically it gives the range of combinations of K and L to produce a given quantity, in this case Q1. And the isocost line shows which combination will be chosen, given a production "budget" of C total cost.

In Fig. 4, the binary distributional element is introduced.

The pathology evident in the present system, as seen from the view of binary economics is illustrated in Fig. 4. Redistributive taxes, make-work projects and boondoggle affect the price of capital, primarily. Additionally, a "scarcity premium" keeps capital costs high. Capital must earn a higher return r1 (8%, 10%, or 12%) than it otherwise could in a binary economy rB (3%). The pivot of the isocost line from Co/r1 to Co/rB means that the relative prices of labor and capital, given by (-w/r) are altered in the binary economy. The decrease in the lowest return needed to reward investors (denominator) increases the absolute value of the ratio of factor prices, -w/r and the isocost line becomes steeper. Employment of the factor labor is decreased to LB, and use of the "more productive" factor, capital is increased.

The interpretation of Fig. 4 is this: The redistributive and scarcity premiums on capital distorts (-w/r), causing more labor L1 to be used in this firm's production than would be the case in the binary economy (LB). [10] In the Kelso theory, capital is responsible for most of the increases in output in the industrial society. But capital's return is either expropriated (redistributed) for "... an economy always short... of aggregate purchasing power, and intent on seeking it through employment alone, or employment combined with welfare," [11] or kept scarce by narrow ownership interests (its potential productiveness lies undeveloped). Lowering r and channeling the resulting productive potential released to all households is accomplished with distributional reform. Put another way, the prerequisite for maximizing labor output per person (Average Product of Labor--APL) and capital output per person (Average Product of Capital (APK)) is a corresponding consumption pattern consisting of personal labor-income co nsumption and personal capital-income consumption per-average-household. This is the essence of "two-factor thinking."

Is the ratio of factor prices given by the absolute value of the isocost line a "technical" relationship, similar to the technical relationship in which factors combine on the isoquant? In the Kelso framework, the answer is clearly no. The distortion in the relative prices of capital and labor (the ratio - w/r) is a product of the wage system of distribution, which allows average citizens to participate in the economy as labor workers, but still needs to "... expand the ways in which they become capital workers." [12] Or alternatively, free markets are not at work, so the relationship cannot be a "technical" one. Redistributive taxes, and so forth and a scarcity premium drive the denominator r up, consequently distorting the relative significance of wages in production, making wage labor look like a better alternative. Participation as "capital workers" has been effectively barred.

The distortion in the price of capital in Fig. 4 might be thought of as the cost of restricting "the more productive factor, capital to the already well-capitalized." [13] That is, the cost of scarcity. Kelso would have argued that the scarcity premium does not serve the interests of any but a few. Yet he would probably have agreed that the economy as presently structured, cannot possibly remove the premium on capital's price without binary ownership structures, because the massive capital accumulation, and resulting productiveness that would result could not be consumed by the existing narrow ownership base. [14]

In summary, Fig. 4 illustrates a link between Kelso's production theory and his distribution theory. In microeconomic theory, production is linked to costs; one interpretation of the Kelso productiveness theory, then is that costs of capital are driven up by distributional flaws, restricting capital formation, and growth. In Figs. 5 and 6 we examine, in a microeconomic framework, the "binary" growth process discovered by Kelso. The "Binary Growth Effect" is broken down into two parts: the "Primary" effect (Fig. 5), and the "Secondary" effect (Fig. 6).

In Fig. 5 the "primary" binary growth effect is isolated. With the same cost (Co) as before (Fig. 4) more output (Q2) is produced in Fig. 5, using the same labor force (movement from A to B). How can the firm do this? To answer this question, three isocost lines have been drawn, representing the firm's costs under a wage-and-welfare mixed economy, and under the assumption of a binary system of property ownership. The slope of isocost line Co/r1Co/w1 is flatter than that of isocost line Co/rBCo/w1. The rental rate of capital in Fig. 5 (r1) represents the higher interest rates, relative to the binary model, that prevail in modern industrial "mixed" outtake distributive systems (i.e., wage and/or welfare outtake). In the binary system, the "schedule of the marginal efficiency of capital" (Keynes' term--not pictured) "... is kept as high as possible, and the rate of interest is kept as low as possible" [15] (rB, in this instance) for every level of output. Why this is so is a critical element of the model, and s hould be elaborated on here.

Interest rates in the binary economy are lower at every level for at least three reasons, all of which incorporate distributional elements not normally associated with the theology of interest rate determination in standard economics. The interest rate can be defined in Keynesian terminology as the price of liquidity, or "... the cost of the convenience of plenty of ready cash." [16] In the binary system, the Keynesian interpretation is turned around: the liquidity premium results from the ability of narrow property interests to keep capital scarce.

The first reason why the "schedule of the marginal efficiency of capital" shifts out in the binary system is, like every aspect of the Kelso theory, intertwined with distribution; which in turn is a function of accessibility (or inaccessibility) to the markets for productive capital. Here is the idea that broader access to productive capital credit markets encourages "full employment" of capital, a uniquely Kelsonian idea (note our earlier discussion of "capital-employment economics"). As the citizens in an industrial economy become "capital workers," the redistributive and scarcity premiums on interest rates are no longer needed: capital distribution will replace welfare redistribution in households that are in need, and vigorous capital formation policies will be pursued to allay scarcity.

