The Legacy and Future of Binary Economics


Binary economics is a lens for studying the dichotomy of labor and capital. The general idea is that capital works for you, and as we automate more, capital starts to replace labor. Because of technology, eventually, we will never reach full employment. The goal of binary economics people (Louis Kelso) is to spread ownership of capital. The top 0.0005% own the most stock (i.e. the means of production). If you make every citizen an owner of the means of production, then you can democratize the access and ability to receive dividends (i.e. economic power). You can't have true democracy without capital ownership and full economic participation. There is prior art in the United States: homesteading with Abraham Lincoln (financing land capital), and higher education tuition loans (e.g. GI bill to finance human capital). New and old companies today are still adopting ESOPs. Now, there is an opportunity to carry the torch further with new ESOP 2.0's. Is it capitalism? Is it market socialism? Is it communism? Who cares, it's great! Worker ownership is like a pizza.


The ESOP is the Employee Stock Ownership Plan. It is an American invention created by Louis Kelso, a lawyer and economist in 1950's San Francisco. In 1958, Kelso wrote the book The Capitalist Manifesto_, _which detailed his idea of economic justice through the democratization of capital ownership. To do this, Kelso devised the general idea of Binary Economics, and ESOPs. ESOPs are a legal framework to give workers and laborers ownership in the companies they work for.

ESOPs work by giving companies loans to buy portions of the company's stock. The initial loan capital is given to a separately managed firm, a trust, who then uses the money to purchase shares. The trust will then sell the shares to the workers, usually a small amount at a time deducted from every paycheck, until all of the company's shares are in the hands the workers and the initial loan is paid off.

This is called a leveraged ESOP, because it uses loaned money from a bank or lender to purchase and facilitate the transfer of stock. Usually, the stock held by the workers is like a little retirement savings account, where when it comes time for the worker leaves the company, they will sell the stock back to the company.

It looks a little like this:


Background of the eccentric Louis Kelso

Louis Kelso lived through the Great Depression and the Cold War, two defining moments of the American 20th century. These events informed Kelso's ideas and philosophies, and his personal story is a pretty wild one, having been a lawyer, banker, navy sailor during WW2, and lecturer.

He was also grew up during America's most active period of labor struggle. He was a child during the 1919 US Steel strike and Seattle general strike, and young adult during the textile and rail strikes. It's probably around this time that he invariably came across marxism and communism.

He initially came up with the idea of Binary Economics while deployed in the Navy, but sat on the theory (a roughly written manuscript) until he was convinced by a friend to publish it as a book. In 1958, he published The Capitalist Manifesto, and over time, he came to see his ideas as a "third way", somewhere between yet distinct from the communism versus capitalism debate that raged through the Cold War.

It was through the book The Capitalist Manifesto that the idea for democratizing capital ownership came about. He was so convinced that the world needed more workers to own capital, that he tried to convince anyone who would listen. In 1956, he worked with a legal client, a San Francisco newspaper, to help with succession planning by adopting an ESOP to buy the founder's shares. There would be more trial and error with other small experiments until 1973, when Kelso sat down with U.S. Senator Russell Long.

Russell Long was a populist conservative from Louisiana, the son of Governor and Senator Huey Long. Huey Long famously fought for the rural poor and busted monopolies, among them Standard Oil. But his son Russell was instead more a conservative politician. Anyways, somehow Kelso gets a one-on-one meeting with him one night in the back of the Madison Hotel in Washington D.C., and basically spends the whole time proselytizing about his theories.

"The senator was very patient, asked many questions,” Kelso recalls. “The waiters were standing around waiting for us to get out. It must have been around midnight. Then the senator said to me, ‘Are you saying that using financing techniques based on a two-factor (labor and things) economic theory can make haves out of the have-nots without taking it away from the haves?’ I said, ‘Senator, you put me to shame. I take three hours to explain something and you cover it in a sentence.’ ‘That’s the kind of populism I
can buy,’ he said." [](
[_Fifty Years of Utopia: A Half-Century after Louis Kelso’s The Capitalist Manifesto, a Look Back at the Weird History of the ESOP_](`_

Luckily, Kelso managed to convince the most influential tax policymaker in the Senate, who sat on the Senate Finance Committee for three decades. Long began to write inclusions for tax credits and benefits into the federal tax code with the goal of supporting the creation of ESOPs, culminating in the Employee Retirement Income Security Act of 1974.

