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

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 the 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 one 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. So this was a fascinating exploration. He has written several books I recommend, including The New Economics and Manifesto and Debunking Economics. This is the Lex Friedman Podcast. To support it, please check out our sponsors in the description. And now dear friends, here's Steve Keen. Let's start with a big question. What is economics? 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. And that's not what it's been at all. So we have a discipline which has the right name and the wrong soul. What is the soul of economics? 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 it, and this is actually working from a work I've learned from Tim Garrett, who's one 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, etc., etc., 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 drumbeats 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's what economics 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 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 see how humanity's going to 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 one about how amazing life is. Life is incredible, and we humans don't respect it enough, we trash it. And that's what's economics, I think it's 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. Strong words. Okay, let's return to the basics of economics. 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. And that's fundamentally systems engineering. And 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, if you've done enough mathematics, as you have, you know difference equations are useful for individual level processes. If you're talking about autonomous, it'll go from state t to t plus one, t plus two, 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 a book, I think it's by Sargent and one other, called Advanced Methods in Economics Using Python, two-volume set. It's about close to 2,000 pages, and four of those pages are on differential equations. The rest is all difference equations. So they're using entirely the wrong mathematics to start with. For people listening, what is difference equations versus differential equations? 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. So you have discrete jumps in time. 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, well, we'll talk about that because it's unclear what the right tools are. Maybe it's more clear to you, but... I've got to make it clear to an audience. Well, so this is a very complicated world. It's a complex world. 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 to that place. I'm fascinated by complex systems. I'm humbled by them, even at their simplest level of cellular automata. I'm not sure what the right tools are to understand that, especially when part of the complex system is like a hierarchy of other complex systems. So you said the economy is a fascinating complex system, but it's made up of human minds. And those are interesting. 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. So let us take a stroll through history. 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 reveal something useful or insightful for our conversation? Okay. So you could, neoclassical, 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. That's where I'd like to start from. And they're called the physiocrats. 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 the soil absorbs the energy of the sun. One seed plants, a thousand flea seeds come back. There is no surplus. 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. What does sterile mean? Sterile means you don't extract value. You simply change the shape of value. So the value comes from the soil. It comes from the soil. That's the free gift of nature. That's literally the phrase they used. 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, you know, 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 two things will exchange for reflects the relative effort that's involved in the manufacturing. So this computer takes two hours to make and this bottle takes two minutes to make, then this is worth 60 times as much as that. They didn't talk about marginal cost. It was absolute cost effectively. They didn't talk about utility as a subjective thing. They ridiculed subjective utility theory. That led to Marx 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, so you 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. So that's the one that everybody learns. 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. And for example, they ignore money. 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. They say money illusion. They represent people's tastes using what they call indifference curves. And they're like isoquants on a weather map. If you look at an isoquant, it shows you all the points of the same pressure. So you can be 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. And you draw basically like a hyperbola running down and linking the two. 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 two. And then if we double the nominal price of coconuts and double the nominal price of bananas and double your income, what happens? And the correct answer is nothing, sir. 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 I 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 data. Like I'll swap you that Microsoft's surface for, actually I'll take two of those for one of these. We do this bartering type arrangement. In fact, that only works if money plays no creative role in 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. Money actually adds to demand. And we'll talk about that later on. So that's the neoclassical school that ends up being subjective theory of value. And then 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. And that mindset describes capitalism. 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. There's no equilibrium. There's no equilibrium. It's unstable. And as a mathematician, it's easy to, you work with stability analysis. You work out what the Jacobian is, 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 all that stuff is missing. So onto the schools of thought, treating the economy as an equilibrium system, which was what the neoclassical school did, is what Keynes disturbed. And he really disturbed it by talking about, fundamentally, that uncertainty determines our decisions about the future. So 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. But you don't know the future. So what do you do? You extrapolate what you currently know. 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. And that's the normal state of a capitalist economy. And 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. If there's a fad, you'll overinvest. Okay. 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. That's what we should be analysing. 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. That's right. That's right. And so that's what makes them interesting. So let me try to summarise 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 labour. That was the classical school. And then neoclassical is value comes from bananas and coconuts, the human preferences, like human happiness, how happy a banana makes you. And then the Keynesian and the post-Keynesian 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 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 Keynesian or is he Austrian economics? He's an Austrian, and Austrians deny. Okay. That's the intriguing. 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 three 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. And that's his equilibrium orientation. Jevons is also one about equilibrium, but he worked more at the aggregate level. So this is 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 going to 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 a 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 an entrepreneur is somebody with a great idea and no money. So to become a capitalist, you've got to get money. And therefore, you've got to 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, et cetera, et cetera. And certainly Ron Bardo, I find totally, like reading a cardboard cutout version of the wealth of nations, I find his worth trivial. 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 was 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. And that's a very important vision. So Schumpeter's argument is the deviation from equilibrium, that's where all the fun happens, that's where all the magic happens. That's the magic of capitalism. And like the Austrians, because they focus on the deviation from equilibrium, are better than their classicals. But they still have this belief in 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. What's that about? Okay. Modern monetary theory is accounting. I want to summarize it bluntly. It's simply saying let's do the accounting, because what money is, is a creature of double entry bookkeeping. Okay. What's 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 want to keep track of your financial flows, then you divide what you, 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 two is your equity. So you record every transaction twice on one row. Okay. So for example, if you and I do a financial transfer, financial transfer, you have a bank account, I have a bank account, your bank account will go down, mine goes up. Okay. And that's, the sum of the operation is zero. Okay. But on the other hand, if I go to a bank and borrow money, then my account goes up, they put money in my deposit account, the bank's assets go up. Okay. And there's still the same sum applies, assets minus liabilities minus equity equals zero. Now that's simply saying money is an accounting, a creature of accounting. It's not a creature of a commodity. So if you think about how Austrians think about money and how gold bugs think about money and Bitcoin enthusiasts, if there are any left, think about money. What they see is money as an object. Okay. And you and I can both have more gold if we're both willing to go to this, you know, a mine somewhere and dig a few holes and get a few specks of gold out. So there's no competition or no interaction between you and me if money is gold and I think money should be an object, a commodity, but money fundamentally is not a commodity. It's a claim on somebody else. That's money's essence. So when you do it, you must use double entry bookkeeping to do it. And then when you do, you find all the answers that come out of thinking as money as a commodity are wrong. So for example, I've got Elon on this one. So I want to get this rid of Elon because I saw him making a comment about this a few weeks ago on Twitter. He said that it's wrong for the government. Effectively, it seems wrong for the government to always be in deficit. Okay. Now when you look at it and say, well, how is money created? How does money come about when it's not a commodity like gold, which you dig up out of the ground, when it's actually social relations between people that create money? Well, money is fundamentally the liabilities of the banking sector. If we make a transfer between us, your deposit account goes down, my deposit account goes up. Those are exchanges on the liability side of the banking sector. But if we have a transaction with a bank, then if the bank lends us money, its assets, loans go up, its deposits go up. Again, that same balance. So you've got to look and say money therefore is fundamentally the liabilities of the banking sector. So how do you create additional liabilities? You must have an operation which occurs both on the liability side and the asset side of the banking sector. So if you and I make a new transaction, no money is created. Existing money is redistributed. But if you go to a bank and take out a bank loan, then money is created by the bank loan. So the liabilities of the banking sector rise, the assets rise, they're balanced, but more liabilities means the banking sector means more money. Okay. So that's how private banks create money. And that's what I first started working on when I became an academic about 35 years ago, the actual dynamics of private money creation. But the government has the same sort of story. If the government runs a deficit, it spends more money on the individuals in the economy than it taxes them, which means their bank accounts increase. So a government deficit creates money for the private sector. Okay. So that's where money creation occurs from the government. So it puts more money into people's bank accounts by spending, by welfare payments than it takes out by taxation. So that's creating new money. And then on the other side of the bank, the money turns up in the reserve accounts of the banks, which are basically the private banks' bank accounts at the central bank. So rather than the asset of private money creation being loans, the asset of government money creation is reserves. Okay. Right. Money creation is a good thing. So you mentioned a bunch of stuff like private money creation with the liabilities and the banks and then how the government is doing, the reserves, blah, blah, blah. At the end of the day, there's a bunch of printers that are printing money. What is money? And then you also said something interesting, which is social relations between humans is what creates money. I think my mind was blown several times over the past minute. So it's difficult for me to reconstruct the pieces of my mind back together. But basic question, is money creation a good thing or a bad thing? Money creation is a good thing because money creation is what allows commerce to happen. Isn't there a conservation of- No, there isn't. I had arguments with physicists over this and it took me a long time to answer it. They thought the sum total of all money is zero. Yeah. Okay. It's the sum total of all assets and liabilities is zero. So if you imagine your assets minus your liabilities is your equity and your asset is somebody else's liability and your liability is somebody else's asset. When we're talking about financial assets, and this is another mind blowing thing that I've just recently solved myself. So the sum total of all financial assets and liabilities is zero. Okay. Wait, wait, wait. I'm going to interrupt you rudely. What are assets? What are liabilities? Assets are your claims on somebody else. Specific. Give me an example of an asset. Okay. Do you have a mortgage for this house? No, I'm renting. You're renting. There you go. Well, if you had a