Non-inflationary economic growth

Norman Kurland, lawyer, economist

22 March 2016

Once upon the time American Dream offered a revolutionary vision to all citizens of the United States to encourage each person and family to gain income self-sufficiency through ownership of productive assets. Binary economics offers a new paradigm to all of families on the globe restore the original vision, voluntarily and at no one’s expense.

Reconciling Binary Economics with the Classical Quantity Theory of Money As previously explained, Capital Homesteading depends on the responsiveness of a central bank’s discount mechanism to the market-driven demand of the lending community, a demand that originates with the unmet capital credit needs of a more broadly owned private enterprise sector. Some economists have raised the question as to whether such a transformation of monetary and credit policy would cause runaway inflation.

This article is intended to show that economic expansion that is consistent with the logic of binary economics will lead to long-term deflationary effects, but without the adverse consequences upon aggregate demand normally associated with periods of declining prices (e.g., overcapacity, unemployment, and reduced labor incomes). Kelso’s binary economic system, in sharp contrast to economies structured to distribute mass purchasing power exclusively through jobs and welfare redistribution, would link income increases directly with the productive contributions from new, expanded or transferred capital.

This article, however, will not discuss why traditional “productivity” theory leads to distortions in income maintenance policies, or why perpetual “cost push” and “demand pull” inflation is inevitable under traditional single-factor policies (“one man–one job”), nor will it explain other fundamental defects of government-subsidized “full employment” policies. (These points are fully covered in the previously cited basic writings on binary economics.) Rather, it will be demonstrated here that the use of monetized credit for enabling all persons to share equitably in capital ownership and capital incomes would conform to the classical quantity theory of money.

Formula for the Quantity Theory of Money

M x V = P x Q

(or M x V = P x T, where Q and T are different symbols for the same variable)

M = Total stock of money in circulation (coin, currency and demand deposits)

V = Velocity of money (the annual rate of use, determined by dividing the Net National Product [NNP] by the total stock of money in circulation [M], or V = NNP M)

P = Average price level (as defined in the econometric model used by the Federal Reserve)

Q = Number of income transactions (also “T”).

Binary Economics is Based on Say’s Law of Markets, the Input/Output Logic of a Market

Economy Say’s Law confirms the identity in a market economy between the market value of goods and services produced in a given time period and the aggregate purchasing power created out of the process of production and arising in the hands of the participants in production. More simply stated, “For every dollar spent, somebody gets a dollar in economic value.” Under binary economics, each of the two basic factors of production–the human factor (labor) and the nonhuman factor (capital) produce wealth or income in the same physical, economic, political, and ethical senses.

There are thus two ways for an individual to derive an income from a productive activity. The most obvious is wages derived from the contribution of his labor. The other is through ownership of productive land, structures, machines and all tangible and intangible technologies devoted to the production of marketable goods and services. A person’s “property right” in the nonhuman factor of production entitles him to receive the entire income or wealth produced by the thing(s) that he owns.

Of course, a free person also owns his own body, and thus has a right to the full fruits of his labor’s contribution to the production process, which he can exchange voluntarily for his labor income, or wages. However, binary economics is careful to separate what is human from what is not. The value of the labor or capital contributed to the production process is determined by evaluating all human inputs and all nonhuman or capital inputs through the mechanism of open and competitive markets. These productive inputs can be measured individually by the value each adds as perceived by buyers in a freely competitive market.

Through expansions and transfers of capital under more innovative corporate finance, sounder tax and inheritance policies, and more realistic labor and income maintenance policies, the right to acquire capital and receive income through capital ownership would be made accessible to the masses of mankind, who today are systematically barred from effective ownership of capital.

The logic of an individual enterprise is demonstrated by double-entry bookkeeping. Increased “outtake” (i.e., income) must be based upon increased production or distortions appear the books (and thus the business enterprise) are “out of balance”a simple observation about an economic reality.

An enterprise increases its profits by increasing production and sales and decreasing costs. Most managers do this by adding new or improved capital instruments, eliminating jobs, or both.