Participating in the economy as capital workers, individuals find that a portion of their welfare needs are replaced by the income generated by their capital estate; government redistributive programs are replaced with capital worker income. Mention will be made shortly of redistributive payroll taxes, that unquestionably burden the working person, distorting labor markets. However Kelso believed that the distortion in the capital markets was a much more serious defect, because of the increasing productiveness, in this context "raw output" potential of capital. Inefficient distribution restricts both the relative use of capital instruments in production, and the absolute quantity of capital employed as a whole, with the latter probably being the more serious defect. Both effects concerned Kelso, and offer a good working concept of productiveness. The tendency for industrial economies to restrict capital's enormously potent productive potential was a terrible drawback of a modern economy's wage-preoccupied sy stem of distribution, in Kelso's view.

The second reason for the downward shift in interest rates from r1 to rB in the primary binary effect (Fig. 5), concerns the risk premium of interest, and the binary economy's effect upon it. The process by which investments are evaluated in the market at present is straightforward: the relative merits of an investment proposal (its marginal efficiency) are compared with "the" interest rate (defined here as a distribution of interest rates for a broad sample of financial instruments), with perceptions as to the future of economic activity playing an important part in investment evaluation. But as both Kelso and Keynes objected, these perceptions are discounted on stock exchanges, where the job of evaluating investments is not done very well. In the present system, as a consequence, not only do interest rates frequently exhibit a high degree of volatility, they also don't work very well as evaluators of investment projects "on long views," particularly in depression.

Because of widespread wealth distribution through the ownership trusts of "democratic capitalism," investment evaluators in a binary system, looking at a five- to seven-year investment horizon, retain a more positive outlook of the future. [17] Every productive investment has a correlative consumptive foundation. Consequently, business plans in a binary system are perceived to be less risky, and interest rates fall.

A third reason why interest rates are lower in the binary system is because of the removal of the monopoly element on capital. Keynes observed that "Interest to-day rewards no genuine sacrifice, any more than does the rent of the land," [18] a proposition with which Kelso agreed. [19] Any "genuine" sacrifice, in the binary understanding, amounts to a restricted-access premium: Restricting access to a market is a common method of achieving higher returns, of course, with the supply-restricting practices of the American Medical Association (lengthy internships, restricted medical school enrollments, attacks on alternative treatment philosophies) offering a good study in these techniques.

Another reason for a lowered interest in a binary system isn't really a reason in its own right, but is related to the previous three, and concerns the liquidity premium attached to interest rates. In the binary sense, the return on capital isn't the "result of the competition of the rate of interest on money," as Keynes defined it, but it's the other way around: the liquidity premium of money is a result of the scarcity of capital. The scarcity of capital, in turn results from the inaccessibility of markets for capital credit by the vast majority, those who can most benefit from becoming "capital workers," and whose needs are great enough to encourage the capital expansion to meet these needs.

Because investments, in the Kelso system are simulfinanced--brought into existence with their consumptive bases predetermined, through the ownership constituencies of democratic capitalism--the underlying reason for high interest rates; that is, ultrahigh liquidity preferences--the fear that an investment will fail to pay for itself--will be lowered.

Returning to Fig. 5, the binary interest rate, rB is lower than r1, and the relative value of wages is therefore higher. As a result, if the firm operates on the binary isocost line Co/rBCo/w1, it finds that it is rational to use less labor and more capital in the productive process. Capital investments that made no sense given a capital return of 8% make sense at 3%, in the binary economy. Whether or not this is a "good" thing is a normative question, of course. A partial resolution of the question, however is evident from the diagram. Notice that, in this first stage of binary growth, no more costs of production are incurred to produce Q2 (point B) than were incurred to produce Q1 (point A). The increase in the ratio of factor prices (-w/r), made possible by distributional reform, simply produced an alternate production "mix." Total costs are the same, yet total social costs are lower because of more efficient use of resources. The same cost of production as before is incurred (Co) and the same quantity of labor as before is employed (L1), but the relative increase in wages means that the firm will use more capital to produce a higher level of output.

How important is the primary binary effect in producing generally higher output and income? Most economists would say that it is marginal, possibly negative, because the technical relationship, [20] or substitutability of the factors capital and labor, implied above, is not observed. That's a misunderstanding of productiveness, however, because it is only one leg of the theory. The secondary binary effect is probably the more important for a general expansion. That will be examined at Fig. 6.

An important difference between the Keynesian, nondistributional-based expansionary theory, and the Kelso distributional-based expansionary theory can be shown from the Fig. 5 microeconomic analysis. When the ratio of factor prices doesn't change for this firm, the slope of the isocost line remains constant. In Fig. 5, isocost line C1/r1C1/w1 has been drawn parallel to isocost line Co/r1Co/w1. This isocost line has the same slope (-w/r) as line Co/r1. The difference is that the line is shifted, meaning that the total production cost of this firm has increased, to produce Q2. Notice that in the binary system, the higher output is achieved with the same total cost (Co), because capital is substituted for labor in the production process. In the standard system, on the other hand, costs increase, labor employment rises, and capital employment barely rises at all to produce the same quantity Q2.