mortgage, that'd be your liability. That would be my liability. Okay. The mortgage would be the bank's asset. Right. Okay. If you add the two together, you get zero. Okay. So that's zero. That's zero. The money is the liability side of the banking sector. Okay. Okay. Assets are the assets on the other side can be either created by the banking sector, which is where you get bank loans or created by the government where you get reserves. But money is the liabilities. Money is if you think about protons and anti protons in that sense, money is like the anti proton. It's the negative, the liability. But wait, the liability is the negative. How's that money? I thought money is the positive. What is a liability for the banking sector is an asset for you and me. And assets includes money. Yeah. Yeah. Okay. If you have a bank, like you'd have a bank account and you'd have some cash. Yeah. Okay. Those are your assets. But the bank account is a liability of the banking sector and the cash is a liability of the federal reserve. Okay. So what's money? Well, money is the promise of a third party that we both accept to close our transaction. And this is... That's a bank? That's a bank. Yeah. One of the most important works I've ever read is a work by a wonderful now, unfortunately deceased, tiny Italian economist called Augusto Graziani. And he's the most wonderful personality. Augusto, I've met him on a few occasions, is one of the few human beings who can speak in perfectly formed paragraphs. Okay. Superbly eloquent. And what he did was write a paper called the Monetary Theory of Production. You can find it downloaded on the web. It's pretty much open source now. And what he said is, what distinguishes a monetary economy from a barter economy? So he said, in a barter economy, what we do is, you know, I'll give you two of these for one of those. Yeah. Okay. Barter. Just working at a relative price. There are two of us involved and there are two commodities. So with money, money is a triangular transaction. Okay. There is one commodity. I want to buy that can of drink off you. Two people. Two people and the price that's worked out ends up being in a transfer from the promises to pay the bank that the buyer has to the promises pay the bank that the seller has. So if I, so what you have is a monetary transaction in a capitalist economy involves three agents, the buyer, the seller and the bank. So the bank always has to be part of it. Well, the bank has to be part of it. When I hand you the money, you accept that as, you've now got rather than it's the bank promising to pay me something. It's now the bank promising to pay you something. And we exchange the promises of banks and that's fundamentally money. So money is fundamentally a threesome and everybody gets fucked. Is that a good way to put it? No, I'm just kidding. I can use French in this conversation. That's good. That's not French. That's a different language. I'll explain it to you one day. I'll explain it to you one day. You Australians will never understand. Okay. If I can return to, we'll jump around if it's okay. Oh, that's fine. So you mentioned Karl Marx as one of the great intellects, economic thinkers ever. Yeah. He's, he might be number one. You study him quite a bit. You disagree with him quite a bit. Yep. But you still think he's a powerful. A powerful mind. A powerful mind. So first of all, let's just explore the human. Why do you say so? What's interesting in that mind? In the way he saw the world, what are the insights that you find brilliant? Marx once described his major work as towards a critical examination of everything existing. So he's a modest bastard. Yeah. So he wanted to understand and criticize everything. Yeah. And even he wasn't trained directly by Hegel, but he was, his teachers were Hegelian philosophers. And what Hegel developed was a concept called dialectics. And dialectics is a philosophy of change. And when most people hear the word dialectics, they come up with this unpronounceable trio of words called thesis, antithesis, synthesis. I can barely get the words out myself. Yeah. And that actually is not Hegel at all. That's another German philosopher. Kant? Fichte. Oh, I thought it was Kant. No, Fichte. Well, I'm not sure. I mixed them up. All Germans look the same to me. Yeah, yeah, yeah. So, but if you look at this beautiful book called Marx and Contradiction, you want to find a great explanation for Marxist philosophy. I've forgotten the author. I think it's Wilde, W-I-L-D-E, Marx and Contradiction. And he points out the actual origins of Marxist philosophy. I didn't know that when I first read Marx. So I became exposed to Marx when I was a student at Sydney University, and we'd had a strike at the university over the teaching of philosophy. And what happened was the philosophy department had a lot of radical philosophers in it and a conservative chief philosopher. And the radicals wanted to have a course on what they called feminist aspects of philosophical, sorry, philosophical aspects of feminist thought. And the staff voted in favor of it. This is back in the days when university departments were democratic. The professor opposed it. He got it blocked at a high level. The staff leapfrogged over that. And then finally, the vice chancellor blocked it. So that led to a strike over the teaching of philosophy at Sydney University, which at one stage over, probably over half the students were on strike. Economics began out of that. Over teaching of a philosophy of feminism. Yes. That's such a different life to what we're living now. That's the academic milieu in which I developed all my ideas. And I had become a critic. I've gone from being a believer of mainstream economics when I was a first year student to disbelieving it halfway through first year. Okay. And I then spent a long time trying to change it, getting nowhere. And then this philosophy strike happened and we took it on in economics and we formed what's called the political economy movement and had a successful strike. We actually managed to pressure the university into establishing a department of political economy at Sydney University, as well as the department of economics. What was the foundational ideas? Were you resistant to the whole censorship of why can't you have a philosophy of anything kind of course? Well, it was much more libertarian in the genuine sense of the word period of time at the end of the 60s, beginning of the 70s. Then the word libertarian has been corrupted since then, but it really was about free thought. And you went to university to learn. It was about education. I remember having a fight with my father once where dad was angry about the marks I was getting for some of my courses. And he said, if you don't get a decent result, you won't get a decent job. And I said, I'm not here to get a job. I'm here to get an education. Oh, wow. Okay. Now the thing is, ultimately it's been a pretty good job for me as well. This is in Sydney, by the way, and Sydney in summer is absolutely gorgeous. And what us bunch of lefties decide to do during summer, but read Karl Marx. Yeah. On the beach or? Actually inside the room of the philosophy department at the university of Sydney in the main quadrangle. And it was sandstone all around us. And we bunch of about 20 or 30 of us reading our way through Marx. Capital, like which capital? There's volume one capital. And I remember walking off to that meeting with one of my friends, who's a law student. And this was a period of a huge construction boom in Sydney. So the whole skyline, which we could see from the campus was full of what they call kangaroo cranes, which were an Australian invention that are cranes that can be leapfrogged over each other to build a skyscraper. So here you are reading Karl Marx, looking at the mechanisms of capital. And I looked at those mechanisms and I knew Marx argued that labor was the only source of value. Yeah. And he said machinery doesn't add value. So the cranes are worthless. I'm looking at these cranes and thinking, I want a very good explanation by Marx as to why those cranes don't add value. So reading through the first seven chapters of capital, what you found was Marx applying this dialectic. And like the fictian stuff is bullshit. That is not how Marx thought at all. I was reading, trying to find the thesis, emphasis, synthesis, and it's not there at all in any of Marx's works. And I've read everything he's ever written on economics from 1844 to 1894 when his last books were published. There's not one word of mention of that. What he does talk about is foreground and background and tension. And his idea of a dialectic is that there is a unity will exist in society and that unity can be an individual, that can be a commodity, anything at all. That the unity will be understood by that society, one particular aspect will be focused upon. So if you think about the human being in capitalism, the focus on the human being as an object is their capacity to work. You're a worker, okay? That gets put in the foreground. The fact that you're human and you want to play a guitar and go surfing and make love and all the other things that humans do is pushed into the background. There's a tension between the two of those. And that can transform that unity over time. And that's a beautiful dynamic vision of change. So dialectics is a philosophy of change. So synthesis, antithesis is what does every idea have a counter argument? Yeah, there's a positive and negative and you bring them together somehow. And then Marx has this foreground, background, and tension. Foreground is all what we think of as economics and background is all the lovemaking we do as humans. That sort of thing. And why is there a tension? Well, because if you imagine the unity, like if you take a human in any preview, because you go back to Cro-Magnon days when we're living in caves and we've got to go hunting and cook food and stuff like that. But there's no social hierarchy as we've become used to. So you don't get labored as a worker or a capitalist. You're just a human in that situation. Then you've got more an integrated view of who you are. And I think that's one of the appeals of a tribal, a genuine tribal culture that you get treated for the whole of who you are. You've certainly categorized, you're male, you're female, you're young, you're old, you're a hunter, you're a tool maker, et cetera, et cetera. But you're treated as more an integrated object. When you get put in a complex society like a capitalist society, then one side of you is emphasized and the others are de-emphasized. So is it fair to say that the background is like our basic fundamental humanity and the foreground is the machine of capitalism? Effectively, and when you look at it in terms of a human. But what Marx did is apply this to a commodity. He said, what is the essential unity in a capitalist economy? And the essential unity is a commodity. That's the essential unit. The essential unity. What's unity? Unity is an object in society. Okay. So he started from the point of view of trying to understand how exchange occurs. How do we set prices? And his starting vision was to say that a commodity is a unity in a capitalist economy. The part of the unity that we focus upon is the exchange value. A capitalist produces a commodity, not because of its qualitative characteristics, but because it'd be sold for a profit. So the foreground aspect of a commodity is its exchange value. The background aspect of it, it won't succeed as a commodity unless it has a use value. So the background is the utility thing. Yeah. So if you made something which didn't work, then you might be able to sell it, but it has no utility. You can't make that into a commodity. A broken thing can't be sold. Does that have the subjective? Yeah, it has to have the subjective side. So people enjoy it. As well as the objective. So the objective is what capitalists worry about. I'll give you my favorite counter example. I took a bunch of Australian journalists to China way back in the period when the Gang of Four was being on trial. And we did a tour of the Forbidden City in Beijing. And at that stage, all the artifacts of the royal family, the emperor, were actually in the building still. And we walked past one of them, and it was this solid gold bar about this long, shaped like a fist, turned over like this. And on this side, there were rubies, emeralds, diamonds. You'd never seen gemstones. I mean, gems that big. And one of the journalists asked me what I thought it was, and I said, oh, it's obvious. Jane, it's a backscratcher. Ha, ha, ha. I walked away. She caught up with me about 20 minutes later. I said, I asked one of the guides. It is a backscratcher. Wow. So here's a backscratcher for the emperor made of solid gold with diamonds and rubies and emeralds during the scratching. Yeah. Now, that's a commodity in a feudal society. In a feudal society, the cost doesn't matter. You want the most elaborate, beautiful thing because you are the emperor. So in a feudal society, the commodity, what's focused upon is the utility. And the cost of production when you're the emperor is immaterial. Capitalism reverses that. So the commodity in a capitalist economy is a plastic $2 scratcher you can get from Kmart or Target. And so the use value is necessary but irrelevant to forming the price. Now, that was a completely different vision of exchange in capitalism to what I found in the neoclassical theory because that says it's the marginal utility and the marginal cost of everything that determines the exchange ratio. And the crazy thing about that is not so much the marginal utility, but the argument in the neoclassical theory is that the price ratio, the price will – when there's an exchange going on, there's two-person, two-commodity exchange of two commodities between two people, they will – the price will change until such time as the ratio of the marginal utilities is equal to the ratio of the marginal costs. That's supposed to be the equilibrium. And Marx says that's bullshit. That's a previous society where you exchange stuff that you happen to have for stuff somebody else happened to have without any real production mechanism being involved. And he said that's like when you have two ancient tribes – two tribes meeting for the very first time and one tribe can make something the other tribe can't make. And they will therefore – the price they were willing to pay will reflect how unique this other object is that this one tribe can make and the other can't. So, for example, the story of Manhattan being sold for 40 glass beads, it's actually 40 glass trading beads, I do believe it is a true story. But