Commentaries
Books by Louis O. Kelso
Lou Kelso hired me for my first job with a law
firm. After our work lives separated, we had occasional luncheon
conversations for the rest of his life. Lou wrote five books over 30
years, demonstrated his programs with clients of his law firm and
investment bank, lobbied new legislation and delivered hundreds of
interviews, speeches and essays. He died in 1991 at age 78.
Lou self-published his first book, The
Distributive Dynamics of Capitalism, in 1956. A friend and client
of Lou’s, Mortimer Adler, had authored several published books. With
the two of them as co-authors, The Capitalist Manifesto was
published by Random House in 1958. They followed this in 1961 with The New
Capitalists: A Proposal to Free Economic Growth from the Slavery of
Savings, Random House.
In 1967, Lou and Patricia Hetter co-authored
Two-Factor Theory: The Economics of Reality: How to Turn Eighty Million
Workers into Capitalists on Borrowed Money and Other Proposals, Random
House.
Lou’s final book, co-authored with Patricia Hetter Kelso and published
by Ballinger
in 1986, is Democracy and Economic Power: Extending the ESOP
Revolution.
Articles by Lou, books by others on his ideas and
information about Lou can be seen at
www.kelsoinstitute.org/bibliography.html. Extensive biographical
anecdotes about Lou’s life and work are in Stuart Speiser’s book, A
Piece of the Action. Rutgers University has established a
fellowship for "studying the topic of broadened ownership of capital in
a democratic society in the Unites States," described at
http://www.smlr.rutgers.edu/KelsoFellowships.pdf.
Lou’s books use theory and history to justify a
movement toward broader ownership of capital. Then he describes his own
ways of doing that. These commentaries on Lou’s books are directed
primarily to his programs.
* * *
The Capitalist Manifesto was written during
the Cold War, when capitalism and communism were competing economic
systems. In part one, Lou shows where he thinks Karl Marx made his big
mistake and says:
The path the capitalist revolution will
take faces in exactly the
opposite
direction from that taken by the communist revolution.
It seeks to diffuse the private ownership of
capital instead of
abolishing it entirely. It seeks to make all men
capitalists instead
of preventing anyone from being a capitalist by making the State
the only capitalist.
Part two of the book is Lou’s program for the
“capitalist revolution.” It would help households become owners of
corporate shares. They would pay for the shares through bank loans.
Dividends on the shares would first repay the loans. After that, the
dividends would be a major source of household income.
Each element of the program calls for new
legislation. One major government program would make credit easily
available for households to invest in businesses. A “Capital Diffusion
Insurance Corporation” would be federally chartered, to insure against
some of the risks, such as the failure of a business to sell all of a
securities offering and the catastrophe to a borrower from multiple
business failures. This insurance is intended to lower the bank’s
interest rate so that the borrower’s loan payments would be less than
the expected dividends on the shares.
To provide cash for loan repayment and household
income, corporations would be required to pay out their entire net
income in dividends. (Younger businesses could retain earnings for
growth and reserves against risks.)
* * *
The New Capitalists: A Proposal to Free Economic
Growth from the Slavery of Savings, further explains how new
investments would be financed by loans, rather than only from savings.
The problem this would solve is presented as:
The conventional methods
of financing new capital formation involve a systematic
concentration of the ownership of productive capital. [The challenge is
to find a method] which would simultaneously promote the growth of new capital
formation and increase the number of households owning viable capital
estates.
This second book describes the method as a
“financed-capitalist program.” The loans proposed for individuals to
buy securities would be non-recourse. That is, like most home mortgage
loans, the lender could foreclose on the securities purchased but the
borrower would not have to pay any remaining balance. That risk would
be insured by the Capital Diffusion Insurance Corporation (CDIC). The
insurance would not protect against the failure of any one business.
Rather, the borrower/investor would be required to have a diversified
portfolio and the risk insured would be that the value of the entire
portfolio sank below the amount of the loan.