Without distributional reform, r1 remains the same, no matter what level of autonomous expenditure the firm undertakes as a result of positive perceptions of economic activity, and the slope of isocost line C1/r1C1/w1 remains the same as before. In the binary system, the fall in the interest rate to rB, means that the firm can produce Q2 even without an autonomous increase in the firm's production budget to C1. Without distributional reform, the firm will operate at point C, and will use more labor (L1) in the production process and incur a higher production cost, even though it could operate at point B using the same production budget as before. Clearly, the distribution element is why. For if L1-LB workers can become, in the Kelso term, "capital workers" that is, can participate in the production of Q2, not through their labor services (L1), but through their capital (say, KB), then the same output is produced as before, and the same consumption right exists; however the consumption right is now partially determined by the capital worker's capital marginal product, and not exclusively by his or her labor marginal product.

The distribution-neutral shift from Co to C1 is inefficient, and results in a higher cost. Kelso called the distribution-neutral shift from Co/r1 to Cl/r1 "laboristic," because a higher output is produced with a higher cost, where the same output could have been produced with a lower cost, even though fewer "jobs" have been created. Kelso called this "one-factor" thinking, which emphasizes labor work as the sole source of income for average households. The constant clamor for "job creation" by politicians is instructive: none of them talks about producing more, or better products of labor (production side), they talk about "jobs" (i.e., a paycheck, the consumption side). Since when is a product, the incidental result of a "job?"

Kelso didn't think that expansionary policies without distributional reform could be sustained. The process is clear from the distribution-neutral parallel shift line in Fig. 5. High interest rates mean that the "more productive" factor, capital is restricted from employment, to create "jobs," the only accepted means through which average citizens can participate in economic production. The parallel shift in production costs to produce Q2, although Q2 could be produced with Co, is the cost of maintaining the trusty, but outdated wage-and-welfare system, in an age when capital is capable of producing general affluence. "Job creation," therefore becomes a costly alternative to distributional reform, and is sustainable only until competition, or reform removes the premium from r (and as we shall see, from w as well!). Generally speaking, the competitive task will be performed by underdeveloped nations if the reform task is not. An application of this principle is contained in the next section.

The "secondary" binary effect is what really provides the impetus for binary expansion, and that is illustrated in Fig. 6.

Fig. 6 illustrates the real power of Kelsonian production theory coupled with his distribution theory. In Fig. 6 a new isocost line C1/rBC1/w2 is drawn. A higher overall production cost of C1 is now incurred by the firm, an increase from Co. This is a shift parameter, very similar to the expansionary shift parameters of finance as it is now practiced. But the primary fall in the binary cost of capital (rB), which made the isocost line steeper (producing the "primary" binary effect, Fig. 5), is now flattened out as the relative real wage falls (from w1 to w2). Wages fall because capital replaces labor in the productive process, and because the redistribution premium is relaxed on wage income!

The latter cause is probably more significant than the former for falling real wage costs to the firm. It's easy to react negatively to Kelso's theory as "a theory of low wages," [21] but it's more appropriate to view it through the cost aspect of production theory. It is true that as capital replaces labor, an oversupply of labor exists at the prevailing wage, driving wages down. However a portion of wage income in household income is replaced by capital income both in the near term, and (more usually) in the longer term. The portion replaced can be a significant proportion, depending on the wage level of the household in question, the quantity of labor services displaced by capital services, the expansion rate of economic activity, and the coverage rate of the binary economy (e.g., where 85% of the eligible population is considered "full coverage"--similar to minimum wage coverage now). In general, poorer households should benefit disproportionately, at least at first, because their lower wages will fall l ess than the more highly paid, while their opportunity to acquire capital will be at least as great as any other income level, possibly more so.

The real impetus for failing wage costs, from the employer's view, results from lower payroll taxes, including both the employee's share, and the employer's. For the Federal treasury, falling payroll taxes are offset by higher employment, as vigorous capital-formation policies bring full-employment levels of output rapidly. Kelso believed that the "secondary binary effect" [22] would form a "simply titanic" [23] tax base: "I estimate that our economy must expand from seven to twelve times its present size. That is the most gigantic construction job in the history of man." [24] In the terminology of this paper, labor and capital become "fully employed."

The binary program is designed to attack capital scarcity, then. Keynesian economists, particularly have identified capital's scarcity as a great variable in the underemployment of resources. Solow, for example estimated that the "saturation" level of capital (i.e., the point at which its scarcity premium is gone) was consistent with a capital stock roughly twice as large as that which, given the rate of interest on money that prevailed in 1957, could have been produced. [25] Keynes himself thought that vigorous capital formation could proceed for at least "a generation" before saturation set in, under the prevailing rate of interest on money in 1936. [26] And in 1976 Kelso estimated that this expansion could keep a generation fully employed, given a binary framework (note that interest rates were much higher in 1976 than in 1936 or 1957, possibly indicating a growing scarcity premium).

It isn't enough that capital scarcity is viewed negatively, Kelso said, but the underlying distributional reasons why it is scarce must also be understood. With distributional reform, (i.e., through the ownership trusts of democratic capitalism), there remain no barriers to the full employment of capital.

