Joe Raedle / Getty Images

Every man a capitalist

By democratizing capital, market economics could make us all prosper

February 18, 2016 2:00AM ET

Law professor Robert Ashford offers a solution to our core economic problem of eroding wages combined with increasing concentration of wealth and income at the top. His ideas, which Congress long ago embraced — sort of — could benefit us in myriad ways if only people knew about the opportunity that surrounds us, but remains as invisible as the air.

The idea is how to make every one who labors not just a worker, but also a capitalist.

What makes Ashford’s approach fascinating is that it does not require taxes to redistribute wealth, it encourages capital investment, it promotes business profits and it aligns neatly with what America’s founding fathers wrote about the requirements for a successful democracy.

Ashford, a colleague of mine at Syracuse University College of Law, teaches his students that what we call productivity is often a shift in labor performed by people to labor performed by capital.

Consider a poor man who hauls sacks of grain for a living. If he can save up and buy a donkey he can carry much more grain. That donkey is his capital. With the increased earnings from this capital the man can acquire a cart, then a truck and eventually build a short-haul railroad, all the while prospering as capital performs more and more labor.

The more the man has, the more he can consume, his mud hut being replaced by a house and other signs of prosperity all made possible by acquiring more and more capital with the earnings of his capital.

The trick, of course, is to acquire your first capital and then use it to acquire more and more capital. That’s where Ashford’s plan comes in.

Spread the wealth

As a young man Ashford became chief operating officer and general counsel at the investment bank founded by Louis O. Kelso, a financier who six decades ago co-authored “The Capitalist Manifesto.” 

Robert Ashford
Syracuse University College of Law

Kelso has intrigued me since I first read about him in fifth grade as a poor boy in the rich town of Mill Valley, Calif., bicycling up and down its steep hills to deliver newspapers after school. What intrigued was Kelso’s idea that we could all prosper if instead of just earning a paycheck we were paid partly in capital and with the earnings of that capital bought more capital.

Congress embraced Kelsoism in the 1950s, although the Capitol Hill sausage makers turned his elegant concept into a much narrower law, the Employee Stock Ownership Plan or ESOP. Successful ESOPs include W. L. Gore & Associates, maker of Gore-Tex; the Publix supermarket chain; and Dansko, a shoe maker. There also have been some awful abuses that I exposed over the years when owners turned failing enterprises over to naive workers.

Kelso’s co-author, the philosopher Mortimer J. Adler, taught that democracy “requires an economic system which supports the political ideals of liberty and equality for all. Men cannot exercise freedom in the political sphere when they are deprived of it in the economic sphere.”

The founders agreed. John Adams wrote that our democracy would be doomed if a business aristocracy born of inequality arose, manipulating voters who knew only wages and not property into creating "a system of subordination to all.”

Highly concentrated wealth and the political power it buys, Adams warned, “will destroy all the equality and liberty, with the consent and acclamations of the people themselves.”

Similar worries came from the father of the Constitution, James Madison. He favored “the silent operation of laws which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigents towards a state of comfort.”

Companies should like broad capital ownership because it would give more people a stake in profitability.

Madison wanted farmers to own their own land, not be sharecroppers, and workers to own their own tools. Before he died, Madison recommended all workers be paid partly in company shares to avoid concentrated ownership.

The benefits of ownership

Ashford argues that broader ownership of capital would benefit us all by moving the whole society toward broader ownership of assets, including an appreciation of the value of savings (from paychecks) and investing — the acquisition of capital with the earnings of capital.

Wealth concentrated at the top, and growing from an avalanche of dividends and other capital earnings, gives the rich political power that can be wielded against workers. That poses a danger to our republic, as Plutarch, the Greco-Roman historian warned 2,000 years ago: “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”

Companies should like broad capital ownership because it would give more people a stake in profitability. Aligning the interests of workers and companies should, in turn, reduce the antagonism toward business that permeates a large share of our population. I am struck by how many people send me angry emails and tweets that assume profit and prosperity are evils, rather than realizing that it is the concentration of wealth under rules that favor the already rich that should alarm us.

Ashford points to other benefits from widespread acquisition of capital with the earnings of capital. For example, reliance on welfare would decline, a deeper tax base would justify lower tax rates, while growing purchasing power, and consumer confidence, would mean more sales by businesses.

The lack of cash savings among millions of households is a severe problem that imposes a host of costs on society. A family that lives paycheck-to-paycheck with no reserves faces a crisis when the car needed to get to work breaks down, the home water heater fails or illness strikes.

The uncoordinated patchwork quilt of emergency relief charities is both too small to meet current needs and vastly larger than would be required in a society where all people have savings. Such problems would recede even more if all people had capital and knew how to use it wisely or were subject to rules that restrained spendthrifts.

One obvious concern is that many people do not care much about the prospect of future comfort and would rather spend today. They would fritter away any capital today, rather than defer purchasing and let the magic of compound interest grow their net worth for future spending.

Years ago, my daughter Amy showed fellow factory workers how saving just 1 percent of their gross pay would allow them to get three times that much in 401(k) match money, growing to a tidy sum by old age. They laughed. One said he had no expectation of being alive then, but could do with a few more bucks on the next weekend.

Over time, perhaps a generation or two, the benefits of having even modest wealth should shift American culture away from spending now to prospering over each lifetime.

For what Ashford calls “inclusive capitalism” to succeed would require rules limiting withdrawals until the vast majority grow accustomed to slowly building wealth by acquiring capital with the earnings of that capital.

Kelso, who died in 1991, called his idea “binary economics” — a terrible name perhaps, but a great idea that could help us all live long and prosper.


Postscript: You can read a fuller, but simple, account by Ashford, his brother Nick, an MIT professor, and Ralph P. Hall, a Virginia Tech professor, here or here

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

Find Al Jazeera America on your TV

Get email updates from Al Jazeera America

Sign up for our weekly newsletter

Get email updates from Al Jazeera America

Sign up for our weekly newsletter