Binary Economics, Pro and Con

Many thanks to Rodney Shakespeare for his brief explication of Binary Economics. I think it is a useful theory and shares the goals and objectives of Distributism, namely, the necessity of distributive justice for economic order. However, I am not a full convert, and can briefly list here the pros and cons of the system. Rodney is already familiar with these critiques, as we have had this conversation before.


  • Binary economics is binary, that is, it attempts to view economics as a system of complimentary factors, primarily labor and capital. A system that emphasizes one against the other (and it doesn't matter which one) will always be wrong.
  • It emphasizes distributive justice, without which no economy can ever reach equilibrium and will require meddling by the state of vast infusions of consumer credit (usury) to balance supply and demand.
  • Its major tool, the Employee Stock Ownership Plan (ESOP) is a kind of industrial distributism in itself.
  • It recognizes the ruinous role of usury in the economic system, and the power of "fiat"and debt-based money to create a special and undeserving class of "winners" at the expense of everybody else.
These are not inconsiderable advantages, and Binary Economics deserves praise for coming closer to the truth that does the Neoclassical or the Austrian models. However, against these advantages, we can balance some serious questions about the theory.

  • Although it advertises itself as "the" new paradigm, it is in reality much too dependent on the errors of Neoclassicism, especially in regard to productivity. In fact, BE's "productiveness" theory is just a radical restatement of J. B. Clark's "marginal productivity" theory, and if "productiveness" (which allocates 2/3rds of productivity to capital) where to be widely adopted, it would work against worker rights, not for them.
  • BE holds that savings are not necessary for economic expansion, because the government can just print money to lend to new enterprises, money that will be paid back and then withdrawn from circulation. However, while it is true that financial savings are not necessary, actual savings are. A new plant can only be built from existing stocks of cement, and while the government can easily print money, it cannot print cement. There must be unused capacity in cement (and everything else) for expansion to take place.
  • Printing money can only re-allocate existing stocks. A person who saved a million to build a factory (or borrowed from those who saved) must compete with the person who was given a million by the government to build the new plant. Therefore, such printing is inflationary. Now, BE claims it is not inflationary, because the money is withdrawn from circulation as it is repaid. But in between the loan and the repayment, it certainly will be inflationary.
  • BE adopts the marginal utility theory of value (which is incoherent) and rejects the only coherent theory of value, the Cost of Production theory or the Labor Theory of Value. Again, it is repeating a mistake of neoclassicism.
  • Finally, it depends on the "shares" model of ownersihip, which is technically not as good as the cooperative model of ownership. Shares create a problem when workers exit the company, because shares represent a claim on future earnings. Thus, in one of the most successful ESOPs, the Springfield Remanufacturing Company, the company had to spin off a non-employee owned subsidiary for the express purpose of growing it and selling it off when the original founders retire, so as to have funds to pay off the share claims of these original owners, which will be considerable when they retire; it is somewhat paradoxical for an ESOP to depend on a non-employee owned company in order to succeed.
  • Contrast this with cooperative ownership, in which the workers take out their share of the profits when they leave, but have no claims on the future earnings of the firm. Hence, there is nothing to buy out, and no problems threatening the stability of the company. The retiring employee has his share of the cash that his work has created, and may invest it as he pleases, but has no further claims on the workers who remain with the firm.
Having said all that, I genuinely admire the advances that Binary Economics brings to the discussion, and find that the practice has brought true economic freedom to many people.


John Médaille Monday, September 24, 2007 at 2:42:00 PM CDT  

The following is submitted in behalf of Rodney Shakespeare, who responds to me a follows:

With reference to John Medaille's comments on binary economics.

John's reference to the government 'printing' money spoils his critique because it is based on a misconception. 'Printing' is usually taken to mean that the money is not repayable and so by using the word 'printing' a false impression is being given that binary economics is inflationary (when it is actually counter-inflationary). In binary economics, loans (repayable and cancellable) are what is involved.

Also the banking system today creates billions in dollar loans out of nothing (that is the fundamental reason why there is continual inflation around the world), adds interest and does NOT direct it at the spreading and development of productive capacity. What matters is whether it the money is created interest-free and is then directed at the development and spreading of productive capacity and the associated consuming power.

(Referring to John's bullet points)

a) Binary productiveness analysis works in favour of everybody owning capital -- that's the market theory consequence of the analysis. Without such an analysis, there is no impetus to wide capital ownership and that, ulitmately, is why Distributism has no impulse to the large-scale spreading of capital ownership.

b) Cement is necessary but if there is increased demand for it the price just rises -- there is no inherent shortage of cement, nor of bricks, copper, plastic and widgets. Same with skilled labour. Any rise in prices is then reflected in the calculations as to to the financial viability of the project. If there really is a complete physical shortage, then there is a physical shortage which, obviously, stops something but that is completely distinct from pressure on the price of cement (which, in due course, leads to another cement factory being created to supply the demand) The real present shortage today is in demand (which is one of the reasons why why binary economcis spreads consuming power).

c) Here again you are referring to the printing of money. Yes, existing money must compete with central-bank interest-free loan money, but why not? Binary money is concerned with spreading ownership and existing money is concerned with keeping ownership narrow. In a binary economy existing money will have plenty of opportunity for investment in tyhe share capital of existing companies, in new new start-up and risk investment and also in capital credit insurance. John's position on this is in effect saying that the existing wealthy must be allowed to hog all all the big new investment opportunities. Binary economics. wants to spread ownership and faces up to this issue. As I said in the article below it gets down to whether we are, or are not, determined to spread ownership.

It is not fair to say that in between loan-out and loan-in binary economcis is inflationary. A theoretical small and temporary blip is not inflation. Binary economics in the long run is counter-inflationary.
d) The Labour Theory of Value (i.e. saying that Labour does it all) is nonsense. When you enter a supermarket and the door opens automatically, there is no little man in a cupboard pulling a string. The door opens by itself -- full stop. Design, and construction have been paid for and so it is irrelevant that humans built the door. The idea that because humans built something they have a claim on its output forever is Marx's "congealed" labouur theory -- which is even more of a nonsense than the Labour Theory. Moreover, maintenance is maintenance. People who uphold the outdated Labour Theory of Value are never able to support a thorough-going wide ownership -- and that is why Distributism limits itself to small farms and talk of workers owning their own tools . It is time that Distributism got itself up to date because its general aims and morality are splendid.

e) Yes there can be problems when workers (owning shares) leave a corporation but there are practical solutions. It all gets down to whether or not wide ownership is really desired -- or just talked about.

f) John mentions the cashing in of shares on retirement. Yes there are a number of options and Mondragon experience could be valuable. There was going to be a full l chapter on Mondragon and Co-operatives in the Ashford/Shakespeare binary eocnomics book but we were on 750 pages and had to cut it down to 450.

Rodney Shakespeare.

verdra Tuesday, August 12, 2008 at 7:28:00 PM CDT  

i have just recently come upon this economic theory and though there may be minor issue(which can probably be fixed) the foundation of this theory seems very sound. i would like to see more discourse of this subject as well as of this caliber. thank you both for this enlightening discussion.

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