This secondary binary effect is really where the theory of productiveness assumes its importance. Note the importance of scale effects in the theory, which follow from binary capital formation! Insofar as growing capital formation produces increasing returns to scale, these effects help the firm to change its production "mix" (the "primary" binary effect). For its real power, then the binary theory of productiveness requires both effects, although it is workable as a "pure" distributional theory too (primary effect only).

Kelso clearly believed that falling wages due to the relative increase in the use of capital (primary effect) would be offset by an escalation because of labor shortage brought on by economic expansion (the secondary effect): "I think we'll suck people off the welfare rolls. I think we'll suck them off public employment. We may even have to open up immigration again in order to satisfy our requirements." [27] This escalation is consistent with the historical evidence suggesting that wages rise in times of capital accumulation.

The main attraction of the binary expansion program is that it is self- sustaining. An individual's productive input, through his or her combined capital work and labor work, is logically connected to consumptive outtake, through a Binary economy, where he or she earns (and spends) both labor- and capital incomes. Put another way, property ownership is the standard, or anchor of the system, very similar to a minimum wage standard, or a worker health-and-safety standard, or an environmental standard. Because both productive inputs are widely distributed (labor, naturally and capital, through the ownership trusts of democratic capitalism), the illusion, fostered by conventional structures, that consumptive outtake can somehow exceed input is removed. As presently structured, the welfare-state's governmental redistributive institutions form an opaque screen that obscures the basic truth that outtake cannot exceed input. This makes possible the illogical expansion of spending programs, including Social Security, Medicare, Unemployment compensation and the rest that have no correlation in expanded productive programs. Borrowing, and other various accounting tricks complete the illusion, with disastrous results. Coupled with government fiscal and monetary expansionary policy (represented by the parallel shift in the isocost line--Fig. 5), the welfare economy continues to expand inefficiently until it prices itself out of world markets.

Given the preceding graphical analysis, what can we add to our definition of productiveness? First, we can conclude that it really is several ideas rolled up into one. We can say that if capital has indeed replaced a good many of the tasks previously performed by man, then by extension it is possible that capital's ability to produce value for humanity has been barely tapped. The theory of binary expansion shows how, given a logical distribution structure, the power of industrial machinery and other property, once it is "fully employed" can serve humankind, and not the other way around.

It is clear that productiveness is inextricably bound to distribution. Unless capital is allowed to do its work, its untapped productiveness cannot be realized; and for capital to do its work, it must be widely distributed in an industrial economy, in the same way as labor productiveness is distributed evenly in the abilities of able-bodied men and women. Because capital produces in the same sense as a worker produces, it only follows that the productive potential be widely dispersed on just the same principles which govern the dispersal of labor power; that is, ownership of productive power is synonymous with ownership of the right to share in the produce of economic activity. Louis and Patricia Kelso called this "the right to be productive."

Productiveness doesn't resemble productivity much, even though the two words sound alike. As labor is added to a fixed capital stock (in an efficient production stage), labor's average productivity falls (all things equal), because the marginal product of labor is falling: each worker is adding less to output than the worker before. The same is true of capital: as more capital is added to a fixed labor force, the marginal product of capital falls--workers might not know how to maximize the use of new technology, for example [and sometimes managers are unclear about the possibilities of new capital tools, too]. The "productiveness" of capital equipment is unaltered, however whether workers know how to use the equipment, or whether they do not. Failure to bring productive capital into existence is the ultimate idling of potential, however. So productiveness is in part a theory of employment of capital equipment in the productive process. That is why Kelso linked his production theory to distribution theory; ca pital won't do anyone any good if it isn't employed, and it can't be employed unless its product benefits a human being. The theory of productiveness is the idea that output can shift outward to the boundary of physical resources, if distribution institutions are innovated to channel the enormous output potential to average consumers.

From an economics interpretation, productiveness can only be observed. Scale effects probably embody some of the principles of productiveness. As capital and labor are added, output increases by more than the sum of its parts. A corollary to this is that as output increases, labor's share of the national income should decline, something which has not been observed. However the distributional flaws which were cited by Kelso as impediments to the successful operation of productiveness, cannot be overlooked, and in econometric measurement must be adjusted for, to fairly test the hypothesis that capital is capable of doing more, if only more have a chance to let it produce income exclusively for their benefit--the distributional piece of the theory.

1.1. An application of the model

Unlike a low-wage, no-welfare developing economy, the binary economy is a lower-wage (in its primary stage), technology-maximizing, high welfare economy. There is really no similarity in the social results of the two forms of economic organization; however the means by which the two reach their divergent results, is enlightening. We shall examine the difference in this section.

The theory of productiveness has a dark side that has been observed throughout recorded economic history. Rather than lowering wages in a high wage society, as capital income replaces a portion of labor income in average households, the microeconomic theory above implies that entrepreneurs can take a poor, desperate population, and achieve a short-term unsustainable effect that has some of the appearances of the "binary effect," but none of the positive social results. By passing off the costs of pollution, welfare, retirement, housing standards, worker safety standards, and so forth to the community in which operations are undertaken, an entrepreneur can drive capital costs downward, very similar to the fall in capital costs to rB in the preceding section (Figs. 4-6). The result is a vigorous, short-term, unsustainable surge in output which outwardly resembles the primary Binary Effect. The induced expansion can go forward until targeted consumer markets are glutted, and then the overaccumulation (or underi nvestment as Keynes would have said) of conventional distribution-neutral expansion sets in. This process, called "capital morbidization" in the Kelso terminology, is more aggravated in the "colonialist" expansion, because none of the redistributional elements in a modern "mixed" distributional structure of wages-and-welfare hinders the conduct. There will be more or less productive impetus from this process, depending on how low r is: it is given that w is low. In the "robber-colonial" model, then, capital costs are lowered by passing off the costs of internationally recognized standards to the communities of the poor and underdeveloped.

