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OUTLINE:
0:00 - Introduction
1:51 - Defining economics
8:50 - Schools of economics
33:10 - Karl Marx
51:24 - Labor theory of value
1:11:10 - Socialism
1:26:12 - Soviet Union
1:39:33 - China
1:59:24 - Climate change
2:21:27 - Economics vs Politics
2:29:30 - Minsky's model
2:44:14 - Financial crisis
2:49:31 - Inflation
3:02:46 - Marxism
3:10:06 - Space and AI
3:16:11 - Advice for young people
3:20:02 - Depression
3:24:35 - Love
3:28:35 - Mortality

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The real foundation of Marx's political philosophy was the economic argument that there would be a tendency for the rate of profit to fall.

And that tendency for the rate of profit to fall would lead to capitalists battening down on workers harder, paying them less than their subsistence, a revolt by workers against this, and then you would get socialism on the other side.

So what he called the tendency for the rate of profit to fall played a critical role in his explanation for why socialism would have to come about.

If you look at Marx's own vision of the revolution, it was going to happen in England.

The advanced economies would be first to go through the revolution.

The socialist, the primitive economies would have to go through a capitalist transition.

And this is the difference when the Mensheviks and the Bolsheviks.

So the Mensheviks, and Hyman Minsky came out of the Menshevik family, the Mensheviks believed you had to go through a capitalist phase.

Russia had to go through a capitalist period before it becomes socialist.

The Bolsheviks believed they could get there in 1 go.

The following is a conversation with Steve Keen, a brilliant economist that criticizes much of modern economics and proposes new theories and models that integrate some ideas and ditch others from very thinkers, from Karl Marx to John Maynard Keynes to Hyman Minsky.

In fact, a lot of our conversation is about Karl Marx and Marxian economics.

He has been a scholar of Karl Marx's work for many years.

He has written several books I recommend, including The New Economics Manifesto and Debunking Economics.

To support it, please check out our sponsors in the description.

And now, dear friends, here's Steve Keen.

Or maybe, what is or should be the goal of economics?

Well, it should be I understand how human civilization comes about and how it can be maintained.

So we have a discipline which has the right name and the wrong soul.

The soul of economics really is to explain how do we manage to build a civilization that elevates us so far above the energy and consumption and knowledge levels of the base environment of the Earth.

Because if you think about, and this is actually working from a work I've learned from Tim Garrett, who's 1 of my research colleagues who's an atmospheric physicist.

And his idea is that we have these, we exploit these high-grade energy sources from the sun itself to coal, nuclear, et cetera, et cetera, which means we can maintain a level of human civilization well above what we'd have if we were just still running around with rocks and stones and spears.

So it's that elevation above the base level of the planet, which is human civilization.

And if we didn't have this energy we were exploiting, if we didn't use the environment to elevate ourselves above what's possible in the background, then you and I wouldn't be talking into microphones.

We might be doing drum beats and stuff like this, but we wouldn't be having the sort of conversation we have.

So it would explain how that came about, that was the economic should be doing and it's not.

So this is the greatest thing that the Earth has ever created is what you're saying, this conversation?

Yeah, we're the most elaborate construction on the planet.

And like that's not what we've done, We've denigrated the planet itself.

We don't have respect for the fact that life itself is an incredible creation, and my ultimate, if I had to say how humanity's gonna survive what we're putting ourselves through, then we'd have to come out of it as a species which sees its role as preserving and respecting life.

I like how you took my silly, incredible statement and made it into a serious 1 about how amazing life is.

Life is incredible, and we humans don't respect it enough.

And that's what economics, I think, has played a huge role in that.

So I actually regard my discipline, I would never call it a profession, let alone a science, my discipline has probably helped bring about the termination potential, the feasible termination of human civilization.

So what is the soul and the practice of economics, what should be the goal of it?

Because you're speaking very poetically, but we'll also speak pragmatically about the tools of economics, the variables of economics, the metrics, the goals, the models.

Practically speaking, what are the goals of economics?

Well, in terms of the tools we use, we should be using the tools that engineers use, frankly.

And that sounds ridiculously simple because you would expect that Economists are using up-to-date techniques that are common in other sciences where you're dealing with similar ideas of stocks and flows and interactions between the environment and a system and so on.

That's fundamentally systems engineering.