Binary economics carries the logic of double-entry bookkeeping and the nature of a firm’s production advances to the level of an entire economic system. Viewing the entire economy, the summation of costs (i.e., prices for all inputs) must always equal the summation of all labor and capital incomes derived from the productive process. In other words, every dollar of cost on one side of the national ledger represents someone’s income on the other side. This mathematical identity is the essence of Say’s Law of Markets.

non-inflationary growth

“Without the broad ownership program for all of citizens, all newly created capital would flow automatically into a relatively stationary ownership base, as it has since the beginning of the Industrial Revolution.”

Image – Public Doman

At the national level, Say’s Law of Markets is expressed in one of two interchangeable ways


Formulæ for Expressing Say’s Law at the National Level

(1) Flow-of-Product Definition of NNP:

NNPf = C + I + G

NNPf = Net National Product (the total money value of the flow of
final products of the community).

C = Total spending for final consumer goods and services.

I = Net capital investment (total capital investment less
depreciation ± changes in inventory).

G = Total government expenditures on goods and services (total
government disbursements less transfer payments and
interest on government obligations).

(2) Earnings or Income Definition of NNP:

NNPe = EL + EC + ET

NNPe = Net National Product (the total of factor earnings or income–wages, interest, rents, profits and transfer payments–that are the costs of production of society’s final products).

EL = Total after-tax national earnings of labor (wages, salaries, commissions–i.e., employment income).

EC = Total after-tax earnings of capital (profits, interest, rent–i.e., property income).

ET = Total net government transfer payments (welfare, social security and other entitlements).

“NNPf” and “NNPE” are simply different ways of expressing the same thing:



The Relationship Between the Quantity Theory of Money and Say’s Law

There is a direct connection between the quantity theory of money and the various measures of the net national product. Taking the two identities and solving for the common factor in the following way demonstrates how they relate to each other.


1) V = NNP M (From the definition of the velocity of money)

2) M x V = P x Q (The Quantity Theory of Money)

3) Substituting for V gives M x NNP M = P x Q

4) Eliminating M M (i.e., “1”) from the equation leaves NNP = P x Q

5) Substituting identities gives, M x V = NNP

6) And therefore M x V = P x Q = C + I + G = EL + EC + ET

“The Kelso program would modify our corporate, labor, government planning, taxation, and financing institutions to remove structural barriers to broader capital ownership and revive competitive market forces and faster rates of growth”

Application of the Quantity Theory of Money to an Economy Planned to Operate in Accordance with the System Logic of Binary Economics

Binary economics challenges some of the most fundamental and widely held assumptions underlying conventional schools of economic thought. Among the fallacies exposed by Kelso are:

  • the inevitability of economic scarcity,
  • the absurdity of “full employment” of workers as an efficient,
  • realistic and morally sound foundation for long-term national income distribution and human development policy, the notion that economic growth must be financed by past savings,
  • the blind assertion that there is an inevitable trade-off between unemployment and higher prices (the “Phillips Curve”), and many other myths that hide the illogic and structural faults inherent in any market economy that fails to provide for the wide diffusion of ownership of capital–the second, and with advancing technology, the more productive factor of production. Prices are only driven up by higher market costs when there are actual, not artificial or politically induced, shortages of workers, technology and resources.

Few will doubt that there are many system “leakages” in the form of underutilized people, technology and resources. This represents untapped productive capacity that binary economics would add to the productive process.

Let us now match Kelso’s assertions with the hard logic of the quantity theory of money.