In the "renegade exploitation" model, falling w is a function of desperate poverty, which makes it possible for wages to fall to their lowest possible level. In the worst case, wages fall to the "fire sale" level, in which case the firm faces a forward-falling labor supply schedule; as wages fall, more labor services are offered. Falling wages in the first stage of binary growth are the result of impersonal market forces accompanying the relative rise in the importance of capital work. The lower labor costs in the short-term act like the "purchase price" of newly fabricated, productive capital. It is likely that falling wages would be a short-term phenomenon, however, as the binary economic vision became clear to all economic participants. Then capital formation could be accelerated by "keynesian" fiscal and monetary policies, to hasten the era of the binary self-sustaining production-distribution network.

Falling w/r in the binary paradigm, by way of summarizing the preceding section, results from a replacement of labor work with capital work (production side), simultaneous replacement of labor income with capital income (income side), the relaxation of taxation on both capital's and labor's return for redistributive purposes, a declining governmental redistributional role, and a falling scarcity premium on capital as it becomes more widely distributed on market principles.

Binary theory, then is a mirror-image of colonialism: but they are similar only in the sense that day and night are part of the same revolution of the world on its axis. The colonialist framework begins with poverty due to an accident of nature, while binary theory begins with unemployment due to lack of a logical definition of capitalism. [28]

Low capital costs are associated with the abrogation of responsibility in the colonial setting. In the Binary setting, they are the result of acceptance of responsibility, at all levels of society, to produce through both labor work and capital work.

Robber capitalism is unsustainable. Binary expansion is self-sustaining.

State-of-nature capitalism drives its costs lower and lower through community suffering, while two-factor capitalism's costs are anchored to the impersonal realities of the market, a different concept altogether.

Exploitative capitalism depends on affirmative steps to stifle dissent, while the binary economy expands and depends on individual political participation through both democratic political institutions and the institutions of economic democracy.

Falling wages under colonial capitalism result from human suffering, while falling binary unit labor costs are offset by a rise in the proportion of "capital-worker" income in the household incomes of people who tend to spend.

The higher reason for human existence is killed by unbridled capitalism, while binary capitalism releases the life and vitality of its members.

1.2. Income-expenditure (macroeconomic) interpretation

Another helpful way of visualizing the binary system is with a macroeconomic analysis. In the following discussion, the emphasis is on the distributional side of the theory. Fig. 7 begins the presentation, with an income-expenditure framework.

The intent of Fig. 7 is to illustrate how distribution structures can increase output beyond what traditional "Keynesian" methods can achieve.

Three functions of national income are drawn in Fig. 7. C1 = f(Y1) is the beginning point. Equilibrium (e1) is achieved at Y1, with autonomous government expenditure-plus-investment of I1 + G1. C2 = f(Y2) represents the vertical shift of the national income given increased government expenditure and investment. The national income function C2 = f(Y2) shifts upward by a distance equal to (12 + G2) - (I1 + G1). This function is also parallel to C1 = f(Y1). That, in turn is because nothing has been done to alter the existing system of distribution. Property rights are unchanged, except the existing capital owners have been given an exclusive charter to profit from the new, expanded economy, until the lack of distributive reform causes the expansion to fail. Were this not so, the slope of the national income line would be changed, as with C3 = f(Y2B). However because the conventional wisdom holds that job distribution is the way to achieve economic distribution, no usufruct reform is coupled with Federal incenti ves and direct spending; consumption propensities, and by extension savings propensities remain the same as before.

The system reaches equilibrium at e2, but the pernicious gap between the 45-degree line representing "full spending" in the economy, and the flatter national income line (slope determined by consumption propensities) remains. The volatility in investment markets remains, and frequent government direct spending measures must consistently step in to close the gap, not a problem by itself, except that the measures generally used to fulfill this Federal role require incurrence of deficits, which in turn tend to become endemic in the Federal budget.

Given binary property reform, national income is still C2 = f(Y2) at first, given the same autonomous investment and government policies (12 + G2) which achieved income of Y2 before. The difference occurs in successive periods, as property income begins to augment labor income in the households of people who tend to spend high proportions of their income. The national income line pivots on the y-axis, to C3 = f(Y2B), where C3 represents a higher consumption propensity in the national income, on average, and Y2B represents a higher national income from the same investment and government expenditure (12 + G2) that resulted in Y2 before. "B" indicates that the rise in income from Y2 is attributable to the binary financing method. The two primary features which cause the national income line to become steeper for the same Federal direct- and indirect investment programs are:

1. Binary low-cost investment funds are only available to projects which feature significant employee ownership, consumer ownership, and individual ownership through the ownership trusts outlined by Kelso;

2. Income from the assets of the ownership trusts of democratic capitalism are paid in the current period: that is, to employee owners quarterly, consumer owners bi-annually, and individual owners monthly (or a schedule similar to this).

