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.

Pro

• 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.

Cons

• 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because the government can just print money to lend to new enterprises, money that will be paid back and then withdrawn from circulation.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.

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Binary Economics

The following article is contributed by Rodney Shakespeare, Co-author (with Robert Ashford) of Binary Economics: The New Paradigm. Binary economics is most famous for its advocacy of ESOPs (Employee Stock Ownership Plans), but it has other aspects as well. This is the second in our occasionally series on alternative approaches which embody distributive principles.

Binary economics is a school of economics expressing a new universal paradigm which challenges the fundamental assumptions of conventional economics. It states that it is a private property, market economics which ensures that, over time, all individuals come to ownership of an independent capital estate providing an income.

A summary of binary economics might be – a justice which creates efficiency and an efficiency which creates justice. A more detailed summary could be – the use of central bank-issued interest-free loans, administered by the banking system, for the development and spreading of various forms of productive capacity (and the associated consuming capacity) thereby creating a balance of supply and demand and forwarding social and economic justice.
Some quick illustrations of the binary proposal to use central bank-issued interest-free loans are:−

1. a halving or more of the usual cost of a bridge, sewage works or hospital
2. a halving or more of the usual cost of micro-credit for poor people to start a business
3. the enabling of any individual in the population (from a baby to a retiree) to become a shareholder in one of the great corporations. There are also binary plans for pensions and universal health care.

The key point is that binary economics is determined to spread the ownership of all forms productive capacity to everybody in the population.

But − wait a minute − isn’t that Distributism as well? And isn’t that the sort of thing which is in, or should be in, a modern Christian economics? And what, for that matter, is in, or should be in, a modern Islamic economics?

The answer is that any truly modern form of economics includes the following characteristics:–

• markets which, in a fair and efficient way, really do work for everybody
• private property which extends to all individuals in the population
• a proper balance of supply and demand
• capital ownership which extends to everybody
• some form of independent income for everybody
• no inflation
• an ethic concerned with social and economic justice
• an interest-free money supply which is totally directed at the real economy and so at the development and spreading of productive (and the associated consuming) capacity

So it could be Distributism, you might say. After all, Distributism has markets and private property; it wants social and economic justice; it wants capital ownership for all….. – yes, it could be Distributism.

Or rather, it could be Distributism IF Distributism really did have the mechanisms to achieve its aims. And IF – and this is of fundamental importance – Distributism had paradigm-altering concepts capable of challenging conventional economics so that the new ideas and policies are seen as being more realistic, more true, more just and more practical than conventional economics. It has to have these concepts because the big underlying issue is whether there is anything which can successfully challenge conventional economics, its nostrums, contradictions, injustices and inefficiencies. And not just that but it must also be something which can produce a stable economics (at a time when a global financial collapse is looking increasingly likely) and which can address the big environmental problems (and an environmental collapse is looking increasingly likely as well).

Now these are big matters and none of them can be properly addressed in an article such as this. But you might like to reflect on some of the issues in particular asking yourself what you have in common with other modern people of faith and of good faith. If you think you do have something in common then go to Wikipedia and have a look at the article on binary economics and, if you go to www.binaryeconomics.net you can buy The Modern Universal Paradigm which deals with all these matters and more.

Rodney Shakespeare.

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