the thing is the Indians couldn't make glass beads. So they valued the glass beadness of the island of Manhattan, which is a utility-based comparison. What Marx said, that's the very initial contact. Over time, even if you don't know the technology, over time you start to realize how much work goes involved to making what they're selling you versus what you're selling to them. And you start making stuff specifically for sale. So Elon's not losing personal utility each time a Model 3 goes out the door. There's no – he might get utility out of the fact that he's created that vehicle, that concept, and manufactures it and so on, but he's not losing utility each time a Model T Ford goes out the door. And we're going back for the ancient commodity there. So the utility plays no role in setting price in Marx's model, whereas it's essential in the neoclassical model. Yvon Martin What's the difference between utility and marginal utility? What does the word marginal mean and why is it such a problem? David Morgan It turns marginal utility – well, utility itself has different meanings than the two schools of thought. If you take the classical school of thought, which when Marx comes from, utility is effectively objective, so the utility of a chair is that you can sit in it, not how comfortable it makes you feel. If you think about the utility of the chairs, we're both sitting in, they're identical from a classical point of view, we're both sitting. But from a neoclassical point of view, it's how comfortable it makes you feel. And that depends upon your subjective feelings of comfort. You might be far more comfortable in the identical chair that I'm sitting in than I am, and therefore the comparison is difficult. And therefore, working out a ratio involves you've got a decline in your – each time you give away a chair in exchange for an iPhone, you have a fall in your utility. And then therefore, you want a higher return because you're losing more utility each time. The more chairs you give away, the less utility you're getting from chairs. So there's a decline in your utility, that's your marginal utility. So it's including your subjective valuation in setting the price. And what Marx pointed out is this is a caricature of actual change in a capitalist economy. Because we have in a capitalist economy, huge factories sending out huge quantities specifically for sale. They've got no utility to the seller unless they're sold. So it's a very different vision of how price is set. And Marx used that to explain where profit comes from. But he made a mistake. And his argument was that talking about a worker as now your unity, this foreground, background, tension thing, the foreground is that you hire a worker for their cost of production. And the cost of production is a subsistence wage. The utility to the buyer is the fact that they can work in a factory. Now it might take six hours, let's say, to make the means of subsistence. And that's the exchange value. And that's what the capitalist pays as a wage to the worker. But they can work in the factory for 12 hours. That's the utility. 12 minus 6 is 6 surplus of value hours. And that's where profit comes from. And that was Marx's argument. And I thought it was brilliant. But it also applied to machinery. Right. OK. Let's link it to that. Hold on a second. Deep is good. I just wanted to find terms. Don't take that statement out of context, the internet, please. OK. You said buyer, seller, worker. In a factory, who's the seller? Who's the buyer? Why is the worker the buyer? The worker is the commodity in this case. Because if you're going to make stuff in a factory, you've got to hire workers. Yes. And what Marx is saying, the buyer in that situation is a capitalist. So what does the buyer pay? He says he pays the exchange value. That's back to the commodity thing. But that's the starting point. He said the essential unity in a capitalist economy is the commodity. A commodity has two characteristics, exchange value and use value. Exchange value of a commodity in a capitalist economy will be its cost of production. The use value is what you do with it, OK, once you've purchased it. But labor is a commodity? In this case, when a worker is being hired for a job, yes. The worker's labor has an exchange value and a use value as well? Yeah. Use value. Use value of a worker's labor. Exchange value. Let me think about that. So the hours they put in. Is the use value. Interesting. So what does the worker want in this? What are the motivations? Are we not considering the worker in this context as a human being? Well, you come to that. That's actually, that's the next layer. What Marx gave was just like a layered cake, starting from a foundation of saying straight commodity exchange and then saying, well, you're treating a worker as a commodity. Now, a commodity is something, you know, like this. OK, that has, so far as I'm aware, no soul. OK, not going to be complaining if I turn it upside down, it'll fall over. But so there's no soul there. As a human is both a commodity and a non-commodity. And therefore, there'll be a tension in the person. I'm being treated as a commodity here. I'm being paid just enough to stay alive. You know, I've got a wife and kids back at home. So that is another layer of thinking in Marx. And on that layer, he then says, well, workers will therefore demand more than their value. So that's when you get like political. You get political and you get money coming above that and so on. But the basic idea starts from the commodities, the fundamental unity in capitalism. The important commodity in Marx's thinking was the worker, because that's where he said profit came from. And then that explains the motivation of the capitalist. And that ultimately leads to the labor theory of value. And Marx's arguments about how capitalism will come to an end. OK, so first of all, what is the labor theory of value? And actually, before that, what is value? Is that this is like me asking what's happiness? Is there something interesting to say about trying to define value? You vary. And this is a huge problem in economics is arguments of what does value mean? And the neoclassicals came down as that it's subjective. It's value is whatever you get out of it. It's your personal evaluation of something, your personal feelings. So they've got that very subjective idea of value, whereas the Marxists and being inheritors of the classical school talk in terms of objective value. So the value is the number of hours it takes to make something. Or the effort, the value is the effort that goes into making something in the classical school. Well, that's just one measure of objective. Where do you fall? Huh? Where do you fall? I fall on... Subjective versus subjective spectrum. I think you have to have the capacity to move between one and the other in a structured way. A model of value. Yeah, well, my base model is the objective. But above that, as soon as you start talking about the worker, for example, then you get involved in the subjectivity because a worker will be angry, and justifiably so, about being treated as a commodity. Because I'm not a commodity, I'm a human being. And that's where Marx saw political organization coming from. And that's subjective now. And then when you get to money itself, Marx actually said, well, what's the value of money? Now, if you use an objective theory of value, you would say, well, the value of money is its cost of production. What's the cost of producing a dollar? It's about two cents. So he said it can't be. The value of money cannot be its cost of production. Or there must value, I think if I remember the phrase properly, is value here, it must mean the effectively uncertain expectations or subjective valuation. Uncertain expectations or subjective valuation. Okay, but he's okay with that? He was okay with that because he could move between different levels. Because he had a structured foundation of this dialectical vision of foreground, background tension, commodity having use value, exchange value, and a gap between the two. When you're talking about machines, when you're buying stuff for production. And then at the next level, he could look at workers, worker organization, and say that's driven by being treated as a commodity when you're a non-commodity. So the basic labor theory of value that is described to Karl Marx is that value at the base layer fundamentally comes from the labor you put into something. And you say, well, there's some deep truth there, except he misses one fundamental point, which is machines can also bring value to the world. He was saying they don't. He was, the only thing that matters is human labor, not labor. How do you measure what's the role of the, whatever value machines bring to the world? Okay, this is another intriguing history because Marx, when he first started, had what you can call an exclusivist explanation for why labor created value. What's that? And that was to say that the labor is the only commodity with both what he called commodity and commodity power. So you have labor and labor power. Labor is the, and I get fuzzy about this, I haven't read it for something like 30 years, but labor has both commodity and commodity power. The commodity is you can buy labor, which is the means of subsistence. Labor power is the capacity to work inside a factory. There's a difference between the two. Therefore, that difference will give rise to surplus. And there's no other commodity that has this instance of commodity and commodity power. So that was his exclusivist argument. In the middle of the 1857, he was visited by a guy called Otto Brauer in his home in Chelsea. And Otto returned to Marx a copy of Hegel's, I think it's called Phenomenology of Right. I haven't read it, but that's the book. And Marx was then at that stage reading through all the classical theorists again. And he was, suddenly he read Hegel again. And if you know Hunter S. Thompson. Okay. Okay. Who doesn't know Hunter S. Thompson? Somebody who hasn't had enough drugs, obviously. Yeah. But Hunter S. Thompson. He comes to you in a dream after you take your first pop. Mescaline or whatever. If you know your drugs well enough, you can tell, okay, he's stoned, okay, he's on cocaine. Well, Marx suddenly, his writing style in the middle of a book called the Grundrisse completely changed. He switched from weed to cocaine. He switched from Ricardo to Hegel. Okay. And what in Ricardo, he had this exclusivist argument about labor and suddenly Hegel is back talking in terms of dialectics, not actually using a word, but foreground and background and tension. And then he, that's where this use value exchange value tension thing came from, is rereading Hegel 13 years after he stopped reading philosophy. Because in 1844, he was reading just the economists. So you're saying Karl Marx is human after all. He's human. He could be. I would love to have a beer with Karl for a while. For Karl? He's Karl to you? He's Mr. Marx to me. Maybe Karl to me, I'm afraid after all these years. Yeah. Yeah. You've had quite a journey together. So that's where after Hegel, his interpretation of the dialectics comes in the form of background, foreground and background. And then on page 267 of the Penguin edition of the Grundrisse. Literally your memory. One and a half pages long footnote. It's pretty hard to forget because when I did this, when I first read Marx way, way back when I was, how old was I? 20. Okay. I tried to explain my explanation of Marx's use value exchange value stuff to my colleagues in this philosophy discussion room at Sydney University during a beautiful summer that we are inside concrete sandstone walls discussing Marx. And I went to say, look, the use value exchange value argument can be applied to a machine. What's the exchange value of a machine? It's cost of manufacturing. What's its use value? Its capacity to produce goods for sale. No relation between the two. There'll be a gap. A machine can be a source of profit. Now I said that and I got laughed at. I'm quite literally laughed at. So when I went back to university 13 years later to do my master's degree, I chose to read through and find in Marx where he first came across this insight. So I made it on my first master's thesis failed by the way, and justifiably so. I was learning. I didn't know the level of academic discourse necessary. I had an advisor who didn't understand what I was writing. He got me to write for his new Keynesian audience and it was a mess and it got failed. So I got rid of it. It didn't get failed because like, why do you think? It wasn't a good thesis. It was, I didn't know the level. It was written for an audience my supervisor thought that I should be writing for. And it was a mess. And so I met another guy, Jeff Fishburne, as a lecturer at New South Wales University. And Jeff was open-minded. He was not a conventional neoclassical thinker. And I realized I'd throw out the half that Bill had got me to do, focused just on Marx. And so I decided to read Marx in chronological sequence from his very first works of economics, which are called the Economic and Philosophical Manuscripts of 1844. And he wrote those in a garret in Paris after he'd been expelled from Prussia. And so he decided to read the, having been an expert on philosophy and regarded as the towering intellect of Hegelian philosophy in Prussia, but driven out because he was a radical. He ended up running a newspaper or writing for a newspaper. And he was reporting about the eviction of peasants from the forests, taking away their feudal rights. And so this is where his passion for economics and humanity came from. And he was a poet as well. He wrote love poetry to Jenny von Westhalen. That's his first published works were pretty much in poetry. He was a rouse about. He was a wild character. We'd probably fight like crazy, I imagine, if we met. Over the beers? I'm slightly, even though I can be, I can get involved in an argument like nobody's business. No, really? No, really. But I'm a bit more peaceful of personality. You think Marx is feistier than you? He was feisty, but feisty with, he could be arrogant. Like I've got intellectual arrogance. I've come to accept that. But there's like a fundamental humility to you. You're saying Marx is like, he has ego that's hard to control. A bit too big ego. Yeah, I'm guessing. I mean, I'm never going to meet him. Well, the beard says ego to me. The beard is huge. Yeah, that's huge. Okay. So this is interesting. You went chronologically. Right through his works. The development of the human being through his works. Yeah. And I was trying to find the point at which he discovered this use value