ERISA was the tipping point of turning binary economics from theory into practice, and it spawned thousands of formed ESOPs, reaching over 10,000 ESOP by 1990, representing over 10 million employees controlling over $1.3 trillion in assets.

There was a period during the 1980's, when worker ownership seemed like the wave of hype, but today in 2019, ESOPs are kind of forgotten. Part of the reason is that the majority of the initial tax breaks from the Russell Long and Kelso era were slowly dismantled, expired, or removed. The other reason is that many of the firms that adopted ESOPs have closed down or been acquired. But the promise of ESOPs and Kelso's dream of widespread capital ownership is kind of paused in a frozen state.

Labor versus Capital

The core theory of binary economics is to recognize the dichotomy between labor and capital as the two sources of wealth. Most classical and neoclassical economists make the distinction that technology makes labor more productive, and that capital is usually a fixed thing.

Kelso regarded the workers, who owned labor but no capital, as on a road to nowhere. Technology meant that things would get worse. As shovels, for example, became more efficient, fewer workers would be needed for foundation digging, and labor’s share in the production of wealth, relative to capital’s, would continue to shrink. It was thus imperative to get a portion of ownership of the shovel into the hands of the workers.

One of the implications of this idea is that technology and automation will work to replace labor - eventually capital will do the work. So, the idea is that economic justice can only be brought through the spreading or capital ownership, where if workers can have power if they begin to own the means of production. Sounds very marxist, eh?

My gut says that Kelso knew that his ideas were seen as crank-like - ESOPs were derided by contemporary economists at the time; Paul Samuelson, fresh off a Nobel in economics, literally called him "an amateur crank" - and Kelso knew that in order to appeal broadly, he couldn't choose a side in the communism versus capitalism climate of the Cold War.

Today, even after the fall of the Berlin wall, Kelso's ideas are still portrayed as third way-ish, and there's been little theoretical economics research in mainstream economics. But the legacy of Kelso and ESOPs are pretty self-evident, with new and old firms in many industries and trades still adopting the mantle of worker ownership.

AltSOPs - CustomerSOPS, RentSOPS, CitizenSOPs

On the face of it, ESOPs failed to revolutionize our society - wealth disparity and income inequality is at historic highs. But if you look at ESOPs as the first iteration of an experiment, then there's a lot to learn and improve upon.

For one, demands for more worker power and worker compensation is growing, partly in response to how messed up our globalized economy is for the working class today. ESOPs are just one tool to changing the landscape, in addition to new corporate structures like Public Benefit Corporations. Workers and new founders are looking for alternatives, and ESOPs represent a good first attempt at giving workers better compensation and ownership.

One new twist for worker ownership is put forth by Robert Hockett, a law professor at Cornell and economic advisor to AOC. He proposes tweaking the mechanism of growing worker ownership on two dimensions: patronage and credit.


Patronage effectively means _how you will pay the lender back for the shares. _The idea here is that people's relations with firms is not limited to just giving them money. Customers who frequent a firm can also give a firm their loyalty or trust.

What if, for example, you live in a small rural and isolated community with a single grocery store? If you're a loyal customer there, it would make sense that eventually the store's customers become owners of the store. Similarly, for public utilities or goods/services in the realm of monopolistic markets, where everyone must patronize for lack of market choices, they represent an ideal situation where ownership of the customer/end-user can share in the ownership of the firm.

This kind of situation could be called a Customer Stock Ownership Plan, where if customers who use a club house for 10 years or more can qualify to become owners of it.

Another situation could be if your neighbors and you discover an oil well in your cul-de-sac, and it represents an opportunity to receive a windfall. Because you don't necessarily want to drill and harvest the oil yourself, you invite (or patronize) a firm to come in to help to capture the windfall, but on the condition that maybe after a certain amount of windfall is captured, the firm's ownership transfers to you and your neighbors. This idea is employed in Alaska with their public oil dividends - and this kind of situation could be called a Rent Recouping Stock Ownership Plan.

Lastly, you could imagine that say being a citizen of a particular country, where the country could payout dividends in shares or capital, of your local and broader community, that you could have a Citizen Stock Ownership Plan - on condition that your patronage is being a good citizen.

