Louis O. Kelso
Encyclopedia
Louis Orth Kelso was a political economist in the classical tradition of Smith, Marx and Keynes. He was also a corporate and financial lawyer, author, lecturer and merchant banker who is chiefly remembered today as the inventor and pioneer of the Employee Stock Ownership Plan (ESOP), the prototype of the leveraged buy-out invented to enable working people without savings to buy stock in their employer company and pay for it out of its future dividend yield.
Then came Pearl Harbor. Kelso was commissioned in the U.S. Naval Service, and assigned to intelligence duty first in San Francisco and then in the Canal Zone. Working tropical hours, Kelso used his free afternoons to work on his seminal manuscript, The Fallacy of Full Employment; in 1946, the war over, the completed manuscript in his footlocker, the Navy sent him on a destroyer back to civilian life. But 1946 was also the year Congress passed the Full Employment Act. This legislation, still in force, defines economic policy in the United States 170 years after the official birth of the Industrial Revolution
as the right to a job. Kelso concluded that the time for his ideas had not yet come.
Kelso's next financing innovation, the Consumer Stock Ownership Plan (CSOP), in 1958 enabled a consortium of farmers in the Central Valley to finance and start up an anhydrous ammonia fertilizer plan. Despite fierce opposition from the major oil companies who dominated the industry, Valley Nitrogen Producers was a resounding success. Substantial dividends first paid for the stock and then drastically reduced fertilizer costs for the farmer-shareholders.
Kelso regarded the ESOP and CSOP as pragmatic proof that his revolutionary revision of classical economic theory, and the financial techniques he derived from this new perspective, were sound and workable in the economic and business world. As a corporate and financial lawyer, and later as senior partner in the law firm he founded, Kelso well understood that world. He was further motivated by his conviction that lawyers had a special responsibility to maintain and improve society's institutions in the light of its democratic values. He further believed that the business corporation was society's greatest social invention and that its executives had a fiduciary responsibility in exercising its vast power.
Kelso long believed that he had not originated a new economic theory but only discovered a vital fact that the classical economists had somehow overlooked. This fact was the key to understanding why the private property, free market economy was notoriously unstable, pursuing a roller coaster course of exhilarating highs and terrifying descents into economic and financial collapse.
This missing fact, which Kelso had uncovered over years of intensive reading, research and thought, drastically modifies the classical paradigm which has dominated formal economics since Adam Smith
. It concerns the effect of technological change on the distributive dynamics of a private property, free market economy. Technological change, Kelso concluded, makes tools, machines, structures and processes ever more productive while leaving human productiveness largely unchanged. The result is that primary distribution through the free market economy, whose distributive principle is "to each according to his production," delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contributions through labor.
Differential productiveness over time concentrates market-sourced income in the hands of those who will not recycle it back through the market as payment for consumer goods and services. They already have most of what they want and need so they invest their excess in new productive power. This is the source of the distributional bottleneck which makes the private property, free market economy ever more dysfunctional. The symptoms of dysfunction are capital concentration and inadequate consumer demand, the effects of which translate into poverty and economic insecurity for the majority of people who depend entirely on wage income and cannot survive more than a week or two without a paycheck. And since, as Adam Smith laid down, economic demand begins with the consumer and consumer purchasing power, the production side of the economy is under-nourished and hobbled.
All of Kelso's financing tools and economic proposals are designed to correct the imbalance between production and consumption at its source, in conformance with private property free market principles identified by Smith and his followers.
In a biographical summary written for the National Center for Employee Ownership in 1988, Kelso described "the area in which first I alone, and then, beginning about 25 years ago, Patricia and I, have made our contribution to the world of economics and corporate (and other) finance. The Kelso contribution lies partly in the area of macro-economic discovery, and partly in practical ways to implement and make good use of those discoveries in human affairs."