The major difference between the binary program and the conventional can be shown from Fig. 7, and has to do with the ability of the economy to achieve sustainable, market-based growth. Because the national income line is steeper for C3 = f(Y2B) compared to C2 = f(Y2), achievement of stable equilibrium is more likely. In Keynesian terms, the "more outrageous defects of the system" have been removed by structural reform of the institutions of finance (production side) and distribution (income side). Because of this, any deviation from e3 (binary equilibrium) does not have the serious recessionary or inflationary consequences as does deviation from e1 or e2. That, in turn, is because the composition of investment is geared towards consumer-useful products, while the distributive system has built in its consumers from the start, in a logical framework. The problem of political determination of distribution (with government acting in the role as chief redistributor) is avoided. Property ownership is the anchor t hat prevents the system from "slipping its moorings," where outtake bears no relationship at all to input. The governmental role is confined to assisting the binary institution to take root. After that, the individual's outtake is determined by his or her input alone; which in turn is measured in the same way as output, by individual average hourly wage (personal MPL) plus average annual capital earnings (personal MPK). Government direct expansion (or contraction) of the overall system remains as a tool of macroeconomic adjustment, but less direct expenditure is required to restore equilibrium than under the present shape of the income function.

Growth is sustainable in the sense that there is less volatility about e3. Volatility is lessened in the binary stock exchanges, because the stock exchanges become only one of many institutions which values investments "on long views" as Keynes would say. The "object of the most skilled investors" is no longer to "outwit the crowd," or to "pass the depreciating half-crown to the other fellow." The object is to structure economic development so that many more average citizens can own property; that is, to evaluate investment and development proposals on the basis of sound management principles, and to help structure ownership constituencies so that spending is sustained.

Fig. 7 only peripherally relies on "productiveness"; the model is mainly distributional. For productiveness mainly means, in one interpretation, that increased output is possible, but that the distributive system deters it. A productiveness interpretation of Fig. 7 is similar to one of the interpretations offered in the preceding section: if capital has indeed become "more productive" over the years, then no one will ever know unless a claim to a portion of its rate of return becomes available to average consumers. That in turn implies expansionary fiscal and monetary effort, combined with the distributive reform of binary economics.

2. Conclusion

In Fig. 7 distribution is included as an endogenous variable of national income, just like the "marginal propensity to consume" is now. [29] The steepness of C3 = f(Y2B) is premised on a higher average MPC, given a binary system. The endogenous variable is distribution (d), however. Consumption (MPC) merely follows as a secondary (assumed) effect. Keynes' framework has nicely anticipated Kelso, and is readily adaptable to Kelso's work.

As the late Kenneth Boulding of Colorado made clear, distribution is the result of decisions, not technical relationships:

"The theory...makes quite clear what the classical economists knew very well--that though production might be the result of the immutable laws of physics and chemistry, distribution was the result of human decision, and that consequently distribution could be changed within a wide range of values." [30]

If production is, as Kelso believed becoming more capital-intensive in the industrial age, then the evidence of that must surely exist in the production literature. A spirited search would likely point up numerous instances in which capital's contribution approaches fortypercent (or higher) within given industries. Isolating industries in which this occurs, stitching them into a hypothetical economy, adjusting for labor-intensive bottlenecks, and you have an econometric model of an economy in which capital produces forty-five percent of the product. How the product came to be distributed in its present manner is another question, though.

It becomes clear why economists view the distributional issues raised here with wariness. It's either something for the sociologists (who have carved out a domain for themselves here), [31] or the reformers, or the political scientists; in short, anyone but the economists. It is, after all, a messy business. Distribution is decided in the halls of legislatures, in union halls, in banks, and sometimes, in the streets. After the change, then the economists study it. If the binary economists succeed in persuading policy makers of the system's validity, academic economists will have enough work to keep them busy for the next hundred years!

The real question underlying binary research and theorizing is something that has not been focused upon clearly enough yet: Does anyone think that there is anything to be gained by substituting the logic of a binary system for the present system? Do such gains in structural efficiency outweigh the wrenching political, social, and economic forces unleashed by any change as comprehensive as contemplated here? The issue has not yet been properly framed in this light by anyone yet, and owes to the deafening silence that has pervaded the theory since its birth in 1956 with the publication of The Capitalist Manifesto.

There are gains, and there are losses in replacing one thing with another. On balance, it must be worth it, and you had better be right; thus the hesitancy of the economics profession and other established participants in policy making for changing the status quo. There are two reasons why the logic of binary economics should be seriously considered, and given a test. Both have to do with the effects of the present system's shortcomings. The first has to do with Social Security and retirement. And the second is more positive, having to do with our ability to push on to a new frontier, a new way, and a new future for ourselves and our descendants.

National retirement policy is, in a binary economy, a function of a defined contribution to a pension fund, not a defined benefitfrom an ambiguous cash machine. The purely political nature of Social Security almost guarantees COLAs, extended benefits, benefits for those whose retirement is already amply supplied by other sources, and so forth. In short, it is a prescription for entitlement abuse.

