Binary Economics: The Economic Theory that Gave Rise to ESOPs   - CLEO Skip to main content


Many people know about Employee Stock Ownership Plans (ESOPs) which, along with profit-sharing and pension plans, are treated as deferred compensation plans under Section 401 and related sections of the Internal Revenue Code. ESOPs have been established by thousands of American corporations, including some of the largest, and cover millions of employees. There is a national trade association (The ESOP Association), that is now celebrating its 50th year in existence, and other organizations established to support employee ownership, including the Ohio Center for Employee Ownership that first published this article in its publication entitled Owners At Work (2006/2007)

Most people aware of ESOPs, however, do not realize that ESOPs are part of a broader approach to expanded capital ownership, broader prosperity, and economic justice known as binary economics. Binary economics was first advanced by Louis Kelso, who is also widely known as the inventor of the ESOP. But Louis Kelso’s approach to economic theory is only partially reflected in the present ESOP legislation. Binary economics offers a plan for more widespread economic prosperity for all people (not limited to employees) than is presently offered by mainstream economics.

Once ESOP participants understand binary economics, they may choose to advocate legislative reforms that will better serve their own economic interests and also the economic interests of their companies and the country as a whole. These reforms would transform ESOPs into much more powerful Super ESOPs in a full binary economy of the future. The Super ESOP will empower employees to acquire shares of stock in their companies entirely with the earnings of capital and on much more favorable terms than at present. Moreover, the Super ESOP will empower employees and others to acquire a diversified portfolio of shares in other credit-worthy companies entirely with the future earnings of the shares they acquire.

This article briefly describes the binary economics and its important connection with the ESOPs. For a fuller explication if binary economics, see the following four articles which can be downloaded for free from SSRN.COM: (1) Binary Economics – An Overview, (2) Binary Economics and the Case for Broader Ownership, (3) Capital Democratization, and (4) Memo on Binary Economics to Women and People of Color Re: What Else can Public Corporations Do for Your Clients?.