good evening good evening and welcome very very much to conversations where i am indeed very pleasure to welcome once again to the program lou is ok also and mr kelso is in the minds of many the economist defining a new economics that has incredible implications in terms of the american west and the world economies and louis kelso once again welcome very very much the conversation the pleasure to be here harold we've been titled the program the economics of reality and you haven't titled your book two factors theory the economics of reality yes and it was a subtitle that's a very real title in the sense that it does gain an understanding of what's actually going on in terms of the evolution of our economy without some of what fact that in a very real and practical sense economics has a valid discipline it is the concept of economists as i say past and present that there's only one way to legitimately earn whatever the percentage is it is so great that there is no resemblance between one factor economics and the economics of reality which i will call two factor economics  the conventional wisdom that scoffing term for people who pretend to be wise and are wrong holds that the only legitimate way for individuals to acquire income is through the employment of their labor power powers of their bodies and minds and including of course experience acquired wisdom talents genius whatever the human being as such can do it's our position that not only can one earn in combat way and by the way it means the same thing if you say one can engage in the production of goods and services that way because that's what earning income is all about so i position that one can and does earn income through his privately own capital some do very few but many more could end or anyone yes by capital we mean of course land structures machines certain intended bills that are given by law or custom the property characteristics  tangible property a good example is a patent for example or the concept of a firm a firm that has a name well known to the public to which the public reacts in a way that is important business wise is an intentional but can be very valuable absolute and very valuable for the owners of it if they know how to use it since most of the assets in the american economy in this is increasingly true around the world are owned by corporations the form the ownership of capital takes is the ownership of stock right at the outset perhaps i should dispel an illusion that will bother some of our listeners the british common law upon which the american common law is based and really from the roman law on down there is no no really great difference in this defines produce or goods and we're talking about capital good or thing are goods and services that you use or eat personally produce or goods are goods in intended to produce goods and services as a steel mill is a producer good on the common law defines property in producer goods as a bundle of rights including the right to possess to use to lease to subdivide even to destroy if you want to and to receive all that the thing own produces ok some terribly interesting cases in the united states supreme court on that some years back when property was much more respected than it is today today th typical owner buy could be cologne or i will say a stockholder we're not talking about their relationship of the stock holder to the assets which underlie his stock income that the assets that he beneficially ohms produces in real terms in real terms and the reason for it is there's no mystery about it in general state and federal corporate income taxes and the employer share of social security tax take roughly half the income so you've lost half your property if you're if your capital  corporations typically use half i'm sorry use three fourths of the remaining half to finance the growth of the corporation now you put half together with three fourths and you've lost seven eight seven eight so the property is gone bye bye and there are certain frictions and what i will call the coercive trickle down economy it's almost income is distributed in america through course if trickle down that shrinks it down from an eighth down to a twelfth now the only point i think our listeners should remember here is that when we speak of the income earning power of capital we're talking about something that is twelve times greater than it appears twelve times as powerful to say it another way the income that a half million dollar capitalist state would earn for you under that at ten you waited property arrangement you could receive from a mere forty seven thousand dollar investment if you got what it really produce the big difference and it tends it through time toward eroding that ever more absolutely absolutely and we'll come to that maybe we ought to talk about the reasons for it yes the the ownership of capital in the american economy was estimated by benjamin franklin in colonial day to be in the top trivial and wheat and not very valuable could be quickly rebuilt some boats and ships were included in that but land was where it was five percent of the people owned interesting lee enough in the last half century a series of studies have been made on not studies connected with each other but a succession of studies of the same phenomenon and those studies all show that all the capital ownership of any income significance five years holmes resulting from the homestead act was the policy that president lincoln was elected on it was a policy of parceling out federally owned land that wasn't otherwise being used in in very limited acreage is usually one hundred sixty acres sometimes more and it was connected with the individuals living on the land and building on it and cultivating it and using it in production and other but it was a deliberate policy to get capital ownership in the american people it ceased with the closing of the thus what i have said is that the ownership of the second factor of production is what i've identified what i've done is to say the ownership of capital by an individual is a way of earning income he is a capital worker the same sense that a labor worker is a labor worker he works through his labor power which you know in a free society  slave society doesn't course and the capital owner if he got the wages of his capital fully would be a full fledged capital worker and would engage in production in the same way and that the labor worker dies and by worker