The insurance underwriting policies of the CDIC
would determine which businesses could have their securities purchased
in the financed-capitalist program. These policies would include an
anti-monopoly limitation, the promotion of technological improvement,
inflation control, preventing concentration of share ownership and
encouraging equity financing over debt.
There would also be CDIC policies for deciding
which households could participate in the financed-capitalist program.
For instance, they should not be ones who would use their freedom from
working for a living “to fall into idleness, lasciviousness, perpetual
play, or other mischief.” Nor should they be people who would “continue
feverishly to produce and accumulate . . . more wealth.”
Eligible households would need the “economic
knowledge” to manage their investments, “or at least the aptitude and
willingness to acquire such knowledge.” They should have the
“educational background” to “provide some basis for hope that the
freedom from personal toil which can be achieved through capital
acquisition would be constructively used to contribute to the work of
civilization.”
* * *
Two-Factor Theory: The Economics of Reality:
How to Turn Eighty Million Workers into Capitalists on Borrowed Money
and Other Proposals looks at concentration of wealth as the result
of a one-factor economic theory: that labor is the only contributor to
production. In the U.S., this has led to a policy of full employment
and higher wages. To take care of those who are too old or unable to
work, the policy takes taxes paid by the workers to be redistributed
under Social Security, unemployment insurance and other entitlement
programs.
The two-factor theory would use “universal
capitalism” to provide income to households, beyond what they earned
from their labor. The objective is not only to alleviate poverty and
free people from living paycheck-to-paycheck. It would also build a
“second economy.” The explanation is that:
1. The very few
households who now own nearly all of the
productive capital are receiving far more
income than they use to
buy goods and services.
2. That additional income
gets reinvested, rather than spent on
consumption.
3. If the income from
capital were paid to far more households,
more of it would be spent in ways that
supported increased
production.
4. This would increase
the economic growth rate and the total income to be distributed as a
return on capital.
5. The far greater
business income, paid to many more households, would eventually replace
the need for income redistribution programs.
The book proposes a “Second Income Plan Trust”
which would purchase the employer’s newly issued shares and hold them in
trust for the employees. A corporation could also have a
“financed-capitalist program,” for selling newly issued shares to
nonemployee households. Loans to fund the purchase would be made by
banks, based upon insurance by the Capital Diffusion Insurance
Corporation. (This later book has the CDIC insuring “against failure of
the new plant, etc.” financed by the newly issued shares “to pay off
their purchase costs within a prescribed financing period.”)
Tax laws would be amended, so that corporations
could deduct the amount of dividends paid to reduce CDIC-insured loans.
* * *
Democracy and Economic Power: Extending the
ESOP Revolution. This final book explains the first ESOP Lou
created, in 1956, and how that experience can carry over to:
MUSOP (Mutual Stock
Ownership Plan, a trust owning several
small businesses for the benefit
of all their employees.) The costs
of creating and administering an
ESOP are usually far too great for
a smaller corporate business. The MUSOP would allow multiple
businesses to share the costs.
CSOP (Consumer Stock
Ownership Plan, a trust owning a business for the benefit of its
customers.) Lou says that, after he created the first and only CSOP,
for Valley Nitrogen Producers in 1963, its competitors lobbied Congress
to prevent the creation of any more.
GSOP (General Stock
Ownership Plan, for ownership of a business by all the citizens within a
related geographic area.) Lou worked to have Congress pass the General
Stock Ownership Corporation law of 1978. The Alaska state constitution
had been amended in 1977 to have 25% of all the state’s mineral rents
and royalties placed in a permanent fund. Unlike the trust form of his
other plans; the Alaska GSOP was to be a corporation which issued one
share for each of its citizens. After a five-year escrow, the
shares would be owned directly by the individuals. (A
1972 effort for a similar fund in Puerto Rico had lost out in political
battles.) Instead of adopting the GSOP plan, Alaska
chose to use a trust, managed by trustees appointed, reappointed and
removable by its governor (www.apfc.org/fundlaw/ConstAndLaw.cfm.