The defined contribution method (a binary method really), by contrast, undoubtedly lowers, at least initially the benefits package for the present ("baby boom") generation. The predicted primary binary effect is, then a more realistic outcome in today's world. To have anything for retirement for this generation will be nothing short of a miracle. That the binary, defined-contribution outcome promises a realistic savings, within a reasonable time frame, [32] and a prospect for personal economic advancement, is the single most encouraging feature of this plan. A more logical outtake (retirement) and input (binary stock) mechanism will keep the system from runaway Federal deficits brought on by the politicization of retirement and social welfare programs.

Point two is this: Social programs are the sledgehammer of economic reform, while the binary program is a finish hammer. This solution was impossible in an age of slow communication and transportation, and information processing. Today, the advances in the microchip and other technologies have made the binary evolution possible. If we can't put the technology to work for us in designing the system which will put productive technology to work for us, what hope is there? And will not then technology rule us?

The very first test of our capability to harness technology, is to harness its productive potential for the greatest number of owners (with at least 85% coverage of the economy considered full coverage). And to test the limits of our ability to adapt our institutions is the measure of our will to succeed in the aftermath of war both hot and cold, in the last century. It is indeed vital that the mastery of the institutional "technology" that will master the scientific technology for the benefit of all be pursued with equal vigor to the way in which we pursue passing things, of no more import than the purchase of a car.

The question is whether we can forge a System for the twenty-first century, using the superior tools at our command, and whether we can pull together long enough, and bury our differences long enough to form a coalition that will stand long enough to bring a better day. The binary program is just the challenge that will test our mettle. The generation before us provided growth and prosperity for fifty years with the New Deal. It was an imperfect, but workable solution as long as production continued to expand. As Galbraith pointed out in 1958:

"Production has eliminated the more acute tensions associated with inequality. And it has become evident to conservatives and liberals alike that increasing aggregate output is an alternative to redistribution or even to the reduction of inequality. The oldest and most agitated of social issues, if not resolved, is at least largely in abeyance, and the disputants have concentrated their attention, instead on the goal of increased productivity." [33]

As we've seen, the binary program of growth theoretically results in vigorous capital formation and a changing mix of human labor and capital labor in the productive process. As businesses realize optimal use of factor inputs through the distributional efficiency resulting from institutional reform, and as they realize economies of scale from increased size, the "total" binary effect results in full employment of all factors, an expanded tax base with lowered per-capita tax burdens, distributional efficiency, lowered firm costs, and increased output. In short, it promises what Louis Kelso said it would: to reinvigorate the economy. The distributional questions "held in abeyance" are resolved, and production spurred, in one "binary" stroke. As Kelso said, "We've got the resources, we've got the intelligence. All we need is some brains at the top. That's the missing link."

(1.) This work is dedicated to Father John Willis, S.J. priest, mentor, friend.

(*.) E-mail address: (S.V. Kane).


(1.) See Louis O. Kelso and Patricia Hetter Kelso, Democracy and Economic Power: Extending the ESOP Revolution. (Cambridge, MA: Ballinger Books, 1986).

(2.) "Along with a Secretary of Labor, why not a Secretary of Capital Ownership?" Kelso asked. See Louis O. Kelso and Patricia Hetter Kelso, "Poverty's Other Exit." Democratic Capitalism: The Kelso Reader on Binary Economics. (San Francisco: The Kelso Institute, 1991), 23.

(3.) Louis Kelso and Mortimer Adler have thoroughly explored the relation of man to machine, in a system of political and economic democracy, in The Capitalist Manifesto. See, Louis O. Kelso and Mortimer Adler, The Capitalist Manifesto. (New York: Random House, 1958).

(4.) Shann Turnbull calls productive capital "procreative," because it is able to recreate its own value many times over. See: Shann Turnbull, Democratising the Wealth of Nations. (Sydney: Company Directors Association of Australia, Ltd., 1975), 5.

(5.) John Maynard Keynes, The General Theory of Employment, Interest, and Money. (New York: Harcourt, Brace and World, 1936): 211.

(6.) Keynes, The General Theory, 213.

(7.) Defined, for purposes of this paper as the narrow holding of income-producing wealth in individual households. A treatment of the empirical evidence justifying the "narrow ownership" assumption is beyond the scope of this paper. For more, see, US Congress. Joint Economic Committee. "The Concentration of Wealth in the United States." US Government Printing Office, 1978. US General Accounting Office (GAO). Program Evaluation and Methodology Division (PEMD). Initial Results of a Survey on Employee Stock Ownership Plans and Information on Related Trends. (Galthersburg, MD: US GAO, 1985).

(8.) Conventional theory holds that capital, if anything tends to contribute less to output over time. See Campbell R. McConnell and Stanley L. Brue, Contemporary labor Economics. (New York: McGraw Hill, 1986), Chapter 17, "Labor's Share of the National Income," 463-484.

It is the scarcity of human capital that is responsible for the observed, long-term rise in labor's share of the national income over the past 100 years, the argument runs. See Irving B. Kravis, "Relative Income Shares in Fact and Theory," The American Economic Review 49 (December, 1959); 917-949.

Kelso argued that his theory couldn't be understood without adjusting for restriction of capital to the well-capitalized.

(9.) Steven T. Call and William L. Holahan, Microeconomics: Second Edition: (Belmont, CA: Wadsworth Publishing Co., 1983): 137.