exchange value idea. And it occurs in a footnote on page 267 to 268 of the Penguin edition of the Grundrisse, which his notes he was taking literally not meant for publication, literally sitting at a stall inside the British Museum, I think, reading all the classical authors in chronological sequence. And then somebody throws Hegel at him and suddenly he's talking in Hegelian terms. And he suddenly says, is not, because it's whole value issues. What is value? Is it exchange value? Use value? How do they relate to each other? That's what he was thinking about. And he said, is not use value, which was left out of the classical school, a fundamental aspect of the commodity? Is there not a tension between the use value and exchange value? Just so we're clear in that context, use value is kind of the subjective thing. Exchange value is the objective thing. Yeah. And Marx was found a way to integrate the two. He was focused on labor being the only thing that can generate both the use value. Yeah. And the exchange value. But no, if you look at the classical school, they focused on exchange value, objective. Look at the neoclassical, they face us upon use value, subjective, or they call it utility. So Marx coming from the Ricardian tradition, basically dismissed the role of utility. And then when he reads Hegel, he's suddenly starting to think in terms of unities and exchange value and use value is the unity of the commodity. And he thinks, well, I can't ignore use value. So rather than leaving it out completely, which is what Ricardo and Smith does, I've got to somehow bring it in. And this Hegelian insight occurs to him. And it's remarkable. I really recommend taking a look at the book, even just to look at that particular page, because what it would have been, it's shown as a footnote, but it would have been him saying, oh, wow. And he's asterisk, asterisk, is not use value a fundamental aspect of the unity of a commodity? So in the notes, you see the discovery of an idea in the human mind, the integration of an idea. And he actually writes, does this have significance in economics? Question mark. And then he probably went home that night and like that, that idea changed him. It changed him completely. And from that point on, his writing was completely different. But he still had this idea from the Ricardian days of saying that labor is the only source of value using an exclusive argument to say there's something unique about labor that explains why it's a source of value. But suddenly this insight occurs to him and he thinks, I can get a positive derivation. I can use the use value and exchange value and the fact they're not related to each other as a dialectical tension to explain surplus value. And that's what he does. So he goes from a negative explanation of where value comes from to a positive explanation on that page of the Guindresa. And he then triumphantly uses it to explain why labor is a source of value. You buy it for its exchange value. You use its use value. They're unrelated. The use value will be bigger. That's where profit comes from. Then he does exactly the same thing for machinery, about 30 pages on. He says it also has to be contemplated, which was not done before. This is right nice to himself, by the way, it's written and really in a colloquial style that the use value of a machine significantly greater than its exchange value. He actually left out the word is. It's used, this is obviously to be a term, it'd be a translation into English of the German, I'm sure. I don't know. I haven't seen the original notes. I'd love to see them. But he says, he leaves out the word is. It also has to be contemplated that the use value significantly greater than its exchange value, i.e. that the contribution of the machine to production exceeds its depreciation. And that was an insight which undermined his explanation for revolution. Okay. Can you say that again? The cost of production exceeds its depreciation? Yeah. Is that okay? Can you linger on that? Well, what Marx argued, and you read this in Capital, and I read this in Capital when I first saw the contradiction in his own thought, he said that no matter how useful a machine is, whether it has took 100 hours to make or cost 150 pounds, it cannot, under any circumstances, add more to production than 150 pounds. Which, in his old exclusivist logic, he could justify, and which in his post-1857 argument is bullshit. Can you still man his case? Can we go to the mind of Marx in thinking if a machine costs 100 bucks, it can't be ever more, bring more value than 100 bucks? But that contradicts his previous logic, because what he said is commodities the essential unity in capitalism. Capitalism focuses upon the exchange value. That pushes the use value into the background, and there's a tension between the two. What that means is the exchange value of a commodity sets its price. The use value is independent. He called them incommensurable. He literally would use the word incommensurability between exchange value and the use value, whereas neoclassicals make them commensurable. So he's saying exchange value and use value are incommensurable, and that normally means that exchange value is objective, like the number of hours it takes to make something. Use value is subjective, how comfortable the chair is, the fact that you can sit in it and the fact that you can sit in a chair. So that's incommensurability. But when you apply it in production, the exchange value of something is objective. It's how many hours it takes to make a machine or how many hours it takes to make the means of subsistence for a worker. The use value is also objective. You're making commodities for sale, and the worker does six hours. Six hours of work will make the means of subsistence for the worker, but the worker will work a 12-hour day, and the six hours becomes a gap. Now, that's incommensurability between use value and exchange value of labor. But when you look at what he said about no matter how long it takes to make a machine or how many pounds it costs, he's saying they're identical, and that's contradicting his own logic. Well, what's the use value of a machine? The fact that it can produce goods for sale, exactly the same as the worker. Now, what I've, in my modern reinterpretation of Marx, which brings in my work on energy, I see both labor and machinery as a means to harness energy and produce useful work. They can both do that. In fact, they do it together. It's a collective enterprise. Okay, so, and we'll go to that. There's no fundamental difference from an exchange value and use value perspective between a human and a machine. And therefore, they're using the same logic, they can both be a source of surplus, which is what Marx contradicted because his explanation for where socialism would come from is that only profit comes from, profit comes only from labor. Over time, we'll add more machinery than labor. That will mean a falling rate of profit, and therefore, a tendency towards socialism. And what he did in that insight in 1857 is contradict his own idea about what would lead to socialism. And he couldn't cope with it. Okay, what's the difference between Marxian economics and Marxist political ideology? The gap between the two, the overlap, the differences, what could- 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 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. He was saying it would have to come about, or is it a good thing for it to come about? So it should come about? He had a should, but he was trying to say it must. So if you look at Marx in the history of radical thought, he was preceded by what were called utopian socialists. Saint-Simon, even the Cadbury's company came out of utopian socialists. And they had an idea about a perfect society in the future where people were properly rewarded, were treated as human beings rather than cogs in a machine, and all this sort of stuff. And they said socialism should come about because it treats humans better than capitalism does. And Marx said, I can prove that socialism must come about. So he preferred, he had a utopian vision of a future society, but he thought he could prove that it had to come about. And the proof relied critically upon tendency for the rate of profit to fall, and that relied upon labor being the only source of profit. What was his utopian view? So this idea of from each according to his ability to each according to his needs. Is that the utopian? I think it's utopian in the context of our modern world. It says that rather than being rewarded, like Jeff Bezos gets enormous fortune, you get what you need, not what you want necessarily. All needs is fulfilled. It was a vision of utopia where you could be a fisherman in the morning, a poet in the afternoon, and a chef at night. Okay, this paraphrasing one of his phrases. So he did have a utopian vision of a future society. And he did think human creativity did much, much greater under socialism than it was under capitalism. He was wrong. So let's explore in different ways where he was wrong. You're saying there's a fundamental flaw in the logic, but also if we can link, if we can explore a high level of philosophical concepts of socialism to like the dreams of a utopia. So what, first of all, what is socialism? That's another loaded term. It is. Socialism, particularly in America, is a very loaded term. And what Americans call socialist is a large amount of provision of services by the state, which is commonplace in Europe. It's still moderately commonplace in my own home country of Australia. And that Americans will call public education socialist. That's a total parody of the word. Strictly speaking, what socialism meant is the public ownership of the means of production, no private ownership of the means of production. What is the means of production? Machine factories, factories. So all the goods that are produced in factories, no, the means of producing the goods is owned by a centralized entity. Yeah. Centrally planned. This is what actually was done under Gold's plan under the Soviets. And even with the collective farms as well, you no longer owned your land. The state owned the land, you worked on the land. And this was supposed to be a utopia. Now it didn't turn out to be one. And we'll talk about maybe your ideas of why it didn't turn out to be one. So the fascists did the same. So is fascism also central? Fascism, so-called national socialism. It's also a kind of socialism. So yeah, but there was no, it wasn't public ownership, there was public direction. So the state would tell factories what to do, but there's still private profit. And a large part of why the Nazis succeeded was the extent to which they managed to co-opt major manufacturers in Germany. So it's- Direction versus ownership. It's a dictatorial, I mean, that's a very particular implementation. So you have to consider the full details of the implementation, but it's basically dictator guided. Yeah. And if you want to take- Versus owned. If you want to take a proper vision, then you have to say it's the ownership of the means of production by the state, okay, versus the ownership by private. That rules out the Nazi period. Use the word that again, they're bastardizing as much as Americans do in the opposite direction. Well, what does ownership exactly mean? It became incredibly complicated. And this is actually the best work on this is done by a recently deceased Hungarian economist called Janos Kornay. And Kornay tried to explain why socialism failed. Because- Why did socialism fail in your view, in his view, in Janos' view, in your view? I think Janos is 100% correct. It's a brilliant piece of work. So I'm going to be really paraphrasing his view. And he imagined an ideal socialist society and there wasn't a Stalin, there weren't purges, and you lived up to all the ideals that Marx had for socialism. So he said, but you do it in a context of an economy, which is incredibly primitive, Russia, okay? Because 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, when 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 one go, okay? Bypass the capitalist phase, do the development under socialism rather than under capitalism. And this is what Janos was actually analyzing. You start from a primitive, feudal economy, very little industrialization, and you want to jump to an advanced industrial society from that foundation. So he said, what you have then for is a whole range of industries, all of which need as much resources as you can get for them, okay? So you want to develop agriculture, mining, industry, every little division of it. They all have legitimate demands on the resources of the country and the state. That means that all your resources are fully employed and are probably over-employed, okay? So you have a resource constraint in that society. The easiest way to cope with a resource constraint is to produce last year's commodity, not to innovate, not to make change. So what they will give you is as you start to add, you invest, so you now have beginnings of a steel industry, beginnings of a car industry, and so on, you start investing, but you continue producing the same product you made last year. And I have a perfect personal example of that, which I'll throw in now if you like, getting pretty heavy conversation. I know my first major girlfriend had a brother who wanted to get a motorbike, but he couldn't afford a Honda or a Kawasaki. At the time, they cost about $3,000 for a 650cc Japanese motorbike. He found he could buy a Cossack for $650, $1 per cc. So I was there when I got- $1 per cc, I guess. This is in suburban Sylvania waters in Sydney. So this crate arrives with a Cossack motorbike inside it. So we take it apart. It's then got all these wooden palings. We have to pull off the wooden palings to open it up. Then there's oil-soaked rag over this thing, which is tied on a wooden base. We take the oil-soaked rag off and we stare in all its glory in a 1942 BMW. It was exactly the same as Steve McQueen in Great Escape. So the Russians for 30 years were making the same bloody motorbike. It had a bicycle seat. And that's how they coped. They just made the same damn machine every year. They said, so that's the outcome. You actually want the best possible world. You're trying to build as fast as possible. You're paying workers as high wages as you possibly can. And that leads to a world where you don't innovate. You said capitalism, on the other hand, pure capitalist economy. You're trying to pay workers as little as possible. You have competitive industries. You're trying to take demand away from your rivals. You have Kawasaki versus Honda versus BMW, et cetera, et