That's what we should be using as the tools of economics.

Now, if you look at what economists actually do, the sophisticated stuff involves difference equations.

And like difference equations, you know, if you've done enough mathematics as you have, you know difference equations are useful for like individual level processes.

If you're talking about autonomous, it'll go from state T to T plus 1, T plus 2 and so on.

But not when you're talking at the aggregate level.

There you use differential equations to measure it all.

Economists have been using difference equations.

So there's like a book, I think it's by Sargent and 1 other, called Advanced Methods in Economics Using Python, 2 volume set.

It's about close to 2,000 pages, and 4 of those pages are on differential equations.

So they're using entirely the wrong mathematics to start with.

For people listening, what is difference equations versus differential

Okay, a difference equation is like you can do in a spreadsheet.

You'll have, this is the value for 1990, this is the value for 1991, 92, 93, 94.

Whereas the differential equation says there's a process moving through time.

And you will have a rate of change of a variable is a function of the state of itself and other variables and rates of change of those variables.

And that is what you use when you're doing an aggregate model.

So if you're modeling water, for example, or fluid dynamics, you have a set of differential equations describing the entire body of fluid moving through time.

You don't try to model the discrete motion of each molecule of H2O.

So at the aggregate level, you use differential equations for processes that occur through time.

And that's economics, it occurs through time.

You should be using that particular technology.

But some economists do learn differential equations, but they don't learn stability analysis.

So they simply assume equilibrium is stable, and they work in equilibrium terms all the time.

And that's, It is, the technical level, it's an incredibly complicated way of modeling the world, using entirely the wrong tools.

Okay, we'll talk about that because it's unclear what the right tools are.

You talk about there, some of the most complex systems on Earth are the human mind, the economy, and the biosphere.

So we'll go, you know, we'll go to that place.

I'm humbled by them, even at their simplest level of like cellular automata.

I'm not sure what the right tools are to understand that, especially when part of the complex system is a hierarchy of other complex systems.

So you said the economy is a fascinating complex system, but it's made up of human minds.

Those are interesting, perhaps impossible to model, but we can try and we can try to figure out how to approximate them, and maybe that's the challenge of economics.

Okay, we'll keep returning to the basics.

Let us try to learn something from history.

I also see as part of economics, is us trying to figure out stuff, and there's a few smart folks that write books throughout human history, and sometimes they name schools of economics after them.

Can you describe at a high level what are the different schools of economics, perhaps ones that are interesting to you, perhaps ones that the difference between which reveals something useful or insightful for our conversation.

So you could, classical, post-Keynesian, Austrian, I like the biophysical economics and so on.

Other heterodox economic schools that you find interesting.

Okay, I actually find interesting a school which went extinct about 250 years ago.

And the name itself implies where their knowledge came from because if you go back far enough in history, we didn't do autopsies.

But when you started doing autopsies, they found wires, they found tubes, et cetera, et cetera.

And they started seeing the body as a circulation system.

And they applied the same sort of logic to the economy.

And they came out of an agricultural economy, which was France, and they saw that the wealth came effectively from the sun.

So they saw all wealth comes from, they said the soil, but what they really mean is sun.

1 seed plants, a thousand flea seeds come back.

We are simply mining what we can find out of the natural economy.

That's where we should have stayed and developed from that forward.

We then went through the classical school of economics, which comes out of Adam Smith.

And Smith, coming from Scotland, looked at what the physiocrats said and what the physiocrats argued was that agriculture is the source of all wealth and the manufacturing sector is sterile.

That's literally the term they use to describe the manufacturing sector.

And we then distribute the free gift of nature around and we need carriages, which was the manufacturing term they used at the time, as well as wheat.

So to make the carriages, we take what's been taken from the soil and we convert it to a different form, but there is no value added in manufacturing.

So Smith looked at that and said, well, I'm from Scotland, and we've got these industries, and we make stuff and it's machinery.

And he said, no, it's not land that gives us the source of value, it's labor.

Now, that led to the classical school of thought, and that said that all value comes from labor, that Value is objective, so it's the amount of effort you put in.

That the price 2 things will exchange for reflects the relative effort that's involved in the manufacturing.

So this computer takes 2 hours to make and this bottle takes 2 minutes to make, then this is worth 60 times as much as that.

They didn't talk about utility as a subjective thing.