we mean worker at all levels of the economy from chairman of the board of a major bank on through to the person who wields a wheelbarrow its labor and all aspects of import is that has nothing  job classification or with management versus management i think we're talking about ways in which people human being citizens as defined in the united states constitution  ways in which citizens engage or can engage in production now i'd like i'd like to turn to the first chart that we have brought with us which which is a is a terribly interesting chart there's more there than meets the eye it runs from seventeen seventy six of course the american political revolution but strangely enough it was one of the most mystical c incidences in history that is the date of the beginning of the industrial revolution as most historians dat the interesting aspect of seven hundred seventy six in terms of these two kinds of workers was that if measured by market forces and that is  the market wasn't wasn't really rigged in seventeen seventy six significantly as it is today as market prices will of labor market people services ninety five percent of the input into production by that i mean ninety five percent of the goods and services were produced by labor but five percent by capital was mostly land land was low in value it was plentiful and you couldn't do much with it without copious applications of labor toil seventeen seventy six when we took the first steps into political democracy of the two forms of social power socially wheel double power political power of course is the power to make interpretive minister and enforce the laws and political democracy is the power to participate in that  power on the other hand is nothing more nor less than the power to produce goods and services it is economic power so that in seventeen seventy six everyone had economic power because labor was the main source and everyone was born within them and excluding cripples and things like that but but in general everyone had economic powers varying in quality in kind yes capability yes nevertheless economic power was democratically diffused throughout this is because look at that chart you see that as as technological change begins to move forward  it creeps up at an exponential rate of increase very slow at first but it goes up and it goes up faster and faster as hyperbolic curve until this is my estimate but as long as long as the capital workers are not recognized as as people who earn income in the same sense of labor does the statistics are disregarded so nobody collects them and everything that we do in the conventional world is designed to rig these figures so that they'd be nothing get to that in a moment but if the input of capital workers were   forms of input labor workers risk capital were roughly change places which capital workers provide at least ninety percent of the input there was a study done at rand corporation who years ago have the great bulk of the people ninety five percent of them providing a mere ten percent of the productive in court in real terms in real terms and remember adam smith said there's only one way to earn income producing if you one more produce more so so this is a is a is a beautiful mess even it is bad it maybe doesn't look as bad at first but in eventually it is and you have a mere five percent of the people who own all the productive capital providing ninety percent of the called the war on poverty but this is what roosevelt was really talking about a war on poverty which meant a war on the effects of poverty not on poverty more on the effects of  people could earn enough income we subsidized we gave income aid to families with dependent children food stamps and fifteen hundred other things they couldn't  buy houses we subsidized public housing privately subsidized housing they couldn't pay their doctor bills we subsidize the go out fully ameliorate the effects of poverty and exactly how they couldn't educate their children we subsidize factor economic policy congress got together and said we want to make one leave no doubt about this subject there is only one way to earn income the policy united states is to promote prosperity through full labor worker the tools of coercive trickle down those are primarily implemented by labor under the policy of the national labor relations act and all the other labor apparatus under which labor simply makes an assault on the on the market value of labor power they demand more and more pay for the same work or less or what's worse they demand more and more pay for less work so we've rigged the price of labor we have used the code receive power of taxation to rip the income away from people who earn it if you really do need the right absolutely in return fifty five percent of the taxing power of the united states and the state governments income taxing power is used for that purpose take it from those who earn it give it to those who need it and the percentage is going up yeah all of that represents or is caused by the by at temps to make the economy work when the few who are put do sing for the many  most momentous implications under the american constitution that you can imagine but we've hidden that dimension you can't  you can't talk about the right of citizens to earn income in the way in which goods and services are actually produced or through the tools that they're actually produced today if you don't bearded conventional wisdom is going to come to bed come to gregg grips with this fact of the matter is they're operating on a set of facts that is unreal has no no relation to the world the conventional wisdom holds that capital instrument acts as a sensually like a catalytic agent yes catalytic agent or some kind of a magic device you put the capital down in the vicinity of the workers and somehow rather invisible signals go back and forth between those things and raises the productivity of the workers who work in the vicinity of it but don't own it of course all this is simply fraud done with statistics what they do is measure the output caused by two input factors and attribute it to the wrong one and what do they do that because they want an excuse and a justification to constantly pay labor more and more for less and less and also constantly to maintain a just system system of distribution of income through a labor relationship of the general society production  rather than to maintain a halting horribly defective system of income