The Citizen SOP is obviously the largest in scale, but you could be even further ambitious with MetaSOPs - the ability to diversify capital ownership into firms of other capital ownership (ESOPs of ESOPs). This protects against the risk of income concentration so all of your eggs are not in one basket.


The other requirement of an ESOP is credit - the ability for a company or firm to take a loan to purchase the stock. This credit mechanism, and the ability to spread ownership to workers, is dependent on the creditworthiness of the firm, because it's dependent on the firm's ability to repay the loan. For companies that are sustainable and healthy, it's a great no-brainer option to leverage that business health into spreading the ownership of the company. But what of companies in variable markets, or rapidly changing industries? Surely they deserve a chance to have their workers partake in the ownership as well. This was artificially egged on with the introduction of tax breaks and tax credits into the federal tax code.

The prior art for expanding the credit for the purposes of spreading capital ownership can be seen from our past efforts to encourage the American Ownership Society™️, namely with housing and higher education. They represent efforts by our public faith to invest in ourselves and our neighbors, for the benefit of our society.

Home ownership is owning physical land capital, and in the past, the U.S. government has set up publicly-backed firms to increase the capital credit that Americans could draw from. The first of these actions was the Homestead Act from Abraham Lincoln used the state's monopoly to seize land, and then redistribute it in the interest of turning new landowners into producers of fertile land.

Later on, the U.S. government set up agencies to promote this: Fannie Mae (Federal National Mortgage Association), Ginnie Mae (Government National Mortgage Association), Sallie Mae (Student Loan Marketing Association), Freddie Mac (Federal Home Loan Mortgage Corporation) are all government sponsored enterprises formed to underwrite loans for expanded capital ownership for housing, higher education, farming, etc. These firms grew and eventually became private, and today they still pay back dividends to the Federal Reserve and U.S. Treasury.

There are other possible complex instruments and ideas to expand credit, but the general idea is that if you want to chase something ambitious like stock ownership for your society, then it can only be financed and supported by the entirety of your society - public and full-faith credit.

Criticisms of Worker Ownership

It's no secret that the massive boom of ESOP firms from the 60s through the 90s was because of the tax benefits and credits written into the federal tax code. But, that was exactly as intended, and helped create the first batch of experimental guinea pigs of worker ownership.

One of the unfortunate side effects of ESOPs was that they promised too much - ESOPs at the end of the day are just a deferred compensation scheme, to let workers share in reaping the profits of their labor. ESOPs did not give workers power in terms of accountability or decision making.

This blew up spectacularly in a few notable cases. United Airlines was 55% worker owned when it declared bankruptcy in 2002, which wiped out the retirement savings of employees as the United Airlines stock was rendered worthless. Enron and Bear Sterns were ESOP shops, and those companies' workers ended up bearing the cost of the fraud and corruption of the managers when the stock value was also wiped out. While ESOPs promised sharing the profits, it also sometimes shared maximum risk.

The legacy of ESOPs meant that now there are rules that corporate contributions to worker savings plans must be diversified, like in a 401k. This was partly learned from the failed ESOPs.

One of the other criticisms is that worker ownership is just a front for corporate welfare - the tax benefits of worker ownership are paid for by the public, while the chance that workers get to see the payday is unchanged. Or, that worker ownership is a false guise for worker power - by becoming owners of the firm itself, it masks the need for a union or organization.

But I think the most basic (and oddest) critique is that leveraged acquisition of worker ownership is subsidized indolence. Once capital is owned, is it still earned? Homesteading - you have to work the land to reap what you sow. Higher education - you have to learn skills and put it to practice to pay it off. The only rebuttal I've seen is that consumer demand grows with wealth and income. This is the same argument from the people who campion UBI, so ¯_(ツ)_/¯.

In summary

Binary economics was a once fringe theory carried by a few eccentric Great Depression babies - and it still is today. But it's carried workers a little bit further by giving them the ability to own their jobs and their communities around them.

ESOPs of the 70s, 80s, and 90s were instrumental in helping reshape our economies. Worker co-op's are on the rise, and it only seems natural that worker ownership will continue to be explored. The real power will be once we realize that worker ownership is just one part of the recipe - it's the pepperoni to the Benefit Corp's sausage, or the open governance's pineapple. How they come together is what matters, because there's a specific kind of pizza for every kind of person.

Back to other posts