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March, 2018 - Inclusive Capitalism: The Ownership-Broadening Road to Shared-Prosperity and Sustainable Growth

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Ralph Hall

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Transcript of March, 2018 - Inclusive Capitalism: The Ownership-Broadening Road to Shared-Prosperity and Sustainable Growth

Inclusive Capitalism: The Ownership-Broadening Road to Shared-Prosperity and Sustainable Growth
Dr. Robert Ashford
Bond, Schoeneck, & King
Distinguished Professor Syracuse University, USA
Dr. Ralph P. Hall
Associate Professor
School of Public and International
Affairs, Virginia Tech, USA
What Is “Inclusive Capitalism”?
(based on the principles of
binary economics
)
A capitalism that
competitively
includes all people in the process of
capital acquisition with the earnings of capital

1. happening every moment

2. how almost most capital is acquired
3. the essence of capitalism
4. the economic basis of the Cold War
5. the most important economic (property) right that
people need, but don’t know they need
Troublesome Realities
1. The economy has substantial unutilized
productive capacity
3. A three-decade declining labor share
of total income
The problem is
not
the technological ability to produce more
They Are Connected
The problem is to do so
profitably
and
sustainably
... which requires
effective demand
Where does
effective demand
for more production come from?

In the Age of the Robots ...
as production becomes more capital intensive
, the distribution of earnings
will become more capital intensive
Earnings from production (distributed or redistributed)
Borrowing and Monetizing
The Purpose of Production Is Consumption
Production (and Capital Acquisition) Are Forward-Looking
Present demand for labor and capital requires credit-worthy expectation of future consumer demand
$ Financial
Capital
Real Capital + Labor
Production
Consumption
(effective demand)
Time
To achieve Fuller Employment
Mainstream Economics ...
Prescribes strategies promoting:
Austerity ("Free" markets)
Stimulus (Government Action)
Agrees the economy is:
Not
working at full capacity
Not
working at full efficiency
Not
realizing its full growth potential
Agrees profitable fuller employment requires widespread demand for consumer goods
Agrees mass production requires mass consumption
Two Mainstream Solutions for Fuller Employment
Austerity
Stimulus
Increase Productivity, Capital Investment – to Create Jobs Reduce Costs That Suppress Profitable Production

Reduce
Taxes
Welfare Transfers
Regulation
Subsidized Non-Productive Activity
Stimulate Demand for Consumption and Capital investment

Job Creation and Increased Productivity
Government Spending via public borrowing and progressive taxation
Welfare Transfers
Access to Credit
There is another principle of fuller employment beyond
Austerity
and
Stimulus
A
broader distribution of capital acquisition

creates the rational expectation of more broadly distributed capital income to people with higher marginal spending rates (
greater consumer demand
) in future years and therefore greater demand for fuller employment of labor and capital in earlier years (the
principle of binary growth
)
At present, capital acquisition is highly concentrated
and therefore fails to distribute the capital earnings needed to purchase its output and thereby make more production profitable
Capital Defined
Real Capital
(or sometimes “capital”) includes land, animals, structures, machines, patents, trademarks, and other capital intangibles

Anything capable of being owned and employed in production
Financial Capital = Real Capital - Liabilities
Balance Sheet
Assets
Liabilities
Real capital
Wages and other operating expenses
Bonds (Financial Capital)

Equity (Financial Capital)
Financial capital
is a claim on
real capital
and its revenues after antecedent liabilities have been satisfied
What Causes Per-Capita Growth?
Modern Economics
: Increasing Productivity
Thus, the
primary role of advancing technology
(reflected in capital) is to
increase productivity
,
primarily labor productivity
Productivity:
Productiveness:
(Value of) Work Done by All Factors of Production
One Factor (Usually Labor)
Retrospectively = Work Done
Prospectively = Productive Capacity
Two Theories of Price and Value
Conventional View
: (Starting with Adam Smith)
Things are worth the work people are willing to do to acquire them
Binary Economic View
:
Things are worth the work people are willing to do themselves
and/or
the work they are willing to employ their capital to do to acquire them
The Earning Capacity (
Rate of Return
) of Capital is a Function of:
Conventional View
1. the willingness of people to work at an agreed-upon wage
2. the scarcity of capital
and (according to the Binary View)
3. the distribution of capital acquisition