They ridiculed subjective utility theory.

And Marx is probably the most brilliant mind in the history of economics.

The only other competitor I'd see is Schumpeter, possibly Keynes, but in my terms of ranking of intellects, I mean Marx, Schumpeter, Keynes in terms of the outstanding capacities to think.

But Marx then turned that classical school, which was pro-capitalism and anti-feudal, into a critique of capitalism, which led to the neoclassical school coming along as a defense of capitalism.

But they defended it using the ideas of the subjective theory of value, so that value does not reflect effort, it's the satisfaction individuals get from different objects that determines their value, marginal utility.

It's the marginal cost that determines how much they sell for.

Capitalism equilibrates marginal cost and marginal utility.

And the concepts of equilibrium and marginal this and marginal that became the neoclassical school.

And that's still the dominant school now 150 years later.

And when you first learn economics, if you don't have the critical background that I managed to acquire, that's what you think is economics.

The marginal utility, equilibrium-oriented analysis of mainstream economics.

People think economists, you must be an expert on money because you're an economist.

Well, in fact, economists learn literally in the first few weeks at university that money is irrelevant.

So They represent people's tastes using what they call indifference curves.

If you look at an isoquant, it shows you all the points of the same pressure.

Here or you can be in Denver and the air pressure can be the same if you're in the same weather unit.

So you just draw a cell that links together.

Well, they do the same thing with utility and say lots of bananas and very few coconuts can give you the same utility as lots of coconuts and very few bananas.

You draw basically like a hyperbola running down and linking the 2.

And they'll say, well, that's your utility, that describes your tastes.

And then we have your income, and given your income you can buy that many bananas completely, or that many coconuts, or a straight line combination of the 2.

And then if we double the price, nominal price of coconuts and double the nominal price of bananas and double your income, what happens?

And the correct answer is, oh, nothing, sir.

You know, you stay at the same point of tangency between what your budget is and which particular utility curve gives you the maximum satisfaction.

So that gets ingrained into them and they think anybody who worries about money suffers from money illusion.

You are therefore ignorant of the deep insights of economics if you think money actually matters.

So you have an entire theory of economics which presumes we exchange through barter.

Like I'll swap you that Microsoft Surface for Actually, I'll take 2 of those for 1 of these.

In fact, that only works if money plays no creative role on the economy.

And that's where you'll find reading Schumpeter, the insight that's the school of thought that I come from that says money is essential.

So that's the neoclassical school that ends up being subjective theory of value, non-monetary, as though everything happens in barter, and focusing on equilibrium, as though everything happens in equilibrium.

Or if you get disturbed from equilibrium, you return back to it again.

Its most interesting feature is that it reaches equilibrium.

Now, what planet are we on to believe that?

Because if you look at the real world, the real exciting world of capitalism in which we live, change is by far the most obvious characteristic of it.

And as a mathematician, it's easy to, You work with stability analysis.

You work out your Lyapunov exponents in a complex system.

You're used to the idea that equilibrium is unstable.

But economists get schooled in believing that everything happens in equilibrium and they don't learn stability analysis.

So onto the schools of thought, treating the economy as an equilibrium system, which was what the neoclassical school did, is what Keynes disturbed.

He really disturbed it by talking about fundamentally that uncertainty determines our decisions about the future.

When we consume, you know if you like Pfizer or whatever particular drink you want to have, you know the current situation.

But to invest, you must be making guesses about the future.

And this is a terrible basis on which to plan for the future, but this is the only thing you can do where there is no possibility of solid calculation.

So investment is therefore subject to uncertainty.

And therefore you will get volatility out of investment.

You will get fads, of course, booms and slumps coming out of that because people extrapolate for the current conditions.

That's the normal state of a capitalist economy.

Schumpeter argued that that's what gives us this creativity as well, The fact that you can perceive a potential demand but first of all you don't know whether that demand is going to work.

Secondly, you don't know who your competitor is going to be, whether somebody is going to be ahead of you or behind.

All this stuff is the real nature of capitalism and that's what we should be trying to capture, the dynamic non-equilibrium monetary violence and creativity of capitalism.

And the post-Keynesian school has gone in that orientation.

They've been, in my opinion, inhibited by learning their mathematics from neoclassical economists.

So they don't have enough of the technology of complex systems.