cetera. The way you get demand away from your competitors is by innovating. So what you will get is cycles and booms and slumps, but you'll innovate and change over time. So what you found was this huge gap between socialist volume production with no innovation and capitalism with innovation. So that was the fundamental failing that Jonas Kornay saw. So why did socialists not innovate? Because if you go back to this famous historical incident with Khrushchev in the United Nations, bangs, takes off his shoe and bangs the desk, says, we will bury you. He literally meant we're going to bury you in commodities. We're going to produce more output than you are. And he was wrong. Because fundamentally in the long term, to bury somebody in commodity production, you have to innovate. Yeah. And I think there's also, there's another remarkable Soviet engineer who was given the job of interpreting Marx's ideas of industrial sectors. So he had the commodity sphere, the industry sphere, sector one, sector two, sector three. Sector one producing consumer goods, sector two producing capital goods, sector three producing luxury goods for capitalists. And so he had a three sector model of the economy and he was talking about the dynamics between them. And what Feldman did was reinterpret this as an engineer would reinterpret it, which was brilliant work. So what he said was, you need to produce the means of production. If you want to grow quickly, you focus on producing the means of production rather than commodities. So you don't make cars, you make car factories. Okay. You make a few cars, but most of the effort goes into expanding how many factories you have. And what he did was do a mathematical model where you start off with very low levels of consumer good output, but then you would just go exponential. Okay. Now I took a look at that back when I was doing my master's degree in training in mathematics. I took Feldman's equations and then looked at what was actually driving it was he was imagining correctly a huge pool of unemployed labor. If you go back to the earliest stages of Soviet industrialization back in 1917, post the second world, post the first world war, you had all these unemployed workers, you had all these peasants you could take off the land and put into factories. So you had a huge supply of workers. What you had to do was build the factories. So you're building the factories, but at a certain point you exhaust the supply of lowly employed or unemployed labor. And so rather than having this exponential takeoff, you hit a ceiling and then you can only grow as fast as the population because you're not innovating. So that's what actually hit the Soviet system. And it's why they never buried the Western consumer goods. And instead why Western consumers looked in envy at the goods being purchased by their Western people and said, if that's exploitation, we want exploitation. So okay. There's a lot of interesting stuff to ask here, which is, so Marx's vision for the socialist utopia is you have to go through capitalism. And then Trubik's were true to Marx's original idea. So is there a case to be made that in the long arc of human history on human civilization on earth, that we're going to live out Marx's vision for utopia, which is like, will we run into a wall with capitalism? I think we are running into a wall with capitalism. In fact, I think we've already gone through the wall and we haven't yet realized we've smashed our skulls. But on the other side, we're bleeding and everything like that. Does Marx have any insights on what the other side of capitalism, what is beyond capitalism? I think that beautiful phrase of from each according to his ability, to each according to his needs, describes what we should end up with. And I think that's actually, if I think about, you know, I'm an Elon Musk fan. That's what I think is partially going to be the nature of society if we build one that functions on Mars. Because and I've actually seen an interview with the Italian who's involved in designing what the future colony will look like. He was actually asked this question, can there be enormous inequality in Martian civilization? The guy said, absolutely not. Because the resources, again, resource constraint applies. You simply can't give somebody an underground bunker 100 times the size of somebody else's 100 underground bunker. Because the scarcity of resources imposes a need for equality overall. Is that always, that's interesting. I mean, the scarcity of resources, wait, but I feel like that's the contradiction. I thought. Are you thinking neoclassical about scarcity? Yeah, I'm barely thinking at all. So wait, I thought scarcity, the best way to build on top of scarcity is a capitalist depletion. No, this is where, again, our vision of what scarcity is, is wrong. Because Ricardo said this, but it's actually better than Marx. Because Ricardo said there are some products whose value is determined entirely by their scarcity. Yeah. Paintings, rare wines, et cetera, et cetera. They are things you cannot reproduce in a factory. The essence of capitalism is what you can make in a factory. And therefore, for these unique objects, these rare objects, Picasso painting, a beautiful bottle of wine, et cetera, et cetera, then the utility, it can't be reproduced easily. So its price will be determined by subjective valuation. He said, what we're talking about in capitalism is the stuff you can make en masse. And that is the true focus of the capitalist economy. And that is not about scarcity. That is about, the only scarcity applies when you don't have the resources to make them anymore or you can't use the energy involved because you'll damage the biosphere too much, which we've already done. But fundamentally, the scarcity that neoclassicals have made us think about and Austrians think about as well is non-reproducible. But the essence of capitalism is the commodity, the backscratcher, the two-buck backscratcher that anybody can, the cheapest chips to make. And that's why you can make a profit out of them. Not the elaborate gold thing with diamonds and rubies that only the king gets. So we think our vision of scarcity has been perverted by neoclassicals analyzing the exception to capitalism and calling it capitalism. Okay, fair enough. So let's put Mars aside because I think there's a lot of strange factors that have to do with a whole nother planet, civilization that we don't quite understand, like how economics works with different geographic locations, one of which have new challenges, which is what essentially this is. I don't know if you can apply the same economic theory. No, I'm saying, your question, I think, we'll be forced into that ultimately by having to make a compromise with the ecology. And we've been ruthless about the ecology of this planet and we're going to pay the price for it. So if you have a planet where you can't be ruthless, okay, you have to mine it as carefully as possible, then that utopian might be imposed upon you for the needs for survival on that planet. Back here, Marx's utopia was still the one that ignored the ecology. And I think if I have a vision of a utopia in future, it's got bugger all to do about what humans get out of it. It's what humans respect. They have to respect life. So I don't see that as, I see that as a one-eyed utopia, a utopia for a single species, as if it can exist on its own, which we should know it can't. Quick bathroom break? Yeah, I'm about to. That would be great. We took a little bit of a break and now we're back. We needed to take a break because my brain broke and I'm piecing it back together. You mentioned ecology and life and the value of all of that. We'll return to it if we can. But first, we said why this kind of, this idea of why socialism failed. Can we linger on this a little bit longer in how did the ideas of Karl Marx lead to Stalinism? So this particular implementation. Is there something fundamental to these ideas that leads to a dictator and that leads to atrocities? There's something about the mechanism of the bureaucracy that's built that leads to a human being that's able to attain, integrate absolute power and then start abusing that power, all that kind of stuff. Some of the history of the 20th century, is that inextricably connected to the ideas of Karl Marx? I think to some extent it is, but I'm going to also say that if it hadn't been for the Bolsheviks interpreting Marx and saying we can reach socialism without going through capitalism, then it might not have happened. So if you look at the, like the Mensheviks were a rival political group in Russia and that's where Hyman Minsky, who's a huge inspiration for me. So he's an economist who was maybe, can we take a little attention, who was Hyman Minsky? Yeah, Hyman Minsky was the person who developed an analysis of capitalism based on financial instability. And he was actually the PhD student of Joseph Schumpeter and an Austrian economist as well, whose name I've forgotten temporarily. And he asked him, his parents were both refugees from Russia during the Stalinist period because the Mensheviks were being wiped out in Russia, just like any other opponents to the Bolsheviks were being eliminated. So I think his parents met in Chicago, still remained socialist, still remained politically active. And he was educated in a family that was just imbued with Marx as its vision. He ended up fighting in the second world war on the American side, coming back to America and studying mathematics and then also doing an economics degree leading to a PhD. And the question he posed for himself is what causes great depressions? And he put it beautifully, he said, can it happen again, it being the Great Depression? And if it can't happen, then what has changed between the society before the first, second world war and after that makes a depression impossible? What's the answer to those two questions? His answer was, yes, it can happen again. But what has prevented it happening by the time he started writing about it, which was the late 50s to the mid 80s, late 80s, we met once, but only once. Over a beer? No, he gave a seminar at New South Uni and he's a bit of an obstreperous bastard. What's, what, what, what? Wow, what is it? It means argumentative and likely to dismiss you. So like a good mate of mine was the guy I brought him out to Australia, a guy called Graham White. We're still, G'day Graham, we're still good mates. G'day Graham. I love your language and your accent. It's a great, actually, there's a really good TikTok I saw earlier today with an Aboriginal guy saying he loves the Australian language because it's absolutely ironic. You ask an Australian a question and he'll give you an answer, which is the opposite of what he means. And you've got to work out the rest for yourself. Yeah. He goes up to another Aboriginal mate and says, G'day mate. He says, how are you? Oh, not bad. What have you been doing recently? Oh, not much. When are we going? I said, not, not, not, not too far, not too soon. Yeah. Whereas, not too far away. Yeah. All negatives. And he's a beautiful, beautiful rendition. Yeah. Yeah. That's the cool thing about the internet culture. That's, they appreciate that ironic side. Like, for example, the best compliment you can give as an Aboriginal to somebody else is that's deadly. That's deadly. That's a compliment. That's deadly. Okay. Yeah. One, another mate of mine, this comes to the Australian language. If I call you a bastard, that's a compliment. Yeah. Depending on how I intonate the word bastard. Bastard. Bastard. That's deadly. Yeah. I love that. And there's something, unfortunately, there's something about the British accent that makes people sound maybe brilliant, maybe sophisticated. But actually pompous. Yeah. No, that's unfortunately the downside of that is you can sound pompous. There's something about the Australian accent that you just can't sound brilliant. It humbles you. You sound like you're having a lot of fun. There's wit, there's all that kind of stuff. But you just can't be like, Karl Marx in an Australian accent would just not come off. That is a very good point. He would not be able to pull off the beard. I mean, I just, yeah. It's fascinating that the accent determines something about the person. Maybe it's the chicken and the egg too. It drives the way of the discourse. Obviously, there's a lot of brilliance. There's a lot of brilliance in your work. But it sounds like you're always having fun. Yeah. And look, this Pat Poncho has got a lot of Australian mates here. He spent, what about, how long in Australia? A year and a half. And he's got all these mates who replace Aussie Rules Football in Austin. You should join them one day. I will. It's actually, it's a very creative sport. It's much more fun. It's different than rugby? Oh, very. Rugby is hopeless. Rugby is two morons smashing their bodies against each other. Easy now. Sorry. Sorry. Did I mean to offend the rugby fans in the audience? Well, okay. So it's too simplistic. It's too simplistic. I mean, there's skill in it. I've seen some really skillful rugby union and rugby league players in my day. But fundamentally, if you hit somebody hard enough, they go down. Okay. Whereas in Aussie Rules, it's about catching the ball and then kicking the ball. It's all skill. And the bodies of the athletes, I can actually get off and measure what a sport is like by the bodies it creates. And you get these incredibly elegant, lithe muscular forms out of Aussie Rules. Such beautiful words you have in your vocabulary. Lithe, I don't even know. But I'll assume you know what it means. And maybe somebody in the audience. Okay. So, all right. Fine. We should also mention that you, in your youth, like last year, had Olympic weightlifting as part of your life. Long time ago. And like you said, tennis. I also played tennis for many, many, many, many years. Okay. Yeah. It's a fascinating game. It's a wonderful game. Yeah. That's my favorite game. Karl Marx and Stalin. So how do we get onto Aussie football and Australian and the accent? I'm not really sure. You talked about the way I said something about Karl Marx and would Karl Marx. Anyway, we got there. Yeah, we got there and now we return. But back to Marx. I think- It's not the destination. It's the journey. I think Marx, the failure of socialism, with Janos Kornai captured beautifully. This idea already called demand constrained versus resource constrained economies. And capitalism is demand constrained. And this is again where neoclassical theory is completely wrong, empirically completely wrong. So the neoclassicals have a vision of capitalism being resource constrained, and it's