New scientific ideas, especially those related to an existing paradigm, are notoriously difficult to name. Although going along with Random House's cold-war title, The Capitalist Manifesto, Kelso and Adler, rigorous thinkers both, knew that capitalist was not the right term. But they could not come up with a better one. In their book they had called Kelso's new concept the theory of capitalism. Later Kelso and Hetter, wrestling with the same semantic problem, came up with the term universal capitalism. Not until after their last book was already in print did Kelso discover the term her had been searching for all along: binary economics.
that would be both an advisor and investor in mergers and acquisitions
involving Employee Stock Ownership Plans. The firm, which would later come to be known as Kelso & Company
, would transition toward private equity
investments in the late 1970s and would raise its first private equity fund
in 1980. Today Kelso & Company is a $10 billion private equity firm
and was among the 50 largest private equity firms globally.
Early career
Kelso began to think seriously about economics in 1931, the second year of the Great Depression. Although not yet 18, he was determined to launch his own investigation into the cause of a phenomenon no one was able to explain to his satisfaction. This quest took him to the University of Colorado at Boulder, where in 1937 he was graduated with a B.S. degree in business administration and finance; he went on to law school, receiving a J.D. in 1938. He then joined a Denver law firm and also briefly taught constitutional law at his alma mater.Then came Pearl Harbor. Kelso was commissioned in the U.S. Naval Service, and assigned to intelligence duty first in San Francisco and then in the Canal Zone. Working tropical hours, Kelso used his free afternoons to work on his seminal manuscript, The Fallacy of Full Employment; in 1946, the war over, the completed manuscript in his footlocker, the Navy sent him on a destroyer back to civilian life. But 1946 was also the year Congress passed the Full Employment Act. This legislation, still in force, defines economic policy in the United States 170 years after the official birth of the Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
as the right to a job. Kelso concluded that the time for his ideas had not yet come.
Development of ESOPs
Kelso created the ESOP in 1956 to enable the employees of a closely held newspaper chain to buy out its retiring owners. Two years later Kelso and his co-author, the philosopher Mortimer J. Adler, explained the macro-economic theory on which the ESOP is based in The Capitalist Manifesto (Random House, 1958). In The New Capitalists (Random House, 1961), the two authors present Kelso's financial tools for democratizing capital ownership in a private property, market economy. These ideas were further elaborated and refined in Two-Factor Theory: The Economics of Reality (Random House, 1967) and Democracy and Economic Power: Extending the ESOP Revolution Through Binary Economics (1986, Ballinger Publishing Company, Cambridge, Massachusetts; reprinted 1991, University Press of America, Lanham, Maryland), both co-authored by Patricia Hetter Kelso, his collaborator since 1963.Kelso's next financing innovation, the Consumer Stock Ownership Plan (CSOP), in 1958 enabled a consortium of farmers in the Central Valley to finance and start up an anhydrous ammonia fertilizer plan. Despite fierce opposition from the major oil companies who dominated the industry, Valley Nitrogen Producers was a resounding success. Substantial dividends first paid for the stock and then drastically reduced fertilizer costs for the farmer-shareholders.
Kelso regarded the ESOP and CSOP as pragmatic proof that his revolutionary revision of classical economic theory, and the financial techniques he derived from this new perspective, were sound and workable in the economic and business world. As a corporate and financial lawyer, and later as senior partner in the law firm he founded, Kelso well understood that world. He was further motivated by his conviction that lawyers had a special responsibility to maintain and improve society's institutions in the light of its democratic values. He further believed that the business corporation was society's greatest social invention and that its executives had a fiduciary responsibility in exercising its vast power.
Kelso long believed that he had not originated a new economic theory but only discovered a vital fact that the classical economists had somehow overlooked. This fact was the key to understanding why the private property, free market economy was notoriously unstable, pursuing a roller coaster course of exhilarating highs and terrifying descents into economic and financial collapse.