There's only a really tiny handful of people working in complex systems analysis in post-Keynesian economics.

But that is, to me, the most interesting area.

So their tools may be lacking, but they fundamentally accept the instability of things.

And so that's what makes them interesting.

So let me try to summarize what you said, and then you say how stupid I am.

Okay, so then there was the physiocrats that thought value came from the land.

Then there's Adam Smith who said, nah, value comes from human labor.

And then neoclassical is value comes from like bananas and coconuts, the human preferences, like human happiness, how happy a banana makes you.

And then the Kensian and the post-Kensian were like, yeah, well you can't, you can never, the moment you try to put value to a banana and a coconut, you're already working in the past.

It's always going to be chaos and stability, and then you just, you're fishing in uncertain waters, and that's why we have to embrace that and come up with tools that model that well.

And also Joseph Schumpeter, what school would you put him under?

Is he a Kenzian or is he Austrian economics?

He's from Austria but he's not an Austrian economist.

There are elements of the Austrian school of thought which are worthwhile.

What is Austrian economics in this beautiful whirlwind picture that you painted?

Okay, Austrian economics grew out of the rebellion against the classical school.

So you had 3 intellects who mainly led the growth of the neoclassical school back in the 1870s.

It was William Jevons from England, Menger, who's from Austria, and Vollras from France.

And Vollras tried to work out a set of equations to describe a multi-product economy where there's numerous producers and numerous consumers.

Everybody's both a producer and a consumer.

And you try to work out a vector of prices that will give you equilibrium in all markets instantaneously.

Jevons is also 1 about equilibrium, but he worked more at the aggregate level.

So there's a supply curve and a demand curve, and that's what Marshall ultimately codified.

Menger was pretty much saying that, well, yes, there might be an equilibrium, but you're gonna get disturbed from it all the time.

You'll be above or below the equilibrium.

And what came out of the Austrian school was an acceptance of that sort of vision that the market should reach equilibrium, but then said, well, you'll get disturbed away from the equilibrium.

And that's what gives you the vitality of capitalism because an entrepreneur will see an arbitrage advantage and try to close that gap, and that will give you innovation over time.

And Schumpeter went beyond that and saw the role of money and said that entrepreneur, an entrepreneur is somebody with a great idea and no money.

So to become a capitalist, you've gotta get money and therefore you've gotta approach the finance sector to get the money and the finance sector creates money and also creates the debt for the entrepreneur.

And so you get this financial engine turning up as well and you will get movements away from equilibrium out of that.

You won't necessarily head back towards the equilibrium.

So Schumpeter has a rich vision of capitalism in which money plays an essential role, in which you will be disturbed from equilibrium all the time and that is really I think a much closer vision of actual capitalism than anything by even the leading Austrians, Hayek, etc.

And certainly Rombado I find totally like reading a cardboard cutout version of the wealth of nations.

But Schumpeter was rich, but with the same foundations as the Austrians.

But because he talked about the importance of money, that took him away from the Austrian vision, which is very much based on a hard money idea of capitalism.

Schumpeter said you needed the capacity of the financial sector to create money to empower entrepreneurs.

So Schumpeter's argument is the deviation from equilibrium, that's where all the fun happens, that's where all the magic happens.

And like the Austrians, because they focus on the deviation from equilibrium are better than their classicals, but they still have this belief in the, you'll reach equilibrium ultimately, or you'll head back towards it.

Whereas they don't have an explanation of capitalism that gives you cycles apart from having the wrong rate of interest.

So there's no role for an accumulation of debt over time.

So what Schumpeter gave us was a vision of the creativity of capitalism being driven by entrepreneurs who are funded by money creation by the finance sector.

And that's fundamentally the world in which we live.

So there's also, kids these days are all into modern monetary theory.

Okay, modern monetary theory is accounting.

It's simply saying let's do the accounting because what money is, is a creature of double entry bookkeeping.

Banks, this was invented back in the 1500s in Italy.

I've forgotten the particular merchant who did it, based on some Arabic ideas as well.

But the thing is, if you wanna keep track of your financial flows, then you divide all the financial claims on you, you divide into claims you have on somebody else, which are your assets, claims somebody else has on you, which are your liabilities, and the gap between the 2 is your equity.

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Steve Keen: Marxism, Capitalism, and Economics | Lex Fridman Podcast #303