distribution through this coerced trickle down instead of neighboring people to become literally and actually productive in the way in which goods and services produced so it's a pretty fix that we've gotten ourselves into in a certain sense here is usually terrible effects technology that is responsible for the production in the economy the technology is owned by five percent perhaps of the total society i presented it as have five percent of the families the consumer in a relationship to that ninety five percent of the people of either labor or income transfer payments through the government labor welfare label where falls through the government and this is a very very difficult problem because these lines are now progressing on into the future we have a real well we've run out against s tone walls that aren't going to be moved president reagan elected back to maintain eighty two on a program of getting rid of welfare well that's a that's a sound program nobody likes to be a host and earning income have it taken away from them to support strangers to someone you love that's another matter but isn't up that's not what the question  and no one no red blooded american wants to be a parasite in any sense of the word and if you knew his constitutional rights he could like it even less because the constitution tells  you've got a right to be productive the right to life with liberty which is proclaimed by the prologue to the constitution the declaration of independence and by the constitution itself the right to life with liberty is meaningless if it doesn't mean you are entitled to the power to earn the income to support that life and that lifestyle the that you reasonably are entitled to and that is a kind of situation that we've gotten ourselves into historically to this point and it seems to me there ought to be a great deal more follow through my people think in terms of their given that analysis given that set of facts which were limited here we might be able to go in are there some contemporary of smith and it was interpreted as smith's writings when he when he did this in essence looked at from the standpoint of the individual worker smith said to him you want to enjoy so you can live well produce goods and services that the public wants if you want to increase that income increase that production and the beauty of the market is that that invisible hand of the market causes the same forces to evaluate what is produced that major the income distributed out of production and so they're equal and so on said smith and even better say to articulate it somewhat in more detail supplied that is to say the production of goods and services creates its own demand will come is adequate to take it off the market will come back to that in a moment the the composite is equally true the second diagram simply shows that for the economy as a whole the gross national product is a build up of costs that's how that's how the figure is computed by the government statistical deal labor statistics and the value of the goods and services produced is is i'm sorry the value of the goods and services produced is equal to the income distributed to all the participants in production remember it still requires you to be a participant in when you understand that not only are there two ways to earn income but that the whole process of science is to make the capital worker endlessly and progressively more productive because it's because capital takes the place of labor or if it doesn't take the place of it at least produces more now there's a big argument about whether do not apply to a two factor economy and if you want to illustrate that very quickly let's take the case the first diagram on adam smith's  laws if that one little old family that one little consumer unit there who's producing something happens to be the hunt brothers and they have thirty billion dollars worth of capital working for them you can't say that supply creates its own demand unless the hunt brothers consume what they produce and you and i know or it's not the way it is thus the system is totally out of control in that by endlessly building ownership into those who can't use it can't use it we sterilize a lot on the one hand and we deprive the system there was no moment in the history of the world prior to this one when we had the massive capability of building houses of the highest quality the greatest beauty the greatest doura billing and the lowest cost to right now and yet look at the real the great bulk of people who once could have had houses can't have many more why for the very simple reason that coerced trickle down the wage base with welfare and inflates the prices and relying on labor input even though it's jiggered in other words even though it's enormously exaggerated it still isn't enough to to take what is produced primarily by capital off the market what we have done is to specifically and massively mismatch the power to produce with the possession of unsatisfied needs and wants so that those who have unsatisfied needs and wants have ready access through conventional finance to get as much more capital those who have only their labor power and it's precarious value held up by this coercive rigging and who desperately need capital ownership to unable to be capital workers as well as labor workers as an alternate way for income to be just and to and have a way to earn more income can't do it so on the one hand we push the price of housing through the ceiling on the other power groups in the society seeking things they can't get seeking things to do more harm although their intentions are good i mean the minute the minute a labor unions  renounced some of their wages or gave back some of their wages it looked like we had a brief moment of prosperity now they want to back left that's what destroyed the system why did they want more and more pay for the same work or less work perfectly simple the system doesn't give them access to capital owner says he doesn't provide any other way for them paid in production so that's why they have to get in iraq and living by that and that's right good will not be thinking collectively and alternate ways of of course ranging these  relationships and have an alternate way for income to be distributed and the thing to examine when we do that is the world finance finance was defined once by simon  ts one of the great deans of the american economists who saw about half the picture but not the other