(10.) The redistributive (payroll) taxes on labor income are discussed more thoroughly infra.

(11.) Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality (originally published under the title How To Turn Eighty Million Workers into Capitalists on Borrowed Money). (New York: Random House, 1967), 35.

(12.) Louis O. Kelso and Patricia Hetter Kelso, "Why Do We Call It 'Labor' Productivity?" in Using Binary Economics to Restructure the Failed Socialist Economies Into Political and Economic Democracies. (San Francisco: The Kelso Institute, 1989): 93.

(13.) Louis O. Kelso and Patricia Hetter Kelso, "Poverty's Other Exit," 19-23.

(14.) Kelso and Hetter Kelso, Two Factor Theory, Chapter 8 "The Cause of Poverty," 38-43.

(15.) Carmine Gorga, "A Just Money and Credit System in a Just Economy," (Gloucester, MA: unpublished, November 1991); "A System of Interacting Interferences," pps. 43.

(16.) Keynes, The General Theory, 172.

(17.) Robert H.A. Ashford, "The Binary Economics of Louis Kelso: The Promise of Universal Capitalism," Rutgers Law Journal 22 (Fall, 1990), Part III, "Preliminary Analysis of Binary Economic Predictions." Also, Robert H.A. Ashford, "A New Market Paradigm for Sustainable Growth: Financing Broader Capital Ownership With Louis Kelso's Binary Economics" PRAXIS 19 (1998): 30-34.

(18.) The remark is prefaced by this famous "Keynesism": "Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital." Keynes, The General Theory, 375-76.

(19.) Kelso and Hetter Kelso, Two Factor Theory, 41.

"The effect of the custom is ... to give the owners of existing assets a monopoly of access to ownership of all the economy's future capital assets..." [emphasis added]

(20.) Solow is best known for his work in this area. See Robert M. Solow, "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39 (August, 1957): 312-320.

(21.) See especially Speiser' s encounter of this trap in his otherwise excellent contemporary account of Kelso and the Employee Stock Ownership Plan (ESOP), A Piece of the Action, Chapter 5, "Kelso' s One Mistake: Two-Factor Theory," pps. 93-124.

(22.) Kelso never defined "Primary" and "Secondary" binary effects, these are terms that we have made up to interpret some of his ideas.

(23.) Henry F. Thoma, ed., The American Prospect: Insights Into Our Next 100 Years. (Boston: Houghton Mifflin Company, 1977), Chapter 2: "The Economic Foundation of Freedom," by Louis Kelso, p. 40.

(24.) Ibid., p. 40.

(25.) Solow, "Technical Change and the Aggregate Production Function," 319.

(26.) Keynes, The General Theory, 220-21.

(27.) Kelso, "The Economic Foundation of Freedom," p. 40.

(28.) Kelso believed that he had developed the first theory of capitalism, and called his most important work The Capitalist Manifesto for that reason.

(29.) Carmine Gorga has developed a model "... which [has been] copyrighted and might be patented...." that includes d as an endogenous variable of national income. See Carmine Gorga, "A Just Money and Credit System in a Just Economy," op cit. "A System of Interacting Interferences," pps. 42-44.

(30.) Fred R. Glahe, ed. Collected Papers of Kenneth Boulding, V1. (Boulder, CO: Associated University Press, 1972): "Wages as a Share in the National Income," pp. 329--354.

(31.) See, for example Ramona L. Ford, Work, Organization, and Power: Introduction to Industrial Sociology, (Boston: Allyn and Bacon, Inc., 1988).

(32.) A study by the US General Accounting Office (GAO) found that over 10 years, the typical employee owner, through his or her Employee Stock Ownership Plan (ESOP) would accumulate $31,000 in stock. Cited in National Center for Employee Ownership (NCEO), Employee Ownership Report. (January/February 1991), "New GAO data on ESOP Benefits and Termination Rates," p1.

(33.) John Kenneth Galbraith, The Affluent Society. (Boston: The Houghton Mifflin Company, 1958): 97.
          Economics Parallels to Kelso's Theory of Productiveness
Kelso's Theory                      Branch of Economics
Restricted Access to Capital        Public Finance
Capability of capital to produce    Microeconomics
  an ever-greater proportion of the
  economic product
Employment restriction on capital   No Branch
                                    Some analogy to
                                    Labor Economics
Effect of Distribution on           Some analogy to
  Production                        Macroeconomics
Kelso's Theory                         Ideas Within Branch
Restricted Access to Capital           Social costs: How they are absorbed,
                                       and by
  Markets                              whom due to restricted access to
                                       capital markets
Capability of capital to produce       Production theory, including the costs
  an ever-greater proportion of the    production and optimization of factor
  economic product
Employment restriction on capital      * Firm demand for capital: marginal
                                       * Personal Distributionn of Earnings
                                         Between Labor Income and Capital
Effect of Distribution on              Income-Expenditure Analysis: How
  Production                           Distribution d acts as an endogenous
                                       variable of
                                       national income (Y), similar to
                                       variable b the marginal propensity to
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Author:Kane, Stephen V.
Publication:The Journal of Socio-Economics
Geographic Code:1USA
Date:Nov 1, 2000
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