by Louis O. Kelso and
Patricia Hetter Kelso
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In 1967, five hooded robbers in Miami, Florida, relieved William M.
du Pont and his wife of their $1.5 million Russian coin collection
at gunpoint. One of the robbers paused long enough to ask Mr. du Pont: “Why
don’t you make your living like a normal person?” When
Mr. du Pont asked what was normal, the gunman replied: “Working
to earn a living like everyone else.”
As a seventh or eighth generation of what we call “capital workers,” Mr.
du Pont must have smiled at this naïve view. But our national
economic policy still revolves around the idea that every able-bodied
person’s income problems can be solved through jobs. Capital
employment — ownership that is — remains unrecognized as
an equally legitimate way to earn a living.
Capital workers have access to credit. Credit enables a borrower to
buy a capital asset, like a company, and pay back the loan out of the
purchased company’s own earnings. Historically the rich have
monopolized credit — and the rewards that go with it. The result:
5 percent of American families own nearly all of the economy’s
non-residential productive assets, with most ownership concentrated
in the top 2 percent.
To become more competitive and maintain employment levels, the overall
economy needs massive capital investment. But without a change in economy
policy and philosophy, our high-tech future will not be owned by working
people but by the same 5 percent of families that already own our existing
low-tech capital.
Why can’t American workers use credit to buy new and existing
capital assets — especially those of companies in the process
of automating production and eliminating jobs?
The reason is that economists and bankers still decree that capital
ownership must be acquired only through heroic feats of under-consumption — which
they call savings. Only by holding a pool of savings, these conventionally
minded bankers say, can lenders be insured against the risk that a
newly acquired company will fail to earn enough to repay its takeover
cost. But who in America has unencumbered savings of the requisite
magnitude to purchase those companies? Only the already well capitalized — the
already rich.
In conventional finance, savings are put up as a kind of performance
bond. If a new factory, say, does not produce enough income to pay
off its debts, the lenders may foreclose and take the company’s
savings.
But protecting against a possible failure to repay is really a risk-management
problem that should be handled with commercial insurance, not savings.
Savings, after all, are only a type of self-insurance plan, which,
in our view, is obsolete. It does not broaden capital ownership as
technological change transforms industry from labor intensive to capital
intensive. Instead, it concentrates ownership.
The employee stock ownership plan — known as an ESOP — was
invented to democratize access to capital credit. In human terms, it
is a financing device that gradually transforms labor workers into
capital workers. It does this by making a corporation’s credit
available to the employees who then use it to buy stock in the company.
The earnings of the company itself are used to pay for the stock. The
company’s reward from an ESOP — in addition to a motivated
work force of worker/owners — is the low-cost financing of its
own capital needs.
But most economists have not caught up with this new economic reality.
In fact, most economists still refer to the wages of capital as “unearned
income.” The inference is that only labor work is legitimately
productive. Capital workers, in this view, are freeloaders on labor’s
work. This is, or course, the official Marxian socialist position.
But, strangely, it is also endorsed by such capitalist enterprises
as Citibank, which once even used that idea as the basis of an advertisement.
Labor workers and their unions could hardly fail to be confused — especially
when they are asked to help finance modernization by accepting wage
cuts. These wage cuts often help outsiders take over these companies.
Our economy is now well into an era of unprecedented technological
change. Under such code names as “computer-integrated manufacturing,” production
is being reorganized around technologies designed specifically for
automated processes.
Computer pioneer Adam Osborne calls it the “microelectronics
industrial revolution.” He predicts that its impact will rival
that of the first industrial revolution, wiping out perhaps half of
all jobs — blue and white collar alike — in the industrial
world today. “Without adequate planning,” he warned, “we
could be heading for a time of anguish and chaos.”
But the ESOP method of financing enables our nation to deal with technological
change rationally and painlessly — person by person, corporation
by corporation, industry by industry — as capital input displaces
labor input across the board.
Moving from labor worker to combined labor worker and capital worker
is a transition essential to a private-property, free-market economy
whose destiny is inexorably bound to technological progress. This solves
both the individual’s problem of earning a good living and the
economy’s problem of maintaining mass production and purchasing
power.
Relying upon a job to provide an income once worked for most Americans.
It still does for many, at least until they reach retirement or are
dismissed from those jobs. But to earn a good living as long as they
live people must now supplement their labor employment with capital
ownership. Bringing about this long overdue transition is government’s
most urgent task.
When F. Scott Fitzgerald observed that “the rich are different
from us,” Ernest Hemingway retorted, “Yes, they have more
money.”
But this celebrated riposte throws no light on the great divide between
the very rich and even such extraordinarily talented middle class outsiders
as Fitzgerald and Hemingway. Had the latter known the secret of wealth,
he might have replied: “Yes, Scott, they have access to capital
credit.”
-- Originally published in The New York Times, January 29,
1989, Section 3
