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COPYRIGHT 2001 JAI Press, Inc.
Keith Wilde [*]
Capitalism needs democracy as a counterweight because the capitalist system by itself shows no tendency toward equilibrium ... Financial markets are inherently unstable... George Soros, 1998
Soros' arguments in support of this thesis are compelling. [1] They are an urgent reminder that maintenance of civilization requires vigilance and concerted effort. Soros fears that "political developments triggered by the financial crisis may eventually sweep away the global capitalist system itself. It has happened before." Marx and Engels gave a very good analysis of the capitalist system 150 years ago, says Soros-"better in some ways than the equilibrium theory of classical economics." We believe that the financial innovation created by Louis Kelso and expounded with Mortimer Adler in The Capitalist Manifesto [2] (with details in The New Capitalists) may be the best available instrument for preserving the open society that is essential to a stable and democratic capitalism.
1. Problem
The innovation has not been applied with the universality envisaged by Adler and Kelso. Even more surprising is that economic and political analysts appear to have made very little response to a technique which has major implications for their domains of interest. Why has it not been more widely discussed in the social disciplines?
2. Hypothesis
The communications strategy developed by Kelso and his closest allies does not address the relevant disciplinary communities in a language or at a point of entry that engages their stream of discourse. When Kelsonian meets economist they talk past each other, because they have not really met on the same playing field. A brilliant innovation in economic policy, backed up by expertise in financial and legal principles, has been side-tracked by promoting it as an innovation in economic theory.
3. Note on sources
Our principal motivation in preparing this paper was curiosity: why has the Kelso solution not attracted more prominence in its forty years of life? In particular, why have we not encountered it more directly in our work as economic policy analysts? [3] Our interest was engaged by the efforts of Robert Ashford to bring Kelso's ideas into academic circulation through his role as a professor of law and an advocate of socio-economics in jurisprudence. Ashford's conference presentations, written works and personal communications are the focus of our attention. [4] This seems appropriate because Ashford has made it clear on a number of occasions that his first objective is to be a faithful expositor of Kelso's core position. Furthermore, we have witnessed the apparent approval of his efforts and interpretation among others who were close acquaintances of Louis Kelso. Thus, by following Ashford's lead we expect to minimize our chances of misinterpreting Kelso, as well to participate in building a bridge between his writings and a wider community in the social disciplines.
4. Expansion of our hypothesis
Kelso misconceived the position of his innovation within "the great conversation" [5] of political economy. The conjecture is reflected in our title: democratic capitalism is descriptive of a particular style of political economy; binary economics, on the other hand, suggests a method of analysis. One of Ashford's titles promises a description of Kelso's binary economy, from which we would expect a description of life and work if his policy prescriptions were applied. In other words, a work of political economy. On opening the text, however, we find primarily an exposition of binary economics. Kelso proposed a new way of doing economics, therefore, as well as a new species of financial instruments and a renewed vision of the political economic ideal. These innovations in technique and policy prescription are premised in a particular theory about the economy. There are four distinguishable aspects, therefore, to what Ashford calls binary economics-theory, technique, analytics and policy prescription. We have found it possible and useful to focus on each of these separately, and conclude that they are not woven into a tight web of mutual interdependence. That is, the technique and the policy prescription do not depend for their efficacy or desirability on the truthfulness or rationale of the theory and analytics. Even more important, application of the technique and policy prescription has probably been held back because of being embedded in the theory and analytical approach.
5. Importance of the financial innovation
The concentration of wealth ownership in the US and other western industrialized economies, to say nothing of those recently industrialized, has been well documented. [6] The threat of an ever broadening income disparity between the rich and the rest may represent a threat to the future of democracy itself as a larger and larger proportion of the electorate feels futility in their search for public policy representing the needs of the citizenry as a whole. Indeed the growing disparity of incomes and the exclusion from society it represents may be compared to the civil rights movement. As with the civil rights movement, the motive may be more powerful than simply sympathizing with the plight of a particular group in society. It may involve the political and social integrity of the country as a whole. Citizens who do not participate and "buy in" are doing something else.
This may appear to be not an immediate likelihood, given publicly touted record low unemployment rates and burgeoning consumerism (on credit). [7] However, there exists a disturbing set of observations with regard to the coincidence of increasing wealth concentration and economic depression. [Batra, Galbraith] Should economic recession occur in the context of record household debt levels, the issue may attain more immediacy with the public. Although now unfashionable, Marx also has poignant observations on the genesis of decline in capitalist society.
As consolidation and concentration proceed, the next thing to be expropriated is the capitalist who is exploiting many laborers. "One capitalist kills many." The process is described succinctly by Weldon:
The enforced competition among capitalists is revealed by success or failure in reducing costs. For those who fail there is bankruptcy or forced sale, and the transfer of assets to those who succeed. Capitalism grows as measured by output, by productivity, by the number of employed workers, by the size of the reserve army, but it contains all the same a 'constantly diminishing number of the magnates of capital' and a working class 'disciplined, united, organized by the very mechanism of the process of capitalist production itself.' In brief, within the boundaries of a capitalistic nation-state the ranks of the capitalists are thinned by virtue of market forces, and the coherence of workers is steadily increased. 'Bourgeois economy' becomes a system that is capitalistic only in name, for competition has virtually disappeared and the organization of a socialist state is already in place. [8]
This recent analysis by a political economist is remarkably similar in tone to a warning in 1958 that America was headed toward complete socialism, that is, to State capitalism.
Though it is fashionable today to believe that we are advancing toward a sound capitalism, an understanding of the principles of capitalism will reveal that we are retreating from it and, instead, advancing toward a socialist state. Never before has society marched more joyously into ambush by the very forces it implacably opposes but does not recognize. We are faced with the spectacle of a nation sincerely seeking democracy and economic justice through means which it fails to recognize as destructive of both.
So wrote Kelso and Adler in The Capitalist Manifesto. [9]
6. Effectiveness of the financial techniques is not in doubt
The principle which makes them effective was amply demonstrated in the leveraged buy-out phenomenon of the 1980s, and the translation of Kelso's democratizing innovation into enabling legislation led to the creation of thousands of employee stock ownership plans in the United States. The momentum of application is likely to be augmented noticeably by the 1998 publication on two continents of The Ownership Solution by Jeff Gates. [10] The array of international endorsements displayed by his publishers ranges over financiers, industrialists, labor spokesmen, senators, prime ministers, development specialists, religious leaders and scholars--including even a distinguished economist. The argument of the book is based squarely, and with attribution, on the financial techniques developed by Louis Kelso. The potential for effectiveness of the techniques is not in doubt, therefore, and the potential social, political and economic benefits are readily conceivable. Their application to public policy should be a subject for widespread debate in scholarly and popular press.
7. Details and explanation of the financial technique
Operational details have been explained very adequately in many places, by Kelso himself, other of his allies including Ashford, and in Gates' recent book. The technique is based on the counterintuitive but amply demonstrated principle that in a world of banking and finance, major investments can be undertaken even if there is no accumulated pool of savings to borrow from. Even though students in economics are all taken through a demonstration that banks can create money out of nothing but a fantasy of profits to come, the principle is not second nature to us either, unless specialized in a field that is closely linked to money and finance. [11] The idea is becoming more commonplace, however, as word circulates (with indignation) that banks are no longer required to maintain reserves with central banks (for Canada, replaced by capital ratios monitored by BIS). Widespread ignorance of the...
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