This missing fact, which Kelso had uncovered over years of intensive reading, research and thought, drastically modifies the classical paradigm which has dominated formal economics since Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
. It concerns the effect of technological change on the distributive dynamics of a private property, free market economy. Technological change, Kelso concluded, makes tools, machines, structures and processes ever more productive while leaving human productiveness largely unchanged. The result is that primary distribution through the free market economy, whose distributive principle is "to each according to his production," delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contributions through labor.
Differential productiveness over time concentrates market-sourced income in the hands of those who will not recycle it back through the market as payment for consumer goods and services. They already have most of what they want and need so they invest their excess in new productive power. This is the source of the distributional bottleneck which makes the private property, free market economy ever more dysfunctional. The symptoms of dysfunction are capital concentration and inadequate consumer demand, the effects of which translate into poverty and economic insecurity for the majority of people who depend entirely on wage income and cannot survive more than a week or two without a paycheck. And since, as Adam Smith laid down, economic demand begins with the consumer and consumer purchasing power, the production side of the economy is under-nourished and hobbled.
All of Kelso's financing tools and economic proposals are designed to correct the imbalance between production and consumption at its source, in conformance with private property free market principles identified by Smith and his followers.
In a biographical summary written for the National Center for Employee Ownership in 1988, Kelso described "the area in which first I alone, and then, beginning about 25 years ago, Patricia and I, have made our contribution to the world of economics and corporate (and other) finance. The Kelso contribution lies partly in the area of macro-economic discovery, and partly in practical ways to implement and make good use of those discoveries in human affairs."
New scientific ideas, especially those related to an existing paradigm, are notoriously difficult to name. Although going along with Random House's cold-war title, The Capitalist Manifesto, Kelso and Adler, rigorous thinkers both, knew that capitalist was not the right term. But they could not come up with a better one. In their book they had called Kelso's new concept the theory of capitalism. Later Kelso and Hetter, wrestling with the same semantic problem, came up with the term universal capitalism. Not until after their last book was already in print did Kelso discover the term her had been searching for all along: binary economics.
Kelso & Company
In 1971, Louis Kelso founded Kelso Bangert & Company as a merchant bankMerchant bank
A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to....
that would be both an advisor and investor in mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
involving Employee Stock Ownership Plans. The firm, which would later come to be known as Kelso & Company
Kelso & Company
Kelso & Company is a private equity investment firm focusing on leveraged buyouts, recapitalizations and growth capital transactions. Kelso invests in a variety of sectors, including communication, manufacturing and restaurants....
, would transition toward private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
investments in the late 1970s and would raise its first private equity fund
Private equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
in 1980. Today Kelso & Company is a $10 billion private equity firm
Private equity firm
A private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital...
and was among the 50 largest private equity firms globally.
Quote
"The Roman arena was technically a level playing fieldLevel playing fieldA level playing field is a concept about fairness, not that each player has an equal chance to succeed, but that they all play by the same set of rules. A metaphorical playing field is said to be level if no external interference affects the ability of the players to compete fairly...
. But on one side were the lions with all the weapons, and on the other the Christians with all the blood. That's not a level playing field. That's a slaughter. And so is putting people into the economy without equipping them with capital, while equipping a tiny handful of people with hundreds and thousands of times more than they can use."
--Louis O. Kelso in Bill Moyers
Bill MoyersBill Moyers is an American journalist and public commentator. He served as White House Press Secretary in the United States President Lyndon B. Johnson Administration from 1965 to 1967. He worked as a news commentator on television for ten years. Moyers has had an extensive involvement with public...
: A World of Ideas, (1990)
Publications
- The distributive dynamics of capitalism by Louis O Kelso, self-published; 2nd edition (1956)
- The Capitalist Manifesto, by Louis O. Kelso and Mortimer J. Adler, Random House, New York: 1958; reprinted Greenwood Press, Westport, Connecticut: 1975. Also published in French, Spanish, Greek and Japanese. ISBN 0-8371-8210-7
- The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings, by Louis O. Kelso and Mortimer J. Adler, Random House, New York: 1961; reprinted Greenwood Press, Westport, Connecticut: 1975. Also published in Japanese. ISBN 0-8371-8211-5
- Two-Factor Theory: The Economics of Reality, by Louis O. Kelso and Patricia Hetter, Random House, New York: 1967; paperback edition, Vintage Books: 1968. (Originally published under the title How to Turn 80 Million Workers into Capitalists on Borrowed Money.) Also published in Spanish and German.