half when asked what the purpose of finance is he said well there are entrepreneurs and industrial producers of producers of various kinds who need the capital instruments before they have the money to pay for them indeed they need the capital instruments so that they can get the money to pay for them now if he had understood what you did not that every human being in the society is in that same posture  in a world in which technology is shifting the burden of production off labor on to off labor workers on the capital workers every man needs to have itself is a sacred thing and so we find our tax laws designed to give enormous write offs and credits to producers who are owned by the few who produce too much already i mean they produce more than they can consume and they force on the society new and innovative ways to take it away from those who produce it and give it to those who need it was a hell of a way to run the railroad for one thing know and furthermore we're coming closer and closer and closer to a catastrophe particularly if the technology is increasingly responsible production and if we could back up if we could forego technological advance some two bit country would plow asunder in a hurry in other words you can't you're locked into the advance of technology i believe nature intended us to shift the burden of production off labor workers on the capital workers my friends also intended this all to be capital workers even though where labor workers also be capital workers as a way of having income distribution around the society might freeze up for some artistic qualities and concerns it might be all the exploration all the life that lies outside of grubbing for a living yeah earning a living and then the that's quite a better way been beating down the wrong path it's incredible how much attend you people's lives have to have know well well if you destroyed it you know that the more difficult it becomes to earn a living is the more people focus on yes run and that's natural and it is natural and given these realities that they ask us to live in terms of the establishment of the wisdom a lot of attention focused on that inordinately now than perhaps at all because there are not solutions that you have so i think we ought to turn next to the world of finance and see how it helped screw up way the proper point to begin is with the second book our first book that mortimer adler and i did was kept manifesto second one was a book called the new capitalists new capitalists in that book among other things we said for the reasons which i have already identified here now that if the us economy continues to encourag we would rather be jar currency with inflation and we would turn over our markets to foreigners not because the foreigners are necessarily smarter than we are but because they are in general about ten or fifteen years behind us on the road going in the wrong direction and you know the whole world economics operates on differentials margins and what we were saying of course is what needs to be adjusted is the opportunity to produce not the redistribution of income after it's produced by the way aesop i think that's why that's why redistribution doesn't work in the american economy in that second book we took a hard look at why finance tends to make the rich ever richer and to keep the poor and i define anyone without a viable capitalist state as poor that includes ninety five years of the population and gives ninety nine hundred ninety five one hundred percent because that part that that always it was concentrating all the time it's concentrating on and here is the reason we found out affects only the productive use of capital workers so technology doesn't make the it's that fraud word which tries to pretend productivity tries to pretend that technology makes the worker more productive it's a lie it's a bunch of  rubbish and while you may fool some of the people i don't know what you do or not you certainly don't fool the market the market says oh that's not increased productivity of labor that's welfare packed in the wage based on the price goes up and what you're doing is buying dead welfare logic of self financing that is to say people buy capital instruments with the expectation that will they will pay for themselves they'd better be a bad business investment if they didn't or young well from the from the very beginning man's to making of capital acquisition you buy capital if you think it will pay for itself in a reasonable period of time in operation and the rule of thumb in general in business except in the throes of a severe depression which were in which we will never escape from until we change the economic policy was three to five years is probably longer than that more like five to seven or eight years today  now there is nevertheless a risk that it might not pay for itself called the feasibility risk in the whole business the handling of risk is done by commercial insurance and this is the normal way ask any insurance man you'll tell you would still be in the stone age of it weren't for commercial insurance because you could build anything very valuable and take the risk of one wipe out and you're finished forever spread that out spread over a wide base but the most important business risk of all because it determines whether labor workers can become capital workers in the industrialized society in other words it depends upon whether the constitutional rights of man to his life with liberty are going to be satisfied or not that risk that vital horribly important risk we have only used self insurance in other words you start a new business cost a million dollars a bank the likes of the likes the studies and all he says all finance it he's not telling you he alone you million dollars he's telling you he alone you two thirds of a million or maybe three quarters the rest is self insurance self insurance is a what's needed obviously is a reasonably modern way of risk ham mere risk management in finance the risk needs to be commercially  insured or broadly insured so that it doesn't constantly build capital ownership into the already rich where it is sterilized and is no use to the consumer economy and deni useless to talk about particularly frustrating to see alternative yes of taboos put in place as you worked out now the aesop the employee stock ownership plan it was the first tool that i invented and actually invented it before the publication of the cap was