about maximizing your usage of resources subject to constraints. And as Kornai said, that's really what happened under socialism. What happens under capitalism is that you have 15, 20 companies producing automobiles. They are all trying to capture as much of the market as they can. If you add up their marketing plans, you're going to get 120, 130% of the actual market. So they're all going to have excess capacity. When you build a factory, you're building it with a plan for it to exist for 5, 10, 15 years. You have to have excess capacity in the factory. So that means that capitalism has a far greater productive capacity than it actually uses. And then the way that you manage to get demand into your factory is to innovate and produce something nobody else does. Before you're producing in volume, and when somebody produces like a bung tire, comes out of firestone, then Goodyear is ready to expand its production and take advantage of that. So that's the actual nature of competition in capitalism. And that means that we get a cornucopia of goods, even if we're lowly workers. The variety of goods in capitalism is overwhelming. And that just doesn't happen in socialism. You get your 1942 Cossack as your motorbike, that's it. When you put your money down to buy a refrigerator, it'll arrive in 10 years because the factory is already fully constrained. So all these resource constraints mean that people aren't happy under socialism. And if you've got a whole bunch of people that aren't happy, then the best way to control them is to suppress them. So I think in that sense, ultimately, yes, it does lead to something like Stalinism. So it's easier to give happy people freedom. Yeah, I mean, happy people get pretty silly outside. I'm not particularly... The extent to which Americans overuse and distort the word freedom drives me balmy. All of these words can be distorted, but they all at the core have some fundamental power and beauty, and then we just distort on the surface for the fun of it. It's just our battles on Twitter and so on. But what citizens of the Soviet world didn't feel was freedom. Not just in... First of all, it wasn't freedom to buy commodities. The commodities were supposed to be on the shops, weren't there. The volume couldn't be produced. And what you then got out of that as well was the classic Soviet joke, they pretend to pay us and we pretend to work. Okay. Yeah, so you're not motivated. Oh, look, I went to Cuba about eight years ago. I invited to give a talk there. And I was staying in a hotel. It's still, for the hotel, it's a story. One day my meetings were canceled. So I thought I might go down to the beach. And in the hotel, they had a wing, which is the tourist office, and there were three women working inside the office. So I thought I'd just go up and ask them, how do I get to the beach? And one of them says to me, and I stood there, just stood in the room, waiting to see if they'd make eye contact with me. Three women, nobody else in the place, none of them looked at me. So I finally went up to one of them and said, I want to go to the beach and do some surfing work. She said, I can get a taxi outside. Now, fundamentally, she was saying, well, I'm being paid shit money here. I don't want to work. I'm not going to do anything apart from sit here and qualify for my time. And as much as there are reasons the Cubans have suffered from American embargoes and all that sort of stuff, you've still got that fundamental shortage economy that Cornel spoke about coming out of the structure of central ownership and central control of distribution and investment. And that breaks my heart because I think some of the effects of that persist throughout time. They become part of the culture too. Yeah. Yeah. It's very interesting. Negative culture. Yeah. Yeah. Well, from the Western perspective. Well, even from the people living through it. I mean, I had enough conversation with Cubans, meeting them on the street, hopping in a cab. One guy I was talking to, he was an industrial chemist and he got a bit of money being a cab driver because he could make money out of taking foreign tourists from the airport to the city. By the way, this episode is brought to you by delicious Coca-Cola. That's why I didn't want to have it on camera. But anyway. No, maybe they'll actually sponsor. You want to make sure you rotate the label to show this is capitalism. What are we talking about here? Even though it's red. Red and black is actually anarchist. I should tell you, I don't know if you know who Michael Malice is. Michael. Michael Malice. He's an anarchist and he lives next door. Does he? Okay. Now, I've lost touch with anarchist philosophy. I actually used to read Kropotkin and Bakunin and so on. And I enjoyed their philosophy. And then I helped organize an anarchist conference once. And that was the biggest antidote possible to being an anarchist. That sounds like an entry point to a joke. Yeah. Help to organize an anarchist party. It is. I mean, we literally spent three days arguing over whether there should or should not be a chairperson for conversations. Yeah. Well, that may be that. Monty Python's Life of Brian was lived out live. Look at the bright side. All right. So part of that explains why, for example, even to this day in some of those parts of the world, entrepreneurship does not flourish. There's not a spirit in the people to start businesses, to launch new endeavors and all those kinds of things. We're just taking all kinds of strange little strolls, but how do you explain the mechanisms of China today where there's quite a bit of sort of flourishing of businesses and so on? It's a very peculiar kind of entrepreneurship. They got away from central control, but they still manage central political control, but diversified economic control. So you could, it is possible to draw a line between politics and economics. It is possible, and I think in some ways China's more likely to survive as a society going into the future than Western capitalist societies are. So it's like if we do the Karl Marx, the foreground and the background, you can centralize the politics, the humanity, the subjective stuff, and then distribute the objective. You've got to have the goods. And that's why the big change from Mao to Deng Xiaoping was the characterizing that little saying that I don't care whether you have a black cat or a white cat, so long as it catches mice. And there was a level of pragmatism to the Deng Xiaoping revolution over Mao and Madame Mao in particular. And that was manifest in the desire to get as much of those Western goods as possible. And I was actually in China in 81, took a group of journalists there, as I mentioned earlier, for a tour. We ended up going to the Sichuan Free Trade Zone, and that gave us an idea of why China was going to succeed, because they had a rule that you couldn't just come in and exploit the cheap wages. You had to also have a Chinese partner. And within five years, the Chinese partner had to earn 50% of the business, which is huge. And it gives you an idea of the reduction in wages these American corporations are looking at. They'd shut down the factory in what's now the Rust Belt of America. That might be paying somebody there, you know, that time maybe $2 an hour. Then they come across to China and they're paying $0.02 an hour. So they were an enormous amount of wages that they dropped. They were willing to forego half the profits and the ownership of the firm. So what the Chinese were doing wasn't just exploiting their labor force. It was also building a capitalist class. And that meant that you had this, that's where all the Chinese corporations have come from. So they were building a capitalist system within a socialist command, political system. And that worked. And it's still working. So there was the centralization of the economic stuff, the Gosplan approach. I think that was where the Soviets failed. And what the Chinese realized after what they went through under Mao was you have to have that capitalist period, but they weren't going to abandon the communist control politically of the country at the same time. And that worked out brilliantly. And there's a huge amount of innovation taking place in China today. And they also will do gigantic infrastructure projects, you know, breathtaking planning going into that. If you've, you would have seen videos of, you know, building a skyscraper in a day. The planning that has to go into that, the pre-preparation that's necessary is enormous. So there's a real respect for engineers as well in that society, which does not apply in the West. What do you think about the, from the Western perspective, the destructive effects of centralized control of the populace, of the ideas, of the discourse, of the censorship and the surveillance, all those things. It's a bit like we were talking about Russia to some extent beforehand, with centralized versus decentralized corruption. And when you had the centralized political stuff means, you know, you can't criticize within China, but so long as you don't criticize, you can do what you like. And how destructive is that to the human spirit? From the American perspective, that feels destructive. Before, I've been to China quite a few times over my life, a lot in the last, not for about four years, but for the six years before that, a few visits. And I'd be staying in second and third and fourth tier cities. So populations of only 4 million people, which is quite small on China's standards. And I had a lot of happy people that I was interacting with, my girlfriend at the time, her social circle. And like, you can feel when people can't discuss a political issue. For example, in Thailand, you can't discuss the king. They still have less majestic laws. So you can actually be jailed for discussing the king. And you can feel that to some extent, and it is a political issue in Thailand now. But in China, what I got back from most people, it was a bit like a benevolent big brother. But then when you get things like the lockdown, which has applied recently, then you get the failings of the Soviet system is still there in the Chinese system. In that the easiest way to avoid criticism as an underling carrying out instructions of people above you is to carry those instructions out to the letter, beyond what the people actually want you to do at the top. So we had a classic illustration of that when I took these journalists. There was a news report saying that China's output of light industry had grown by 17% in the previous year, but heavy industry had fallen by 7%. We just don't compute. So we kept on asking, why did this happen? Every time we asked a question, this is back in 81, the answer would be the initial answer, we followed the directive of the Central Committee of the Communist Party of China. We finally got a guy to elaborate and say what that was. He said, well, the Central Committee sent out a directive to promote light industry. So what did you do? Quote, unquote, we stripped heavy industry factories and turned them into light industry. Now that's destructive of everything. And that's the overlay that you've still got sitting over the top of China. But a huge part of the industrialization was simply saying, produce whatever you can, make goods, market them, sell them. And you get that innovative component of humanity is respected, and the goods turn up, and everybody's well fed. Food in China is far better than food in America. So in terms of material satisfaction and freedom, so like for example, enjoy dancing. We went to, I think somewhere in Shanghai, and there's this line of people involving a woman who would have been close to her 90s, and a kid who was about six or four. Partying it up? Partying it up in the open air and doing this Chinese collective dance. You have to be really careful about that kind of thing. So in terms of measuring the flourishing of a people by looking at their happiness, I have so many thoughts on this. But I'm imagining North Korea, and if you talk to people in North Korea, I think they would say they're happy. No. Let me try to complete this argument, not an argument, but a sort of challenge to your thought, which, especially in the bigger cities, because they don't know the alternative. So what else do you need? There's enough food on the table. We have a leader that loves us, and we love him. We're full of, our hearts are full of love. Our table is full of food, they would say, because it's enough food. What else do you want from life? No, I think, okay, like that's... So let me sort of chat, because like... That's an alternative. I mean, I've spent time in Romania. So let me sort of complete that, sorry. Because I'm taking the most challenging aspect. When there's centralized control of information, that you don't know the alternative, that you don't know how green the grass is on the other side. And so your idea of happiness might be very constrained. So you could also argue that is happiness, if you don't know. Like... Ignorance is bliss. Ignorance is bliss. And then so is happiness really the correct measure for the flourishing? It's not. But I mean, there's actually a classic book, a movie as well, called Mal's Last Answer. And that is a young man explaining his progression from being a dancer in the Cultural Revolution through to a leading dancer in American and ultimately Australian ballet. And he explicitly says at one point that he's told that the Chinese people have the highest standard of living in the world. And the reaction of him and his kids, like his fellow six-year-olds is, God, it must be miserable elsewhere in the world then. So they knew... They still know. They still know. There's no such thing as that complete ignorance. But what I'm talking about is experiences in China, say, back in about 2016, 2014. There was a feeling of freedom within limits that you didn't want to transgress because the system was working. So if you... It's kind of like marriage. Pardon? It's kind of like marriage. Hey, that's a good example. There's limits. There's limits. You can have fun within those limits. That's right. Okay. So you can have fun. And they did feel free, but they didn't want to go and get divorced. But that dilemma was accommodated because the boundaries, until you started hitting restrictions were wide. And when you look at it, I mean, look at the... Again with the Chinese Communist Party, the administrators of that are often highly qualified engineers, who can then make intelligent decisions about what should be done as infrastructure and so on. And you go to China and you've got incredible high-speed rail, fantastic infrastructure, internet, telecommunications