That trust is one of the examples used for Peter Barnes' proposal in his
2006 book, Capitalism 3.0: A Guide to Reclaiming the Commons.)
ICOP (Individual Capital
Ownership Plan, a trust through which individuals could borrow money to
buy securities issued by small businesses.) The securities would be
rated and the loans to purchase them would be insured to cover failure
by the businesses.
COMCOP (Commercial Capital
Ownership Plan, a trust to hold commercial real estate for the benefit
of individual investors.)
PUBCOP (Public Capital
Ownership Plan would provide insured loans to buy securities in
corporations which owned privatized public facilities, like streets,
schools, prisons, airports and transit systems.)
RECOP (Residential Capital
Ownership Plan, which would combine insurance on home mortgage loans, to
lower the interest rate, with tax deductions. The combination would
reduce the amount necessary for loan payments.)
All of these purchases would be funded entirely by
loans. Repayment of the loans, except for home mortgage loans, would come
from interest and dividends on the securities purchased. There would be
insurance against the risk that this would not be enough to make the
loan payments. The commercial insurance would be reinsured by the
Capital Diffusion Reinsurance Corporation, to be established by the
federal government. When the loans had been paid, by interest and
dividend income from the purchased business, the individuals would get
the right to vote their shares and receive the income directly.
The balance of this final book explains some of the
theories behind Lou’s programs and describes a changed role for labor
unions in converting their members to capital owners.
* * *
Comments on the Kelso programs. Lou and I agreed about the need to broaden the
ownership of capital and increase the number of individuals who could
receive investment income, as a supplement to work earnings. We had
three differences about how that could be done:
1. Lou’s programs placed an intermediary between
the individual owners and the business. Direct offerings create a direct
relationship between owners and management.
2. Lou’s programs require extensive government
legislation and oversight. Direct offerings use the existing legal
framework, without any special treatment.
3. Lou’s programs used Wall Street investment
bankers, including Kelso & Co., in packaging and distribution. We have
prepared electronic toolkits for use by the business itself in designing
and completing direct offerings.
Lou believed passionately that each of these three
elements was necessary. He told me that the intermediary was needed
because the new owners did not have the experience or training to manage
direct investments. He said this was a temporary measure and could
gradually be eliminated as more people became capable of capital
management. In our direct public offerings, over 90% of the investors
have never owned shares directly in a business before. Nor do they have
an account with a securities broker. Nevertheless, our interviews show
that they read the offering documents and perform the same kind of “risk/reward
analysis” as securities analysts and investment managers.
Government intervention was necessary, Lou argued,
because vast borrowings were required for workers to invest in
businesses. The financial institutions would not extend that credit
without government guarantees, tax benefits or other incentives. As to
our direct offerings, one of Lou’s followers referred to them as a
“Marie Antoinette” response. (When told the French people could not
afford bread, their queen reportedly said: “Let them eat cake.”) The
point of the comment being that households don’t have money to invest,
unless they can get loans that are repaid from the investments’
income. However, we have seen that “workers” will choose to allocate
money to owning shares in a business, rather than spend it on something
else. The money is there, if it can be diverted from consumption.
Government-supported borrowings are not necessary. (Ironically, Paul
Samuelson, Nobel Laureate in Economics, referred to Lou’s programs on
television’s “60 Minutes” as: “It really has a Marie Antoinette-ish
ring to it. ‘Let them own capital!’”)
Lou’s programs are complex and require professional
intermediaries and their advisors. The ESOP and all the other “_SOPs”
involve creating trusts and intricate financing negotiations and
documentation. There is clearly a role for investment bankers and their
lawyers. Direct offerings rely on simple structures that have been used
for centuries. We maintain electronic toolkits for direct
offerings and have demonstrated that they can be done without these
financial engineers and sales forces.
These differences do not detract from the benefits
that I and many others have gotten from Lou’s writings and examples of
his theories in action.
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