Louis Kelso's Esop Crusade
The inventor of ESOPs talks about how hard it is to put a theory into practice.
It's one of the most important discoveries in the history of mankind," claims Louis O. Kelso. The "discovery" is his own, capital theory, which Kelso, 68, says he made public back in 1943. The Temporary National Economic Committee, he explains, had studied the causes of the Great Depression and announced that it didn't know what the causes were. But Kelso thought he did. "We should have asked, 'Why are people poor?' Because that would inevitably have led us to the right answer: People are poor because they are not rich; people are poor because they do not own capital."
So Kelso took it on himself, he says, to develop ways for people to acquire capital. The only one of Kelso's ideas that has actually made it into practice is the ESOP, the Employee Stock Ownership Plan.
Politicians have, from time to time, taken up Kelso's cause. Sen. Russell Long (D-La.) has repeatedly sponsored legislation embodying several of Kelso's capital-creating devices. And President Reagan came out in support of Kelso's theories, by name, six years ago. But Reagan hasn't mentioned capital theory since he's been in the White House. Kelso admits that, politically speaking, he's currently getting nowhere with his ideas. "Congress has bought the message of the economists that the economists alone are authorized to speak," he says.
But if Kelso thinks there's a conspiracy of silence against his ideas, he's not remaining silent himself. He sat down with writer Michael Rozek for an interview in the San Francisco offices of Kelso & Co. Inc. The firm makes its money, Kelso says, "designing, selling, and installing ESOPs. We're a closely held company, without any publicly held stock, but we do have an ESOP."
INC: What kinds of companies should get into ESOPs?
Kelso: Every kind. There are no exceptions.
INC: How about a smaller, potentially less secure firm?
Kelso: The purpose of an ESOP is to make a healthy company healthier. An ESOP will not cure a borderline or a submarginal company. It was never designed for that purpose. Nothing else will cure it either, except good management.
INC: Okay, if you have a healthy company, what things should you consider about ESOPs -- to start moving in the direction Louis Kelso wants you to?
Kelso: You have to understand that it is not the tail that propels a dog. And any particular business is a mere hair on the tail. The structural defects in the national economic policy are the problem -- all the techniques of conventional finance that use savings as the basis for financing new capital formation or changes in the ownership of capital. As long as those transactions are tied to accumulated savings, the effect of finance and growth is to make the rich richer and to keep the poor poor and to require the government to redistribute income by taxation, by boondoggle. Meanwhile, the Hunt brothers have perhaps $20 billion of capital under their ownership. If employed shrewdly, that capital could produce affluent incomes for over a million people.
INC: Could you assure the Hunts they'd be just as rich?
Kelso: What are you trying to say? I'm trying to take their wealth and put it...
INC: Yes, but it's their wealth.
Kelso: And it's the society's mistake for letting them get it!Nature will take it away from them, don't worry about that... none of 'em are going to take it with 'em. Besides, do you want to motivate a million people or demotivate three? That's why our educators are part of the problem, and not the solution. Then, too, the answer has to come from the press, and as long as the press buys the bull of the economists, you're not going to get the problem off the ground. You need to change the laws so it's impossible, for example, for a man to pass a morbid estate on to any other person or group. The society has to finger him, and it's not fingering him now. The business schools, the law schools, the public interest lawyers all say, "Let him have as much as he wants -- it's perfectly all right to finance new capital formation and changes in capital ownership so that it all gravitates to the already righ." The hell it is -- it's like genocide, except it's a hundred times bigger.
INC: So, if you own a company, what can you do?
Kelso: Believe me, the Supreme Court listens to what the little guy says. He should step up to them and say, "I'm entitled to equal protection under the Constitution, and access to credit is a matter of law. The 5% who own all the capital have that access -- and the 95% who don't own any capital don't get equal protection. I may happen to have a good business, but the 95% -- the people that I want to sell to who don't own capital -- aren't as good customers as I would like them to be. Because they don't receive wages on their own capital as well as on their own labor, the economy forces us to overprice labor, eventually pricing U.S. products out of the market. We turn our customers over to the Japanese and others. So Congress needs not only to broaden ownership of capital, but to tighten up the laws of property, so that capital owners collect the wages of their capital. Give me and others the power to buy capital and pay for it out of what it produces -- the power I'm entitled to under the Constitution."
INC: So the major, the pure use of ESOPs is capital formation?
Kelso: No, changes in capital ownership, too. Take Conoco, for example. Instead of letting itself be swallowed by Du Pont, it should have sold $10 billion worth of stock to its employees, who could have paid for it over the next few years. Conoco could have used that in its capital formation processes, while putting the voting power in a group whose interest would certainly not have been swallowed by Du Pont.