How was it possible during the World War II era (1940-1945) for the U.S. economy to transform itself from a peacetime Depression economy with unemployment rates never less than 15 percent, to annual wartime growth rates of at least 13 percent per year, without causing runaway inflation, with little or no unemployment and with 13 million of America’s most able-bodied workers removed from the labor force? Why cannot similar growth rates be sustained in a peacetime economy? The adherents of the so called Phillips Curve suggesting that there must peacetime economy? The adherents of the so-called Phillips Curve–suggesting that there must be a trade-off between unemployment and inflation–say that this is not theoretically possible. Students of binary economics contend otherwise, pointing to the history of U.S. economic growth from 1865 to 1895, with industrialization blossoming and price levels declining. More compelling is the logic and untapped growth potential of the Kelsonian binary growth model. An economy transformed according to Louis Kelso’s binary economic growth model and his principles of economic justice would radically unharness the full productive power of modern technology and create directly the expanded private consumer power for sustaining and justifying vastly accelerated peacetime growth rates.

Kelso offers a two-pronged approach for stemming inflation. First, Kelso logically and directly attacks the multiple causes of inflation under today’s inefficient national economic game plan, including ever-rising government costs and the deficit financing of welfare and warfare, plus other nonproductive, resource-wasting activities; excessive consumer debt for people with insufficient present incomes; ever-rising labor costs in the face of decreasing labor (as opposed to capital) productiveness; growing waste of labor and corporate productiveness caused by the demotivation and alienation of millions of potentially productive workers by the injustices, absurdities, and opportunity barriers structured into contemporary economies.

The second prong of Kelso’s program would modify our corporate, labor, government planning, taxation, and financing institutions to remove structural barriers to broader capital ownership and revive competitive market forces and faster rates of growth. It would adopt incentives for accelerating capital formation through means that would expand the base of capital ownership and build capital incomes incrementally and in reasonable quantities into the 95 percent of individuals and families for whom significant capital ownership is virtually impossible to attain today.

Let us now see how the classical quantity theory of money would apply to such a planned ownership program. By combining all the variables in the identity given above, we get,

M x V = P x Q = NNP = C + I + G = EL + EC + ET


Assumptions for Analyzing the Formula

M x V = P x Q = NNP = C + I + G = EL + EC + ET

1. Government spending (G) would be held constant. Any future reductions in welfare and subsidy spending as current recipients begin receiving paychecks and, within a few years, dividend checks under the Capital Homestead Act, might first be applied toward retiring the national debt incurred in the deficit financing of war and welfare over the last 80 years. (In actuality, a strong argument could be made that G would be reduced under a healthier and expanding economy.) Thus, all increases (↑ ) to the nation’s output (NNP) would result from added consumer spending (C) and expanded investment (I):

↑ NNP = ↑C + ↑I + G

2. Unit costs of labor would be assumed to remain constant for the economy as a whole. The reason is that the new policy would eliminate coercive, mercantilist and monopolistic influences on market wage rates by shifting increases in incomes from fixed wages and entitlements to variable increases based on expanded productiveness of assets and widespread sharing of ownership profits. Thus, increased purchasing power would be directly tied to increased capital incomes, with prices and wage rates set by market forces, rather than through artificial schemes and income redistribution.

Assuming further that a new ownership-based social contract for workers is in place as a major component of a national Capital Homesteading strategy, the nation’s supply of market-oriented productive labor will expand as artificially created and subsidized jobs are eliminated, as fixed labor rates become set by global market forces (rather than by political clout), and as barriers to labor mobility and global free trade are lifted. To build a broadly-owned, vastly expanded and more productive market economy, fixed wages would have to be justified by each person’s market-determined labor value, opening up enhanced income and profit sharing opportunities for the unemployed, the underemployed, the handicapped, the elderly and others whose creative potential is now being suppressed by outdated and confused economic policies.

3. Total net government transfer payments (T) would be assumed to remain constant.

4. All future increases in total national incomes or net national product (NNP) would be tied directly to marketable production increases that take the form of increases in employment incomes (EL) and increases in ownership incomes (EC), as determined by competitive market forces and free mobility of workers and invested capital:

↑ NNP = EL + EC + ET

“Kelso’s binary economic system and the social technologies that would become available under the Capital Homestead Act offer a new route to accelerated, quality growth without inflation in the modern economy.”