... as the distribution of capital acquisition broadens, its earning capacity increases (
because it distributes more effective demand)
The Six Growth-Enhancing Powers of Capital
6. Distribute income to purchase production
1. Replace labor (producing leisure and/or unemployment)
2. Vastly supplement the work of labor
3. Do work that labor alone can never do
4. Work without labor
5. Pay for itself out of its future earnings
Capital can:
Do ever more of the work and distribute ever more of the income
Summary of Binary Economics
1.
Labor and capital both do work
- are
equally fundamental, independent variables,
or binary factors of production
2.
Technology makes capital much more productive
than labor in task
after task
3.
A broader distribution of capital acquisition
(with the earnings of capital)

promises greater consumer demand in future years

and therefore
greater demand for fuller employment of labor and capital in earlier
years
(the principle of binary growth)
In the time that I have spoken thus far

... Paris Hilton
has acquired more capital with the earnings of capital
(while asleep) than most people will earn in their lifetimes
How did she do this?
Is ...
She has used institutions of corporate finance:
fiduciaries
corporations
lenders
financial risk credit insurers
Exclusionary Corporate Finance
Corporation
Commercial
Lender
(Bank)
Loan Repayments
Cash Loan
Note
Note
Planned Growth
Capital Assets
Cash
Projecting Ownership-Distribution-Based Demand
The Figure Assumes
A seven-year cost recovery period for capital investment – it shows the number of years of annual acquisitions that will have paid for themselves over time
In every year, some number, N, of an economy’s credit-worthy companies have profitably utilized binary financing to acquire some percentage, X, of their capital investments
The capital credit insurance is profitably priced to repay the lending banks for those financings that fail to repay their acquisition loans so that N and X are net of those failures
N, X, and the rate of return on capital remain constant throughout the period
Binary Growth
If members of the poor and middle classes are enabled to compete with existing owners for the acquisition of corporate stock representing the capital requirements of credit-worthy companies ...
they would bring to the bargaining table a chip not possessed by existing capital owners - a pent up appetite for the necessities and simple luxuries of life that the rich have long enjoyed from capital income
After the acquisition debt obligations have been satisfied, the earnings of capital acquired by members of the poor and middle class, if fully paid to them, will create more production-based consumer demand than if that capital had been conventionally acquired
If
conventionally
acquired, most of the capital earnings would seek investment opportunities but in the context of
weaker prospective consumer demand
Corporation
Commercial
Lender
(Bank)
Commercial
Capital
Credit Insurer
Fiduciary
Trust
Employees
Premium
Insurance
Loan
Repay-
ments
Cash
Loan
Note
Note
Dividend
Payment
Cash
Common
Stock
Planned Growth
Capital Assets
Cash
Customers
Welfare Recipients
Some Additional Affects of Broader Capital Acquisition
[1]
As capital income is more broadly distributed to welfare recipients, government transfer payments can be reduced, and corporations whose shares provide that income can be given a tax deduction
[2]
As capital income is more broadly distributed to taxpayers, they will pay more in taxes thereby increasing government revenues and providing a basis for tax deductions for corporations whose shares provide that income and/or general tax rate reductions
[3]
Government deficits will be reduced
[5]
Tax rates can be reduced
[6]
Sovereign credit worthiness will increase
[6]
Increased financial investment for entrepreneurial activity: As poor and working people are provided a more competitive means of acquiring the least risky, most insurable capital acquisition, well-capitalized people will have incentive to move further out on the investment risk curve, thereby providing more financial capital for entrepreneurial activities, the development of new technologies, start-up companies, and smaller companies
[7]
The growing capital-based consumer demand generated by binary financing will make more capital investment credit-worthy and profitable and less risky, and therefore more insurable, less expensive, and more profitable

Over the same period of time, in a traditional economy, with relatively less capital-based consumer demand, capital investment will be riskier, and therefore more expensive, and less capital investment will be credit- worthy and profitable
[8]
With a broadening distribution of capital ownership and income so that the supply generated by technological change and increased investment will be increasing balanced by a corresponding increase in demand, the amplitude of the booms and busts of business cycles will be reduced
[9]
Thus, binary financing will reduce systemic risk

Conclusion
The barriers to more broadly shared and (therefore) greater prosperity in the UK (and in every nation) is implementation of this more inclusive capitalism is
not
institutional:

All the institutions of corporate finance are in place and functioning profitably for people roughly in proportion to their wealth
These institutions will function even more profitably as more people are competitively included in the process of capital acquisition with the earnings of capital, but in proportions not limited to their wealth
The need is for leadership
Questions?
Three Mainstream Principles of Wealth Maximization
Classical Economics
: Labor specialization is the cause of per-capita growth
Neoclassical Economics
: Efficient allocation of resources
based on marginal productivity maximizes efficiency
Equilibrium (
maximizing efficiency
)
Keynesian Economics
: At equilibrium markets will not likely reach full employment (
fuller employment
) -
Government is needed for fuller employment
The Growing Productiveness of Capital
10 sack-miles of work = 10% labor; 90% capital
10,000 sack-miles of work = less than 1% labor; more than 99% capital
1 sack-mile of work = 100% labor
x 10
x 10,000
1 sack-mile of work = 100% labor
10 sack-miles of work = 10% labor; 90% capital
10,000 sack-miles of work = less than 1% labor; more than 99% capital
Rising amount of sack-carrying capacity over time
(c) copyright 2018
Neighbors
Others
Purchasing a House
Commercial
Lender
(Bank)
Home
Buyer
Loan
Repay-
ments
Cash
Loan
Note
Note
Cash
1
3
Purchasing an Apartment Complex
Commercial
Lender
(Bank)
Entrepreneur
Loan
Repay-
ments
Cash
Loan
Note
Note
Profit
Cash
Title
Home
Owner
2
Once the loan has been repaid, the home is fully owned by the home owner
Rent Payments
Future Income
Stream
Once the loan has been repaid, all future rent becomes an income stream to the owner
70+% Retained Earnings
5. Growing wealth concentration
Capital
productiveness
Non-human
productiveness
Labor
productiveness
Capital productiveness
grows and contributes a growing percentage of total productiveness
What is the Difference?
Labor
income repays loan
Capital
income repays loan
Paris can also acquire shares with borrowed money
Corporation
Commercial
Lender
(Bank)
Commercial
Capital
Credit Insurer
Fiduciary
Trust
Paris Hilton
Premium
Insurance
Loan
Repay-
ments
Cash
Loan
Note
Note
Dividend
Payment
Cash
Common
Stock
Planned Growth
Capital Assets
Cash
1
2
3
4
"Inclusive" Corporate Finance
$
Now think about what would happen if the Russell 3,000 decided to finance part of their growth using this approach
Source: https://www.einride.eu/en/tpod
(sun, wind, ecosystems, .... things that cannot be owned)
(There is a first-actor/collective action problem that can be solved)
How do Corporations Earn Money?
Earn revenues in excess of operating and financial costs
Short-run:
Long-run:
Maintain or increase market share ...
which requires a long-run capital acquisition plan
Earn revenues in excess of operating and financial costs
Exclusionary corporate finance
concentrates additional earning capacity with existing owners
...

which fails to distribute
effective demand to the people who are expected to buy the goods/services
1% of the US population own 40-50% of the wealth
10% of the US population own 90% of the wealth
90% of the US population own 10% of the wealth
(many have negative net worth)
Adam Smith
: Labor specialization
Productivity can increase while the work done by labor decreases
Paris Hilton's shares reflect the increase in corporate wealth
$ Financial
Capital
Real Capital + Labor
Production
Increased Effective Demand for Consumption
Time
and/or
Increase labor productivity to increase growth
Capital
productiveness
Non-human
productiveness
Labor
productiveness
The Mainstream View
The Binary View
Increase productivity (mainly
labor productivity
)
The primary role of
Technology
is to:
Increase capital productiveness
The primary role of
capital
is to:
Fiduciary trust extends to all people the competitive access to the same non-recourse credit routinely available to the wealthy
2. Job polarization and the hollowing out
of the middle class
4. Increasing cost of living
The Two Ice Hockey Sticks
5-% Sale of Stock
25+% Borrowed Money
70+% Retained Earnings
25+% Borrowed Money
Profit and Loss Statement
Revenues
- Operating costs
Labor expenses
Other operating expenses
- Financial expenses
Interest etc.
= Profits before taxes
- Dividends
= Retained earnings
(reinvested in capital acquisition)
She has acquired capital with:
[1] Retained earnings
of capital
[2] Borrowed money
(future earnings of capital)
with non-recourse (as to her) corporate credit
5-% Sale of Stock
- Taxes
= Profits after taxes
Full transcript