Louis Kelso Made Simple

by David A. Spitzley

Louis O. Kelso is justly recognized by most ESOP professionals as the visionary who developed the first ESOPs, and who worked with Senator Russell Long to get them written into Federal law in 1974. However, while Kelso’s contributions to public policy are acknowledged, his writings on economic justice are still unfamiliar to most people. This article will hopefully provide some insight into what Kelso was attempting to accomplish through the creation of ESOPs, as well as the logic which lead him to the idea in the first place.

Kelso is very upfront about his motivations for examining social justice in his first book, The Capitalist Manifesto (CM). After describing the conventional view (in 1958) of the accomplishments of American capitalism, Kelso writes:

With this economic paradise at hand, why would anyone have the audacity, the ingratitude, or the effrontery to call for the renovation of our society by a capitalist revolution?...

Our answer is: To point out that while no specter is haunting America, socialism in a variety of ways is coming in by the back door; to explain that capitalism - "pure capitalism" or capitalism unmixed with socialism - is the only economic system compatible with political democracy; and to show not only that we are a long way from having such an economic system, but also that we have not yet become clear about the principles of such a system. (CM, p.10)

It is an unfortunate fact that Kelso’s explicit anti-communism has tended to turn off many on the left, who, with some good reason, have come to expect attacks on social equity by those who use terms such as "creeping socialist revolution" (CM, p.121). However, it is clear throughout Kelso’s writings that his objections are to "socialistic" methods, rather than the objectives pursued. While discussing the impact of the New Deal, he writes that the redistributive policies involved

...stemmed from deeply humanitarian motives - concern for pressing human needs and the economic welfare of the "forgotten man." These good purposes, as well as the efficiency and prosperity of the economy itself, were served by creating a mixed form of distribution which over the years has become more and more laboristic, less and less capitalistic.

These good ends were served, however, without correcting the injustices of the nineteenth-century capitalism which was self-destructive as well as inhumane because, with a highly concentrated private ownership of capital, it maintained a purely capitalistic form of distribution. On the contrary, the mixture of a laboristic with a capitalistic form of distribution in a capitalist economy, especially in a technologically advanced one in which nine-tenths of the wealth is produced by capital instruments, does serious injustice to the owners of capital. It invades, attenuates, or erodes their property rights in capital in proportion as it makes a larger and larger cut in the distributive share which should be theirs by right of earning it in order to increase the distributive share given to the owners of labor power, which is for the most part not earned by them. (CM, p.100)

Kelso’s opposition to the policies which have been commonly used to reduce economic hardship places some serious constraints upon any solutions he might propose for advancing economic justice. In fact, he concisely states the problem confronting him:

In an industrial economy such as ours, is it possible to order things so that (1) all families are in an position to earn what amounts to a decent standard of living, (2) by an organization of the economy which preserves and respects the rights of private property in capital instruments as well as in labor power, and which (3) distributes the wealth produced among those who contribute to its production in accordance with the principle of distributive justice stated above? (CM p. 64)

Not surprisingly, Kelso answers the above question with a resounding "Yes", giving the core of his solution in the form of three Principles of Economic Justice. Kelso restates them in different terms throughout his writings, but in summary they are:

1. The Principle of Distribution: Each participant in the production of wealth should receive a share proportionate to the market value(s) of the labor and capital they contribute to the enterprise.

2. The Principle of Participation: Each household must have the opportunity to earn a decent standard of living through effective participation in the production of wealth, whether by property in labor, capital, or both.

3. The Principle of Limitation: No one may exclude others from effective participation in the production of wealth through excessive concentration of ownership, whether in capital, labor, or both.

Kelso goes on to identify several injustices inherent in historical and modern economic systems which are due to the violation of one or more of the above Principles:

l Pre-industrial slave societies, in treating humans as property, violate the Principle of Participation, making the slaves entirely dependent upon their owners, who are nevertheless within their rights under the Principle of Distribution to claim the products of their "capital".

l The laissez-faire capitalism of the nineteenth century failed to follow the Principle of Limitation, which in turn led to mass violation of the Principle of Participation, causing wide-spread poverty throughout Europe and beyond.

l Marx, in formulating Communism, or State Capitalism in Kelso’s terms, to solve the problems of the laissez-faire economy, wound up violating the Principle of Distribution, by placing every citizen’s daily subsistence within the hands of the State, following not a Principle of Justice, but a Principle of Charity: "from each according to his ability, to each according to his need".

l Finally, the modern American economy, or "mixed capitalism" in Kelso’s term, represents an alternative attempt to solve the problems of laissez-faire capitalism. Unfortunately, the Keynesian policies of the last 60 years fail to address the underlying problem of concentrated capital ownership, and instead use redistributional policies to raise standards of living for those dependent upon labor for subsistence, at the expense of capital owners. This thus leads to a different (yet related) violation of the Principle of Distribution from that created via Communism.

Working from these critiques, Kelso identifies the distinguishing characteristics of the modern American economy as:

(a) vestigial or nominal private ownership of capital instruments; (b) no limitation on, and hence still undue concentration of, such ownership...; (c) a form of distribution... according to which owners of capital receive some share of what their property produces but much less than they are entitled to..., and according to which those who participate in production through mechanical labor alone receive a much larger share than such participation earns by its contribution; (d) a generally high standard of living for the laboring masses in the population. (CM, p. 106)

With this diagnosis in place, the remainder of Kelso’s writings mostly focus on how to address (b), the concentration of ownership, in a way which will reduce and eventually eliminate the necessity of (a) and (c) as a means of addressing poverty and other symptoms of economic injustice. So, how does the ESOP fit into all of this? As envisioned by Kelso, the ESOP involves three different targets he identified as obstacles to achieving democratized capital ownership: the Corporation, the Government, and the Credit system.

l The modern corporation, by retaining some or all of its earnings for future expansion, both attenuates the rights of capital owners to receive all wealth produced by their property, and also aggravates the concentration of wealth by placing the value of newly created capital directly into the hands of existing shareholders.

l Government policy, in the absence of ESOPs, tends both to encourage earnings retention by corporations (as a way of sheltering from personal income taxes what would otherwise become shareholder income), and discourage significant transfers of capital holdings to capitalless workers by levying taxes on such transfers.

l The Credit system makes capital acquisition nearly impossible by requiring collateral self-insurance in most cases, which restricts borrowing for acquisition of capital to the few who already own significant capital estates.

While there are other aspects of these institutions which Kelso targets for reform, and other institutions entirely which come in for criticism, ESOP legislation addresses all of the complaints listed above to varying extents: pre-tax payment by the corporation into the trust encourages fuller payout of earnings by the corporation; delaying personal income taxes on the shares until such time as they are sold eliminates "drag" on the rate of capital acquisition; tax advantages on payments to ESOP trusts over internally financed expansion encourage corporations to create new owners rather than enrich existing ones; and the use of the shares purchased by the trust as collateral on the loan serves to reduce if not eliminate the "insurance" barrier to capital credit for otherwise capitalless workers.

In combination, the elimination of these barriers through ESOPs has helped millions of workers become capital owners, and this well-established success is inspiring many people to take a new look at Kelso’s other proposals, such as Community Stock Ownership Plans, as a means of spreading capital ownership to even more people. Whatever one may think about Kelso’s political perspective, his proposals for wholesale economic reform represent one of the few cases in the history of ideas where utopian ideals were accompanied by specific suggestions for how society could reach the eventual goal. This fact alone demands that Kelso be given a closer look.


Kelso, Louis O., and Adler, Mortimer J. The Capitalist Manifesto. Random House: New York. 1958