Image Public Domain


Based on the above assumptions, all growth in net national product (NNP) or, in terms of the quantity theory of money, P x Q, would be based on increased consumer spending (C) or increased investment (I), or some combination thereof. However, I is a derived demand, dependent wholly on overall projected or perceived increases in C. (See Harold Moulton, The Formation of Capital, Brookings Institution, 1935, p. 42.)

Since all increases in labor and property incomes, EL and EC, would be systematically channeled under the binary growth economic model to non-affluent persons, overall production could be rapidly expanded to the fullest physical and technological potential of the U.S. economy. The currently “non-wealthy” by definition have a highly positive propensity to consume and a largely unsatisfied proprietary desire. Thus underconsumers (whose Capital Homesteading assets would be independently accumulating through “future savings” earned as the assets pay for themselves) should be encouraged to spend all their current incomes to meet unfulfilled consumer needs, with the exception perhaps of a small amount set aside to meet household emergencies. Under Capital Homesteading the new owners would be “forced” to save to acquire their newly issued ownership shares since their future EC incomes would initially be used to repay the capital acquisition loans. The limits of C would be the sum of projected EL plus EC remaining after the formation costs of each new increment of capital are paid. Taking interest payments into account, payback is normally within five to seven years of acquisition.

As was experienced during the 13 percent annual growth rates during World War II, when maximum market demand for non-consumer-destined production was artificially sustained by government, it is estimated that annual growth rates of at least 6 percent under the binary growth model would be entirely feasible. Expanded bank credit would become available for expanding productive capacity to the fullest extent of underemployed people and underutilized technology, and U.S. industry itself would be pumping marketing power directly and systematically into its potential private customers through a private sector income distribution system linked to the payrolls and dividend rolls of each firm in the system.

Redistribution of income would become increasingly unnecessary. The accumulated savings of the already affluent, who today enjoy monopolistic access to future capital ownership would become free. They would be channeled through the banking system to provide productive credit for those Capital Homesteading projects, which do not meet the requirements for financing through the Fed’s pure credit discount mechanism. They would be further contributing to expanding the capital ownership base.

As a preliminary step to meeting such industry-generated expanded demands for consumer goods and services, industry would have to increase greatly its capacity to produce more. Expanding to full production can only be achieved by accelerating the rate of new capital formation (I) and by operating new and existing enterprises at their fullest potential.

The Capital Homestead Act offers a workable means for monetizing such expanded investment rates through our national banking system, without relying on the accumulated savings of the already wealthy (who by definition already derive sufficient EL and EC to satisfy fully their consumer needs). Without the Capital Homestead Act, all newly created capital would flow automatically into a relatively stationary ownership base, as it has since the beginning of the Industrial Revolution. This does nothing but foment more social disorder and more governmental intervention with every expanded use of technology.

At the microeconomic level, that of the individual business enterprise, capital is never added unless it will pay for its own formation costs out of future earnings of the investment itself (EC), generally within a few years. Thereafter it continues to produce wealth and income in amounts that may be ten, a hundred, even a thousand times its original investment costs (I). This wealth and income flows to whomever had access to the ownership financing used to formed the new capital. The Capital Homestead Act makes this ownership financing, with its self-liquidating logic and immunity from personal risks of corporate finance, available to the masses, where it was formerly limited to present owners.

Since most increases in wealth production are attributable to unit increases in the productiveness of capital (with a corresponding decrease in the relative productiveness of labor), unit labor costs under the binary growth model would begin to stabilize and might even be reduced as displaced workers began to share the fruits of advanced labor-saving technology. Once unit labor costs become stabilized as workers receive rising dividend incomes after the formation costs of new capital are paid for, a uniquely socially beneficial deflationary effect would result: total output of wealth will have expanded at lower overall production costs. This is because profits (EC) represent a residual of corporate earnings after all other production costs are met. (On the other hand, where there are shortages of certain forms of work that cannot be performed by machines, or where affluent workers choose leisure over economic work, market forces will naturally bid up the costs of labor.)