- Democracy and Economic Power: Extending the ESOP Revolution Through Binary Economics, by Louis O. Kelso and Patricia Hetter Kelso, Ballinger Publishing Co., Cambridge, Massachusetts: 1986; reprinted by University Press of America, Lanham, Maryland: 1991. Also available in Russian and Chinese. ISBN 0-8191-7909-4
Other writings by Louis O. Kelso
- Karl Marx: The Almost Capitalist, American Bar Association Journal, March, 1957. http://www.cesj.org/thirdway/almostcapitalist.htm
- Corporate Benevolence or Welfare Redistribution?, The Business Lawyer, January, 1960.
- Labor's Great Mistake: The Struggle for the Toil State, American Bar Association Journal, February, 1960.
- Welfare State - American Style, Challenge, The Magazine of Economic Affairs, New York University, October, 1963.
- The Case for the 100% Dividend Payout, Trends (published by Georgeson & Co.), New York, December, 1963.
- Poverty and Profits, by Hostetler, Kelso, Long, Oates, the Editors, Harvard Business Review, September–October, 1964.
- Beyond Full Employment, Title News (the Journal of the American Land Title Association), November, 1964.
- Cooperatives and the Economic Power to Consume, The Cooperative Accountant (published by the National Society of Accountants for Cooperatives), Winter, 1964.
- Why Not Featherbedding?, Challenge, September–October 1966. (Reprinted in American Controversy: Readings and Rhetoric, by Paul K. Dempsey and Ronald E. McFarland, Scott, Foresman and Company, Glenview, Illinois: 1968.)
- The Economic Foundation of Freedom, The American Prospect: Insights into Our Next 100 Years, Houghton Mifflin Company, Boston: 1977.
- Labor's Untapped Wealth: An Address by Louis Kelso, Air Line Pilot, October, 1984.
Other writings by Louis O. Kelso (with Patricia Hetter Kelso)
- Uprooting World Poverty: A Job for Business, Business Horizons, Fall, 1964. (Reprinted in Mercurio, Anno VIII, No. 8, Rome, Italy, August, 1965; Far Eastern Economic Review, Vol. L, No. 1, Hong Kong, October, 1965. Winner of the First Place 1964 McKinsey Award for Significant Business Writing.)
- Poverty's Other Exit, North Dakota Law Review, January, 1965.
- Equality of Economic Opportunity Through Capital Ownership, Social Policies for America in the Seventies, edited by Robert Theobald, Doubleday & Co., New York: 1968. (Excerpts from this essay reprinted in Current, April, 1968.)
- Reparations and the Churches, Business Horizons, December, 1969.
- Invisible Violence of Corporate Finance, The Washington Post, June 18, 1972.
- Man Without Property, Business and Society Review, Summer, 1972.
- Corporate Social Responsibility Without Corporate Suicide, Challenge, July–August, 1973.
- Employee Stock Ownership Plan, Business & Government Insider Newsletter, July 30, August 6 and August 13, 1973.
- Employee Stock Ownership Plans: A Micro-Application of Macro-Economic Theory, The American University Law Review, Spring, 1977.
- The Greatest Financial Planning Tool of All . . . Could ESOP Save General Motors?, The Financial Planner, November, 1981.
- Sychophantasy in Economics: A Review of George GilderGeorge GilderGeorge F. Gilder is an American writer, techno-utopian intellectual, Republican Party activist, and co-founder of the Discovery Institute...
's Wealth and Poverty, The Great Ideas Today, Encyclopædia Britannica, Inc., Chicago: 1982. - The Right to Be Productive, The Financial Planner, August and September, 1982.