and so on, rapidly evolving solar. There's a range of things there that are so well done that reflect the fact that the selection process that gives you your political elite is partially focused upon sucking up, et cetera, et cetera. It's still there. But it's also focused upon your skill levels. And you get people making decisions who damn well know what they're talking about. Like Australia's got a classic example. The internet in Australia sucks. The reason it sucks is that the Labour Party, which is our version of the Democrats, was in control during the global financial crisis. And as part of that, they wanted to bring in optical fibre connections to the house. So you'd have an optical fibre backbone and an optical fibre right to your T100 output from your home. And the Liberal Party fought that and said, that's going to be too expensive, it'll take too long to do, we're going to do cable to the node and then have a copper network linking from a node on a street to all the houses in the street. It's going to be cheaper and faster, have it more soon, blah, blah, blah. It was a total technical fuck-up. And Australia now has internet that's about 50th or 60th fastest in the world. It's dreadful for the internet. Two political figures made the decision, Tony Abbott and Malcolm Turnbull, rivals and leaders of the Conservative Party we call Liberal over there. Now that was shitty decisions that wouldn't happen in a country like China. Because you've got actual engineers making the decisions. They say you can't get decent speed if you link optical fibre to copper. So what you get is, even though you can't make the decisions yourself, a vast majority of the decisions are made intelligently. And therefore you expect it. It's interesting, but don't you worry about the corrupting aspects of power? Oh yeah. That you start, you know, you have engineers making intelligent decisions, but at which point does the fat king start saying, oh, these engineers are annoying. I have good internet. I don't understand. Bring me the grapes. Well, that, that, you know, you get your colligular effects, that can happen. And like Z, from what I've seen, has got elements of that. So friends of mine who are Caucasians can get away with it. They have a game that they play at conferences, scoring how often people use Z's name in a presentation and giving extra points for the number of photographs of Z that turn up in the whole thing. So you've got this sort of personality cult coming along as well. But at the same time, the planning for the infrastructure that's being built, the social services, the general freedom that exists is so great. And like any Chinese person alive today, like somebody who's Chinese my age, would have been an adult under the early period of, the late period of Mao. And God Almighty, the change, the improvement they've seen in their lives, that's what they think about. So- But it's the, if you just look at the history of the 20th century, your intuition would say that some of the mechanisms we see in China now will get you into trouble in the long term. So it seems to be working really well in many ways in terms of improving the quality of life of the average citizen in China. But you start to get worried about how does this go wrong? Well, yeah, but at the same time, maybe, I mean, often people will say, you know, what's your vision for the future? And what they mean is, what vision for the future do you have that I'm going to like? Right. Okay. Now, what if you have a vision of the future you don't like? It's dreadful. I mean, that's the ecological crisis I think we're walking blindfolded into. But that's right, that part of the picture we'll have to talk about. How fundamental of a problem that is. Okay. But what does that have to do with the future of China? Well, that has to do is that if you wish to impose dramatic controls on the consumption of the rich, which would be necessary to reduce our consumption burden so that we can get closer to the ecological envelope we've destroyed already, then you're going to be more likely successful doing that with a centralized system where people accept centralized political control, than you were in a country where it's all diversified and you scream freedom between every point in a tennis match. And I've literally seen that when I was in Philadelphia some time back. So the ideology that accepts a collectivist attitude may be more successful in controlling our reducing human consumption levels. Because when we talk about democracy, I mean, who's voting here? How many horses and elephants and birds get to vote? Okay. It's very... What's a bird? Yeah. You don't see them around here. It's a very human-centric vision we have of this planet. And we're going to pay a price for that. Okay. So you're saying to deal with global catastrophic events, centralized planning might be... I think will work better, period. But there is some centralized stuff in the United States, for example. Oh, your military. Yeah, I know. No, no. Okay. All right. Now there's that feisty Australian. So besides the military, that's the ideal of the federal government in the United States, is that there is some centralized infrastructure building. There's some big... There's not enough of it....project. Yeah. There's some. The question is, when you deal with greater and greater global catastrophic events, like the pandemic that we're just living through, that the government would be able to step up and impose enough centralized planning to allow us to deal, sort of enable, empower the citizenry to deal with these catastrophic events. In the case of the pandemic, a lot of people argue that, first of all, the world, but also the United States, failed to effectively deal with the pandemic on the medical side, on the social side, on the financial side, the supply chain, everything, in terms of communication, in terms of inspiring the populace with the power of science, and all the fronts. They failed. But the ideal is that we'd be able to succeed. You would have to have a small, efficient, the American ideal, is you have a small, efficient government that's able to take on tasks precisely like the pandemic. But the thing is, maybe it shouldn't have been as small as it was. My favorite instance of that actually involves the UK, because the whole neoliberal approach is about small, efficient government. Small, efficient government works when you face small, efficient challenges. When you face something systemic, rather than episodic, then it's going to break down. This is, I mean, one of the things I greatly respect is Taleb's idea of anti-fragile. You want a society which is anti-fragile, not easily broken. Whereas neoliberalism has pushed us towards this vision of efficiency, but it's easily snapped. Like in the UK, I've forgotten the government minister involved, but she asked her expert committee, this is well before the pandemic, how many masks should we have on hand in case of a pandemic? And the answer from the experts was about a billion. That's 50 masks, that's 20 masks per person. Oh, that's too many. Let's just make 50 million masks. That's one mask per person that was gone in a matter of a day. And therefore, that's why they told us, well, masks don't work. What they meant was, we don't have enough masks for our health people, let alone for you in the public. So we're going to bullshit you and tell you those masks don't really work. And then people don't wear masks, and then we've got enough masks, we rush up the production job. And by the time it comes along, people have got the skepticism about masks. So who does, can you elaborate, who does the blame in that case go on to? The blame comes down to the philosophy that says government should always be small. No, but do you really think that bigger government would be the solution to the mask issue? No. So let me push back, sort of, it's possible that capitalism solves that problem. Well, not if, there's no money in really long-term planning and capitalism. Okay, there's money, there's money in, capitalism is- Isn't it possible to construct, isn't it possible for capitalism to construct a system that ensures against catastrophic events? Not when they're systemic. You can ensure against episodic events. If you occasionally have a really bad storm, but in general, the weather's not so bad that all the infrastructure is being destroyed, then you can share that around on a percentage basis. If you have a Gaussian distribution for your events and you don't, the mean doesn't move around too much and the standard deviation doesn't change all that much, then insurance works fine. But if you have an, if that's episodic, if you have systemic stuff where the climate is changing completely and you're going to wipe out your agricultural capabilities, you simply can't do insurance on that front. You can't make a profit out of catastrophe and capitalism. Okay, so that example of climate change, let's talk about it. Okay. So you mentioned that the human brain, the economy, and the biosphere are three of the most complex systems we know. Okay, and you also criticize the economics community for looking at the effects of climate change when measured as the effect on the GDP. So you're saying it's a catastrophic thing, that the biggest challenge our society, our world is facing. Why? If the economists disagree with you, the effects on the GDP will be minor. So we'll deal with it when it comes. That's the argument against, that's the devil's advocate. You're saying no, it is a thing that will change our world forever in ways that we should really, really, really be thinking about. Okay. Okay. Make the case of why you disagree with it. The case is simple. Economists have made up their own numbers to say that it's trivial. And you didn't. No, I haven't even tried to make the numbers. I'm reading what the scientists write. Okay. Okay. And what the economists have done, and like this is William Nordhaus in particular, Nobel Prize winner, ex-president of the American Economic Association, literally assumed that a roof will protect you from climate change. And he didn't say it in those words. What he said was 87% of American industry occurs in carefully controlled environments, which will not be subject to climate change. Now the only things that all of manufacturing, all of services, he included mining as well, forgetting about open cut mining, government activities and the finance sector, all they have in common is they happen beneath a roof. So he's basically saying climate affects the weather. Climate is weather. Okay. Okay. Now that is not at all what is meant by climate change. It's mean changing the entire pattern of the weather system of the planet. For example, the most extreme form of climate change would be a breakdown in the three circulation cells that exist in each hemisphere. The Hadley cell, the Ferris cell, I think it's called, and the polar cells, zero to 30, 30 to 60, 60 to 90. Those are the main bubbles, if you like, in the atmosphere. Now if we get enough increase in the energy in the atmosphere, just like you turn the temperature up on a stove and you have nice bubbles occurring in a pot of soup and then turn the temperature up and they all break down and you've got bubbles everywhere, that's called the equitable climate. If that happens, then most of the rainfall is going to occur between zero and 20 and 70 and 90 and the middle is going to be dry except for extreme storms. We built our societies in a period of extreme stability of the climate. When you look at the long-term temperature records, it's up and down like a seesaw or like a sawtooth blade between say one degree warmer than now and four degrees or six degrees cooler over the last million years. When you look at where we evolved, it's just at a turning point on the peak of one of those ups and downs. I've forgotten the name of the cycles, but the cycles caused by changes in the Earth's rotation around the sun. We evolved our civilization just at the top, so coming up from a cold period and then we're going to head down to another cold period. That's when human civilization came along. It's about a period of about 12,000 years. Across that period, the temperature has changed by not much more than half a degree up and down. Now, we're blasting it well and truly out of those confines. My way of interpreting what climate change means is the stability of that climate that enables to build sedentary civilizations and not be a nomadic species is being destroyed. The challenge, and by the way, I'm playing devil's advocate. The question is, is there something fundamentally different now about human civilization that we're able to build technology that alleviates some of the destructive effects that we have on the climate? We don't know. We're going to find out the hard way. The uncertainty you think would be very costly. Extremely. Many of the trajectories we might take will be much more costly than they're profitable. Yeah. And like we've seen some of the storms that are happening now in Europe, the ones that washed away a village in Germany some time ago, the firestorm that hit Canada of all places. I've forgotten the name of the town that was burnt down, but enormous temperatures in Canada. Again, the storms that have been happening back in Australia. These are all manifestations of a complete shift in the weather patterns of the planet. They can wipe out. A village just disappears, is wiped out by unprecedented rains, and this keeps on happening. We are still living in a sedentary lifestyle when we're a nomadic species. So to be able to maintain that sedentary lifestyle, we do need to engineer the planet. We need to keep it within that range of plus half a degree Celsius, minus half a degree, which is really what it's been like for the last 10, 12,000 years. Instead, we're blasting it right out of that range. And we know some of the past climates that have existed then. We can model what they imply for our food production systems, for example. Not the only example, but obviously crucial. So when you look at what are called global climate models produced by scientists, one of the examples, and it was published by the OECD last year, 2021, in the chapter on what would happen if we lose what's called the Atlantic meridional overturning circulation, or AMOC, and people would colloquially know that as the Gulf Stream. And that's what distributes heat around all the oceans of the planet. It's part of a huge chain called the thermohaline circulation. But the part that goes across from the equator to the North Atlantic, that's called the AMOC and Gulf Stream for a colloquial way. If that disappears in the