With access to two sources of personal income, EL and EC, all potential customers of the overall corporate sector could afford to pay for all new consumer goods and services (including the costs of providing environmental protections and sustainable, nonpolluting energy technologies). The price of each product sold would represent total labor incomes and total capital incomes distributed directly through the enterprises involved to all participants in the productive process. Supply and demand at the market place would be matched, no matter how fast production levels expanded. Prices might even be reduced with no harmful economic effects to the new owners. In fact, an economy might even find itself competitive once again in fields where its labor costs had become out-priced in world markets.

Viewed in the context of the quantity theory of money, increased consumer spending (C) and increased investment (I) would necessarily lead to an increased volume of income transactions (Q) in the overall economy:

P x ↑Q = ↑C + ↑I + G

Assuming a national policy to maintain stable or lower prices (P), we can see from the formula M x V = P x Q that either the total supply of money in circulation (M), or the velocity of circulation of money (V), or both, would have to increase in order to accommodate increased Q ( ↑Q):

↑M x ↑ V = P x ↑Q

It makes no difference how rapidly Q was expanding, as long as Q represented new capital goods or new consumer products actually placed on the market where willing customers have sufficient job incomes (EL) or sufficient property incomes (EC) to purchase such products:

P x ↑Q = ↑EL + ↑EC + ET

Anticipating Short-Term Problems in Transition to A Binary Economy

One note of caution is in order, however. While a growing economy needs a growing money supply, there is a slight technical lag between the time that the banking system creates money for new capital acquisitions and the time that such productive assets are actually placed in production and begin to produce income to complete the credit cycle. This has a minor and temporary inflationary effect, but one that is more than offset by the long-term counterinflationary impact of the binary growth model.

The key to understanding this author’s optimism is the recognition that the present economic system fosters many leakages and enormous wastes of human creativity, commercializable advanced technologies and nonproductive uses of natural and man-made resources. The binary growth model would close most of these leakages and reintroduce these wasted resources for the production of marketable goods and services. This very logic of the binary growth model would thus raise the physical production and sales of marketable goods and services far beyond current levels without raising production costs in the short run, and by actually lowering production costs over the mid- to long-term. Moreover, any minor adverse effect would be counterbalanced, even in the short-run, by reducing structural inflationary pressures in today’s economy caused by:

  • continually rising labor costs in the face of a continuing displacement of labor inputs resulting from technological improvements,
  • more “created” jobs on government and subsidized payrolls to absorb technologically displaced workers who are unwilling or unable to find satisfying private sector jobs,
  • higher taxes at all levels of government,
  • expanded welfare and unemployment rolls,
  • artificial consumer demand created by easy access to consumer credit, unnecessary and inefficient barriers to enterprise competition,
  • vastly underutilized U.S. plant capacity and U.S. manpower,
  • costly resistance by organized labor to automation,
  • needless strikes, slowdowns, and worker sabotage,
  • continuing government deficit spending and rising interest for non-economically productive spending covered by the national debt,
  • and many other “demand-pull” and “cost-push” pressures on current price levels.

More enlightened national fiscal and monetary policies, geared to “full ownership” and “full and sustainable production” (instead of artificial and dehumanizing expedients to achieve “full employment”) could easily adjust for this minor problem. In no way, however, does it justify any further delays in restoring health to the U.S. economy and greater efficiencies and fairness in how we distribute capital ownership and mass purchasing power.

non inflationary economic-growth


Kelso’s binary economic system and the social technologies that would become available under the Capital Homestead Act offer a new route to accelerated, quality growth without inflation in the U.S. economy. The logic and justice of binary economics offer an improved framework to move modern economies ahead in accordance with its original founding principles, guided by customs, legal principles, institutions and traditions that are embedded in the fabric of this nation. The American Dream offered a revolutionary vision to all citizens to encourage each person and family to gain income self-sufficiency through ownership of productive assets. Binary economics offers a new paradigm to all of families around the world to restore the original vision, voluntarily and at no one’s expense.

Norman G. Kurland – Economist and Lawyer. A Founder and President of Centre for Economic and Social Justice.

Want new articles before they get published?
Subscribe to our NWSC Review.