OWNERSHIP: A Personal Summing Up

[Dellerman@worldbank.org]

Orthodoxy digs its own rut and tends to stick to it so that really new ideas
tend to come from the unorthodox fringe.  Those who are socialized into
expertise in a normal science are also socialized into the flaws or
misconceptions of the field along with the valid parts.  Thus they will rarely
be able to break out of those misconceptions once they are accustomed to basing
their self-esteem on their 'expertise.'  Few are inclined to deliberately
devalue their own intellectual capital.  Those who surmount the intellectual
limitations of conventional economics will probably not have their 'formation'
(in the European sense) in economics.  Thus only by being open to an occasional
unorthodox or 'wild' intellectual seed can economics avoid the enfeebling
effects of continual intellectual inbreeding.

Robert Heilbroner in his "Worldly Philosophers" and elsewhere has written fondly
about the "economics underground."  I share that fondness and try to be
reasonably open to unorthodox if not bizarre ideas as they bubble up.  Certainly
Kelso's work (not to mention my own work) would be seen as part of that
underground and thus I, like Keith and perhaps other non-Binarians, have a
certain fascination with these ideas.  Having read and participated in the
Ownership discussion from the outset, I would like to post a few "learnings" and
make a few (hopefully parting) observations.  I say "parting" since my curiosity
and taste for this particular intellectual unorthodoxy has been more than sated,
although I trust others will continue to try to clarify matters.

1. Perhaps the most remarkable thing is simply that the Binarians seem quite
unable to open an undergraduate micro-economics textbook, read it, and then tell
us just where they disagree with the standard theory of marginal productivity
(MP).  Time and again, as the productiveness discussion started to make
progress, it started to simply reproduce the standard theory (albeit in a very
incomplete form).   Until the Binarians can say where the standard price theory
(including MP theory) is wrong in principle (of course, we all know of the many
distortions in real world markets), then economists will only see vague
pre-analytical discussions of 'productivity' that are quite reminiscent of the
19th century discussions that preceded the development of MP theory around the
beginning of the 20th century.

2. There is another major off-putting thing about B.E. aside from the lack of
contact with the standard theory.  The name "Binary Economics" comes from
Kelso's weird idea that capitalist economics is unaware that capital is
productive in addition to labor.  Since capitalist economics in general and MP
theory in particular were generated in conscious response to the "labor theory"
of Marx, the classical laborists (e.g., Hodgskin, Thompson, and Bray), and (to
some extent) the classical economists (Smith and Ricardo), most capitalist
economists take this bizarre aspect of 'binary' economics as more than
sufficient reason to assign it to the waste bin of kook theories.  On the
fundamental point of ignoring the unique responsibility of human action and
focusing only on the causal efficacy of the services of capital goods, natural
resources, as well as human beings, Kelso and conventional economics are in
complete agreement and share a common devotion to the metaphorical modes of
thought that personify things so that things can be presented as "producing" a
share of the product.  Unfortunately Binarian thinking is still pre-marginalist
so it keeps confusing high capital intensity with high marginal value
productivity of capital, and thus it cannot understand why so much of the value
of the product goes to labor.  But that difference between pre- and
post-marginalist analysis should not obscure the fundamental agreement about the
metaphorical "responsibility" of capital and land in addition to labor for
"producing" the product.

3. Kelso's reproduction of 19th century pre-marginalist notions of
"productiveness" in the middle of the 20th century should not be considered as
an intellectual accomplishment.  His major contribution was on the practical
side, the ESOP and its various minor cousins.  That is what he will be known
for, and I think all non-Binarian advocates of worker ownership or economic
democracy will agree on that accomplishment.

4. The Ownership discussion has been quite revealing, at least to me, about the
ambiguous role that the ESOP has among the true-blue followers of Kelso (the
hard-core Binarians).  I was interested to find out that many of those who are
loosely attracted to B.E. take the theoretical idea that the "capital assets" or
in actual terms, the ESOP shares, are being paid for by the capital income or
dividends as an accurate description of how ESOPs work.  The two-payment
dilution argument showed quite clearly otherwise, and thus it proved to be a
divisive and decisive argument.  Binarians were not able to show any flaw in the
two-payments argument but asked all to take on faith that this flaw in the
current implementation of the ESOP would be remedied in the future Binaria.  Yet
when asked to say how this was so, all that was proffered was more tax-breaks
and subsidized low-or-no interest finance which would eventually outweigh the
dilution of the old shareholders and pass the whole cost of the employees' ESOP
shares on to the tax-payers and economy as a whole.

5. As an aside, the idea that a loan to buy a capital asset could be paid off
with a truncated portion of the cashflow thrown off by the asset is in theory a
non-starter for the simple reason that the value of the capital asset is usually
taken to be the discounted present value of all the cashflow thrown off by the
asset.  That is not rocket science.  The whole idea of a leveraged purchase only
works when the buyer can add some value not available to the seller and thus a
larger cashflow stream will be generated in the hands of the buyer than the
seller.  This "added value" could include tax breaks or below market interest
rates available to the buyer but not to the seller.

