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The Foundation of Binary Economics

“It takes money to make money,” is an oft used phrase in the capitalist economies of the Western world. And while it is not entirely true . . . most of us actually exchange our labor for money . . . it has an intuitive logic that causes the hearer to nod in agreement. We all recognize that labor can produce only a limited amount of income and that “the real money” is made by those who invest their capital to produce income. This fact has become increasingly problematic in capitalist economies as the tools of technology produce an ever increasing portion of the wealth.

Binary economics, first expounded by Kelso and Adler in 1958, differs from classical economics in asserting that there are two factors of production, labor and capital. These factors of production command returns equal to the contribution each makes. With the application of technology capital is increasingly prevalent and productive and consequently commands an ever increasing portion of the total value produced in the economy. The contribution of labor, on the other hand, is relatively fixed. Even the most highly compensated laborers in our society, the doctors, lawyers and professional managers, are essentially hourly employees. They may earn very high hourly rates, but their income is limited by the number of hours they can, or are willing, to work.

Not so for the owner of capital. The income of the capital owner is limited only by the amount of capital that owner can productively invest. Classical economics presents the individual with a “Catch-22” which has serious implications for economic growth. If a member of the society does not have capital, he or she must develop that capital out of savings. The savings are produced from reduced consumption. Thus, reducing the demand for goods and services in the economy as a whole.

Conventional methods of financing economic development and the creation of new capital rely heavily upon the use of credit. Borrowed money is used to purchase assets which produce income to amortize the financing. Once the financing is amortized the capital continues to produce income for its owner which may be used for consumption. This credit route to the creation of capital is common in corporate acquisitions, the purchase of real estate, and the development of new enterprises within existing


Unfortunately, the access to capital through credit is limited

. Because lenders abhor

undue risk, lending institutions look to existing capital as a form of guarantee for the credit. Thus, the financial strength (capital base) of the borrower is the source of comfort and reduced risk to the lender. This is true even in leveraged buyouts where the lender looks for security to the equity of the company, which admittedly may have been very small in the highly leveraged buyouts in the United States in the late 1980s. In some cases, the lender may look exclusively to the experience, expertise or energy of the buyer as security for the loan, but these situations are rare. More often existing capital is put “at risk” to assure the lender against the possibility that the new capital will not pay for itself. Thus, existing capital becomes the foundation upon which new capital is built. From the


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