Louis O. Kelso is justly recognized as the visionary who developed the first ESOPs, and who worked with Senator Russell Long to get them written into Federal law in 1974. However, while Kelso’s contributions to public policy are acknowledged, his writings on economic justice are still unfamiliar to most people.

What was Kelso attempting to accomplish through the creation of ESOPs?

Kelso’s point of departure is the issue of economic justice:

Kelso answers these three questions with a resounding "Yes." The core of his solution is what he calls the three Principles of Economic Justice. Kelso restates them in different themes throughout this writings, but in summary they are:

1. The Principle of Distribution: Each participant in the production of wealth should receive a share proportionate to the market value(s) of the labor and capital they contribute to the enterprise.

2. The Principle of Participation: Each household must have the opportunity to earn a decent standard of living through effective participation in the production of wealth, whether by property in labor, capital, or both.

3. The Principle of Limitation: No one may exclude others from effective participation in the production of wealth through excessive concentration of ownership, whether in capital, labor, or both.

Kelso identifies several injustices inherent in historical and modern economic systems which are due to the violation of one or more of the above Principles:

• Pre-industrial slave societies, in treating humans as property, violate the Principle of Participation, making the slaves entirely dependent upon their owners who are, nevertheless, within their rights under the Principle of Distribution to claim the products of their "capital."
• The laissez-faire capitalism of the nineteenth century failed to follow the Principle of Limitation, which in turn led to mass violation of the Principle of Participation causing widespread poverty throughout Europe and beyond.

• Marx, in formulating Communism, or State Capitalism in Kelso’s terms, to solve the problems of the laissez-faire economy, wound up violating the Principle of Distribution by placing every citizen’s daily subsistence within the hands of the State, following not a Principle of Justice, but a Principle of Charity: "from each according to his ability, to each according to his need."

• Finally, the modern American economy, or "mixed capitalism" in Kelso’s term, represents an alternative attempt to solve the problems of laissez-faire capitalism. Unfortunately, the Keynesian policies of the last 60 years fail to address the underlying problem of concentrated capital ownership, and instead use redistributional policies to raise standards of living for those dependent upon labor for subsistence, at the expense of capital owners. This leads to a different (yet related) violation of the Principle of Distribution from that created via Communism.

Working from these critiques, Kelso identifies the distinguishing characteristics of the modern American economy as:

With this diagnosis in place, Kelso focuses on how to address the concentration of ownership in a way which will reduce and eventually eliminate the necessity of (a) and (c) as a means of addressing poverty and other symptoms of economic injustice. How does the ESOP fit into all of this?

As envisioned by Kelso, the ESOP involves three different targets he identified as obstacles to achieving democratized capital ownership: the corporation, the government and the credit system.

• The modern corporation, by retaining some or all of its earnings for future expansion, both attenuates the rights of capital owners to receive all wealth produced by their property, and also aggravates the concentration of wealth by placing the value of newly created capital directly into the hands of existing shareholders.

• Government policy, in the absence of ESOPs, tends both to encourage earnings retention by corporations (as a way of sheltering from personal income taxes what would otherwise become shareholder income), and discourages significant transfers of capital holdings to capitalless workers by levying taxes on such transfers.

• The credit system makes capital acquisition nearly impossible by requiring collateral self-insurance, in most cases, which restricts borrowing for acquisition of capital to the few who already own significant capital estates.

While there are other aspects of these institutions which Kelso targets for reform, and other institutions entirely which come in for criticism, ESOP legislation addresses all of the complaints listed above to varying extents: pre-tax payment by the corporation into the trust encourages fuller payout of earnings by the corporation; delaying personal income taxes on the shares, until such time as they are sold, eliminates "drag" on the rate of capital acquisition; tax advantages on payments to ESOP trusts over internally financed expansion encourage corporations to create new owners rather than enrich existing ones; and the use of shares purchased by the trust as collateral on the loan serves to reduce, if not eliminate, the "insurance" barrier to capital credit for otherwise capitalless workers.

In combination, the elimination of these barriers through ESOPs has helped millions of workers become capital owners and this well-established success is inspiring many people to take a new look at Kelso’s other proposals, such as General Stock Ownership Plans, as a means of spreading capital ownership to even more people. Whatever one may think about Kelso’s political perspective, his proposals for wholesale economic reform represent one of the few cases in the history of ideas where utopian ideals where accompanied by specific suggestions for how society could reach the eventual goal. This fact alone demands that Kelso be given a closer look.