manifest simply because i'm revolted by the thought of of putting forward an idea that can't be implemented i think as a form of chicanery  give employees access to credit so that they can buy the employer's stock pay for it out of the assets that underlie that stock  and after it's paid for earn it collect the wages of it accumulated in the tax haven until they retire and where used effectively and intensively when they retire from being labor workers they continue to be capital workers and they can go on to their dying day totally self sufficient i'm speaking of the ideal case now because we've got to use it more intensively than we do yes but the object of the game is really lifetime employment that's what that's what the thing is all about from the time that you leave your family get your education you should begin to be and the after for ever be until your dying day self sufficient needing no redistribution no food stamps no welfare no charity no social security no pensions no profit sharing none of that stuff which is largely designed to promote the stock market you know they turn around and gamble and second and securities that have very little value to the individual because their yield is five or six tandem in order to have the country move into a precise into a really appropriate new kind of future that we can solve the year ago i gave some testimony before senator mark hatfield senate appropriations committee  it was the right to be productive and what that does is marshall the constitutional law case for access to capital ownership and of course at the moment the aesop is the best way to do it there are seven other techniques built on the same logic some of them have been partially legislatively implemented most haven't but what's needed of course is simply for congress to say let's abandon the outmoded and false economic policy that there's only one way to earn an income now i testified very extensively before the joint economic committee back in logic in the appropriateness of that that it might be that we could consider collectively as a society a major policy direction or a major policy shift that would allow us to meet some of the major economic problems starts from the wrong so from there on it is terribly easy to cure about a month ago some of the world's most highly respected they said none of the economic theories around the world are working none we must set out to find out why and the nobel foundation and the rock four brothers fund or one of the rockefeller foundation indicated that they would back up and now these fine gentlemen are going to set off on a great economic boondoggle and whatever the appropriated funds are they they won't find the answer before they use those but they're looking for that other corporations in the u s economy for their employees yes beginning to happen right now without a big policy has been on the part of congress that right be a change of the full employment or the employment act nine hundred forty six you at one time of thought production actual production act of yes constitutional safeguards but not just the constitutional safeguards of property but also the constitutional safeguards of the rights of man we talk about human rights the right to be productive is the number one human right if there's one more important than that is simply the right not to be killed on the spot that's right and that we're going to have that kind of a direction toward which we were going is one and despite the fact that these let's say in a certain sense legislative initiative to change the basic policy structure that are generally accepted notion that there could be a dispersal of income access to credit in order to purchase capital is was that will pay for themselves applying the business logic finance to the general citizenry  reserve bank to monetise each transaction determined by the same expertise that determines it today firstly management secondly banks that it's feasible but with no risk in the federal reserve bank at all all they do is monetize the transaction as our last diagram there indicates the  first layer of risk would be taken by the commercial insurers but to make certain that they're that they feel safe and comfortable a nd that they will be backed up there needs to be one new institution the capital diffusion reinsurance corporation a government corporation that  insurance companies could lay off part or all the risk if they want to of course when you lay off risk you lay off premium so you don't do that i should think you can make money out of i guess the most momentous question you can ask about that risk is why would the federal government do a thing like that i mean why would it step up and say well these enterprises that have due to been determined to be feasible  the difference is that today government doesn't without any assurance that the the risks to individuals liquidating except for a little risk of feasibility insurers have calculated that risk if it's very big it will be said to be not feasible it will be financed well that goes on every day anyway and this would be in a certain sense of purpose i would be running short here but this would be in a certain sense a a a a final assurance to the overall to the overall system in the forward movement of the production of the economies we're going to move ahead underpinning these these these a pproaches and institutional structures that you've talked oh it's entirely keeping the congress or a governmental legislative organizationally well behind it it's simply providing the the commercial insurance of something that has been self insured and that's a t v rights well it's an incredibly important decision it's an incredibly important economic systems increasingly being understood by greater numbers of people hope we might have helped here in helping to create a climate of understanding greater standing for an incredibly important economic perception economic direction rather are what it does for the third world that you can see is to eliminate the necessity for savings financing we don't have to look abroad for savings ok that's right that's the critical that's the perhaps the most critical thing at the moment well that's going to have to wait for another program toy cyber running right out of time and may i just really say thank you again let's play great pleasure being with you been a pleasure for you in the cable audience too had the perception of louis kelso author of