6. A further wrinkle in the dilution discussion was that I then showed how the
ESOP could be modified (the "DESOP"  idea) so as to eliminate the dilution
effect--essentially by recognizing a debt of the ESOP back to the company in the
amount of the dilution which would be paid off out of dividend payments on the
shares held in the ESOP.  Non-true-blue Binarians, not to mention ordinary
business people, are intuitively aware of the dilution involved in an ESOP.  How
could there not be dilution when the workers end up with shares paid for by the
company and the tax breaks do not add up to 100% of the share value?  Hence this
new way to avoid the dilution might well have a positive effect on the uptake of
ESOPs (stuck for many years at around 10% of the workforce) and be much easier
to implement as an ESOP option than the grandiose Federal Reserve free credit
schemes to make up for the dilution in that manner.  It should be recalled that
the two-payments argument assumes no change in worker productivity or in wage
and benefit compensations.  I would think that a good part of the ESOP uptake is
because the dilution is counteracted by current or future changes in
compensation (e.g., very explicit in the United Airlines deal) and productivity,
or simply that the old owners do not mind the dilution for non-economic reasons
(e.g., rewarding past employee loyalty).  In any case, my friendly suggestion
was met with complete silence--which I find interesting.  Why?  I surmise that
the problem is that the suggestion corrects a flaw which Binarian theory does
not recognize in the first place.  Hence for Binarians to take the suggestion
seriously would mean facing up to the dilution problem and thus backtracking on
all the rhetoric about "self-liquidating credit" and the like.  This reminds me
of a line from Sinclair Lewis' "Arrowsmith" quoted on p. 339 of James' Scott's
"Seeing Like a State": "They said...that he was so devoted to Pure
Science...that he would rather have people die by the right therapy than be
cured by the wrong."

7. Another thing I learned from the Ownership discussion was the depth of the
anti-labor distain or animus in the hard-core Binarian position.  I would think
that most of the people sympathetic to employee ownership come to it out of some
sympathy to the labor movement and some misgivings, no matter how inchoate,
about the whole employer-employee relationship (but perhaps I have a biased
sample?).  In short, they are people of the Left broadly speaking.  The
Kelsonians have always stood out as being of a rather different stripe.  Indeed,
they differ from the standard mainstream capitalist thought by being more
capitalist or ultra-capitalist rather than less.  When one sometimes hears
Binarian rhetoric about "doing away with the wage system" it turns out to mean
something quite different than how the phrase might be interpreted on the Left.
Instead of seeing any problem in the hiring or renting of people per se,
Binarians simply mean getting enough capital assets into the hands of working
people so that they don't have to depend as much or at all on wage income.
Carried to the limit, it is as if when people come out of school instead of
entering the workforce they would immediately retire on a pension for the rest
of their lives.  It is that sense that Binarian thinking talks about
"eliminating the wage system."  Thus I came to appreciate how there might be
coincidence of rhetoric when people mean entirely different things.  For
instance, the workers in the Mondragon cooperatives do not receive any wage
income but receive advances on their shares of their net labor product; they are
members of the company, not employees.  That example of "doing away with the
wage system" is fundamentally different than the Binarian notion of people
living mostly off of capital income.  This difference also comes out in the
rather bizarre attempt to co-opt Catholic social teachings to the Binarian
cause.  The Mondragon co-ops grew out of an attempt to put Catholic social
teachings about the priority of labor into practice.  The teachings about the
priority of labor were re-emphasized in the Catholic tradition by the Laborem
Exercens encyclical.  When I quoted from the website of one of the Ownership
discussion participants about the priority of labor and pointed out the conflict
with the Binarians' view of the priority of capital, the whole topic got dropped
like a hot potato.

8. Finally, the Ownership discussion has reconfirmed to me that the whole
Binarian position has absolutely no connection with the idea of workplace
democracy.  I am not talking just about Kelso personally but about the theory
itself.  There is no connection in the general Binarian theory between the place
where a worker works and the capital assets they or other people might acquire
through some Binarian scheme.  This is another way to view the divergence
between the Binarians and those who come to employee ownership from the Left
(e.g., from an interest in the labor movement, worker cooperatives,
co-determination, or labor-managed firms).  Kelso envisioned a whole panoply of
SOPs of which the ESOP was only one example.  All the SOPs appealed to a general
spread-the-wealth populism (e.g., the Huey/Russell Long connection) and thus
there was some appeal to the Left, or, perhaps I should say, to a general
Left-Right anti-establishmentarianism.  But it was the ESOP that really "took
off" in legislation and in pr
actice not only in the US but increasingly in other places.  It is interesting
to try to account for the success of the ESOP in comparison with the other SOP
ideas.  From the strict Binarian viewpoint, there is no reason why the shares
acquired by employees should be shares in the company where they work.  Indeed,
a diversified portfolio of shares in other companies would give them a better
capital income in terms of risk.  Yet the ESOP legislation specifically carved
out an exemption to the usual diversification requirements of ERISA.  The other
exemption which allowed ESOPs to buy shares with borrowed money could have been
applied to buy shares in other companies or mutual funds.  It was the specific
requirement that the ESOP buy shares in the employees' own company that
connected the ESOP to the liberal-left ideas of industrial democracy and to the
liberal ideas of incentivizing greater effort on the part of workers--neither
idea being part of the Binarian theory.  Thus the ESOP allowed a broader
Left-Right coalition that was unavailable for the other Binarian ideas that
promoted capital incomes independent of work.  Thus while we should all
recognize Kelso's contribution in the ESOP idea, the relative success of the
ESOPs cannot be imputed just to Binarian thought since the aspects of the ESOP
that differentiate it from the other SOPs are not grounded in Binarian theory at
all.  Not only does Binarian theory not account for the relative success of the
ESOP, it would seem from the Ownership discussion that Binarian theory has
become as much a liability as an asset for the further development of employee
ownership and workplace democracy--IMHO.




______________
David Ellerman
Economic Advisor to the Chief Economist
World Bank, Mail Stop MC4-404
1818 H St., NW
Washington, DC 20433
Ph: 202-473-6368
Fx: 202-522-1158
http://econ.worldbank.org
Research Site:
http://www.ellerman.org