- Tax Reform Is Not the Answer, Chief Executive, Spring, 1983.
- How We Can Achieve Lifetime Employment, Chief Executive, Autumn, 1983.
- Damning Binary Economics With Faint Praise, Workplace Democracy, Summer, 1987.
- Leveraged Buyouts Good and Bad, Management Review, November, 1987.
- The Great Savings Snafu, Business and Society Review, Winter, 1988.
- Why Owner-Workers Are Winners, The New York Times, January 29, 1989.
- Why I Invented the ESOP LBO, Leaders, October/November/December, 1989.
- Don't Meddle With ESOPs, The Journal of Commerce, October 2, 1989.
- Looking in a Marxist Mirror, The Journal of Commerce, January 11, 1991.
Further reading
- "Louis O. Kelso, Who Advocated Worker-Capitalism, Is Dead at 77." New York Times, February 21, 1991.
- "Standard Endorses Kelso Bid." New York Times, March 18, 1988.
Related Writings
- The ESOP According to Kelso, by Stuart Nixon, Air Line Pilot, October, 1984.
- The World According to Kelso, by Steven Hayward, Inland Business, April, 1987.
- Louis Kelso, Capitalist, Bill Moyers: A World of Ideas II, edited by Andie Tucher, Doubleday, New York: 1990.
- The Binary Economics of Louis Kelso: The Promise of Universal Capitalism, by Robert H. A. Ashford, Rutgers Law Journal, Vol. 22, No. 1, Fall, 1990.
- Louis Kelso's Binary Economy, by Robert Ashford, The Journal of Socio-Economics, Vol. 25, No. 1, 1996.
- Binary Economic Modes for the Privatization of Public Assets, by Jerry N. Gauche, The Journal of Socio-Economics, Vol. 27, No. 3, 1998.
- A New Market Paradigm for Sustainable Growth: Financing Broader Capital Ownership with Louis Kelso's Binary Economics, by Robert Ashford, Praxis: The Fletcher Journal of Development Studies, Vol. XIV, The Fletcher School of Law and Diplomacy, Global Development and Environment Institute, Tufts University, Medford, Massachusetts: 1998.
- The Theory of Productiveness: A Microeconomic and Macroeconomic Analysis of Binary Growth and Output in the Kelso System, by Stephen V. Kane, The Journal of Socio-Economics, Vol. 29, No. 6, 2000.
- The Ultimate Management Team, by Chris Bayers, WIRED, January, 2002.
- Employee Ownership and Corporate Performance: A Comprehensive Review of the Evidence, The Journal of Employee Ownership Law and Finance, Vol. 14, No. 1, National Center for Employee Ownership (NCEO), Oakland, California: 2002.
- Binary Economics, Fiduciary Duties, and Corporate Social Responsibility: Comprehending Corporate Wealth Maximization and Distribution for Stockholders, Stakeholders, and Society, by Robert Ashford, Tulane Law ReviewTulane Law ReviewThe Tulane Law Review, a publication of the Tulane University Law School, was founded in 1916, and is currently published six times annually. The Law Review has an international circulation and is one of few American law reviews carried by law libraries in the United Kingdom.-History:The Law Review...
, Vol. 76, No. 5-6, June, 2002. - Employee Stock Ownership Plans: ESOP Planning, Financing, Implementation, Law and Taxation by Robert W. Smiley Jr., Ronald J. Gilbert, David M. Binns, Ronald L. Ludwig, and Corey M. Rosen, (Afterword by Louis O. Kelso and Patricia Hetter Kelso) The Beyer Institute at the Rady School of Management University of California, San Diego, Vol. 1 & 2, 2007
External links
- The Kelso Institute Includes Kelso books in PDF format.
- Kelso & Company
- Louis Kelso Made Simple
- Louis Kelso / On Wealth
- Introduction : Binary Economics
- The Center for Economic and Social Justice, "CESJ."