context of a two and a half degree Celsius increase in average global temperature, then the proportion of the Earth's surface, which is suitable for producing wheat, will fall from 20% to 7%. Proportion for corn, similar sort of fall. The proportion suitable for rice will go from 2% to 3%. Now that means a catastrophic, and that's the word used in the report, catastrophic collapse in food production. So that's what we're toying with. And we are one and a half, we're actually less than, we're about halfway there to that two degrees, 2.5. And economists on the other hand, and this is Richard Toll, published a paper 2016, claiming using what he calls an integrated assessment model that economists developed, that losing the Gulf Stream would increase global GDP by 1.1%. Now his model, this is what really pisses me off about these people, it's the worst work I've read in 50 years of being a critic of neoclassical economics. The GCMs, the one scientists produce, of course include precipitation as well as temperature. The IAMs that the economists produce, and this is stated yet again in a paper in 2021, do not include precipitation. They simply have temperature. So they assume that if temperature improves by moving towards a temperature which is better for producing aquaculture, then so will precipitation. That's completely wrong. They've left out a crucial, imagine trying to model the climate while ignoring the fact that there's rainfall. That's what they've done. So their work is so bad, so dreadfully bad, it should never have been published. So they over, alright, alright, okay. I'm gonna go for them, sorry, this is. Well no, no, 100% as they deserve it. So it's an oversimplification. But I also want you to steel man people you disagree with and criticize people you agree with if possible. To be sort of intellectually honest here. You do say, sort of to push back on the catastrophic thinking about climate change, that ecology, the biosphere, is a complex system. Economics, the economy, is a complex system. So how can we make predictions about complex systems? How can we make a hope of having a semi-confident predictions about the complex system? So the scientific community is very confident about the complex system that is the biosphere and the crisis that's before us on the horizon. And then the economists are, as a community, I don't know what percentage, but. Too much. Too much. That part of the community is very confident looking at the economics complex system in saying that no, this system we have of labor, money, and capital and so on, we'll be able to deal with that crisis and any other crisis. And they kind of construct simplified models that justify their confidence. So how do we know who to believe? For a start, if you believe the economists, you need your head read. Because when you. That's not an argument. No, it's not an argument. It's a summary of an argument. And that is. That sounds a lot like an opinion and an emotional. I know, I know. I'm so angry about it. Listen, I'll tell you where I stand. And I've begun looking, studying the climate change much more. I used to be on things I don't understand, have not spent time on. I have so many colleagues that are scientists that I deeply respect and I trust their opinion. I have seen the lesser angels of my colleagues on the pandemic side, on the other side. The confidence, the arrogance that in part blinded, I believe, the jump between basic scientific research to public policy. And then, so I've become a little bit more cautious in my trust on climate change. I'm still in the same place. And I don't mean climate change. Some scientists say I've become a little bit, wait a minute, how does the basic scientific facts of our reality map to what we should do as a human civilization? There I want to be a little bit careful. So whenever now I see arrogance and confidence, I become suspicious. Well, I'm the same. And that's why I'm being angry about The Economist because there's incredible arrogance, incredible stupidity that the arrogance, assumptions which you look at it and think, how did anybody let that get published? The economic analysis of the effects of climate change are poor, in many cases. Incredibly poor. And this is like Bjorn Lundborg stars himself as the skeptical environmentalist and criticizes the environmental models. He doesn't take a look. He doesn't criticize the work come out by economists. You look at it, it's so bad. Is it possible to do good economics modeling of the effects of climate change? Yeah, it is possible. Very difficult. Or is it like one complex system stack? It's two. In that case, yeah. I mean, like to me, what you should be looking at is saying, what are the scientists saying are the consequences, probable consequences, not guaranteed, but probable consequences of increasing the energy level of the atmosphere by the amount we're doing? What can the scientists say in terms of the effects, because it's so complicated, the effects of sort of shifting resources. So basically, what are the effects of climate change? How can we really model that? Because it's basically you're looking through the fog of uncertainty. Because they're rising sea levels. How can we know what effect that has? How can we know there'll be a lot of change? Yeah, well, I think the sea level one is a poor argument, and I don't focus on it. What I mainly focus upon is the weather patterns. And if you look at, like we got the wheat belt in America goes throughout Idaho and countries, places like that. And you've got an incredibly deep topsoil. Ukraine is another classic example. The depth of the topsoil in Ukraine is remarkable. And that's the wheat bowl of Europe, and that requires both the right temperature for growing wheat and the right rainfall for growing wheat. Now when we look at the models that climate scientists are building of that, you have pretty much your ultimate foundation is the Lorenz model of turbulent flow. And of course, that's the first model which we saw chaos theory, complexity, that beautiful, simple model, three variables, three parameters, an incredible complexity out of the system. And what that meant was you also had an exponential decay in the accuracy of your model over time. So if you're accurate to a thousand decimal places, then in a thousand days, you'll have no data whatsoever because each time you're losing an order of magnitude of accuracy. So that's the point about the inability to predict for the very long future. But what you can just say, well, there's a prediction horizon. If we're close enough to the, if our statistical measurement of where we are is close enough to where we actually are, and our forecast horizon is narrow enough to not extrapolate too far, then for this distance forward, we can make a reasonable fist at predicting what the weather's going to be. And that's the foundation of meteorological, the stuff we watch on TV. Most of the time, the forecasts are going to be correct these days. 40, 50 years ago, most of the time, the forecasts were wrong. So that's the background foundation to these GCMs. But even they've got to massively simplify the world. So you have this enormous sphere of where they might divide it down to a hundred kilometer by a hundred kilometer by 10 kilometer, rectangles, whatever, oblongs. That's how they're modeling the transition of weather from one location to another. So they've got a chunky vision of the planet, which they have to, they can't model it now down to the last molecule. So you're losing- Not yet, right? It's getting better and better and better and better. Oh yeah. I think that's just too much processing power. But you're going to have some confines. You can't go, I mean, if you look at the models to do the weather, they used to be of that a hundred kilometer, I think they're about 10 kilometer grids now. I don't know. But so the processing powers let us get more and more precise that way. I do know that the models now include chemical mixing that occurs above cities. They've added that complexity to them over time. So you're looking at the increasingly accurate models, the weather patterns, the effect they have on agriculture, on food. And you're saying that there's a lot of possibilities in which that's going to be really destructive to society on the food production side. And if you have that increase in temperature, they're going to get a change in precipitation. And it could mean that where the rainfall and the sunshine are adequate for growing wheat is an area where there's no topsoil. It's like a huge part of the models, the models the economists use, which only use temperature, don't include precipitation. They predict that a large amount of the wheat output of the world is going to occur in Siberia, in the frozen tundra. What about, so that's a straightforward criticism of oversimplified models. What about the idea that we innovate our way out of it? So there's totally new, what is the, there's a silly poor example at this time, perhaps, but lab grown meat, sort of engineered food. So a completely shifting source of food for civilization. So therefore alleviating some of the pressure on agriculture. That comes down to the difference that Elon makes between producing a prototype and mass producing the prototype. You can develop the idea very rapidly to put that into production on the scale that's necessary to replace what we're currently doing. It takes years. Yeah. And we haven't got years. We've got, we might have decades. We certainly haven't got centuries. So in the timeframe we've got, I can't see that engineering going from prototype to production levels to replace what we're currently doing in the stable environment they're currently destroying. What do you think about the sort of the catastrophic predictions that people that have thought, have written about climate have made in the past that haven't come to fruition? That's mainly unfortunately involving Paul Ehrlich and the population bomb and the predictions Paul was making. A few individuals or the one individual in that case. Yeah. So I'm mostly playing devil's advocate in this conversation and enjoying doing so. I do think I'm in agreement with the majority of the scientific community. But you still see that argument made. I still see the argument made. And I also am a little bit worried about the arrogance and the ineffectiveness of the arrogance. This is the problem. It's ineffective. And that's what worries me because it's all been put into the sort of, you know, sea level rise, temperature changes. It's not put into the fragility of the system in which we currently live. And the earth will survive. And there's a wonderful science fiction book called The Earth Abides about a world in which humans get wiped out. There's only a tiny little band left and then the earth reasserts itself. So the earth's going to survive us. Will we survive what we do to the earth? That's the question. And my feeling is that we have underplayed the extent to which the civilizations we've built have depended upon a relatively stable climate. And as then there's that turning point in the global average temperature that we evolved right on the top of it. And if we had done nothing, we could find that heading back down towards another ice age could equally destroy the possibility of sedentary life. For example, if we'd never developed fossil fuel based industries, we'd never built super phosphate. So our population would never have reached 1 billion people. And we were still living like fairly sophisticated animals, but, you know, like 17th century level of load on the planet, then we would have gone down, that decline. And the approaching ice age would have started to wipe out our farming areas, the glaciers would have encroached, and we would have been driven out of like an agricultural sedentary civilization by that change. So it's just the fact that we evolved on this stable period in the overall temperature cycle of the planet. And that stability is something which just reflects the turning point in the regular cycle of Malicevic cycle, I think it's called, I've forgotten the actual name, but it's the cycle caused by, you know, change in the earth's orbit around the sun, reflectivity and so on. That cycle, it's just that tiny top bit that we evolved in. So what we should have done, so that's really useful for us, we should stay at that level. Now if we hadn't done it, we'd go back down here and that'd be the end of our civilization by an ice age. Instead, we're going up here really rapidly. And we're causing a change in temperature compared to that long-term cycle, 100,000 times faster. So, yeah, I mean, my biggest worry is even subtle changes in climate might result in geopolitical pressures that then lead to nuclear war. And that's, yeah, I mean, there's an argument that's actually behind, to some extent, not the Ukraine war so much, but the Arab Spring, the wars in Syria, which partially has led to what's happening in Ukraine. And our weapons are getting more and more powerful and more and more destructive, more and more nations are having these destructive weapons. And now we're entering cyberspace where it's even easier to be destructive. Unlike the barrack weapons, which didn't exist in the Second World War. So you don't need nuclear weapons to have catastrophic attacks on each other. So yeah, it's incredibly scary that the war-like side of human nature could be extremely enhanced by climate breakdown. So in this world, on a happy note, I don't know how we went from Marxism and Stalinism to ecology, but all those are beautiful, complex systems. What is the best form of government, would you say? We talked about the economics of things. You ran for office, so you care about politics, too. How can politics, what political systems can help us here? I think we first of all have to appreciate we're one species on our planet out of millions, and as the intelligent species, we should be enabling a harmonious life for those other species as well. Can we actually linger on that? What is, you mentioned that we need to acknowledge the value of life on Earth. Can we integrate the labor theory of value, can we integrate into that the value of life? So there's human life, and there's life. I think if you take that structure that I talked about of Marx's use-value-exchange-value dialectic, the foreground-background, that only exists, that only works because we're exploiting the free energy we find in the universe. There could be no production system without free energy, which is the first law of thermodynamics. There is free lunch, after all, and it's grounded in the energy that's provided to us by the universe. Yeah, that's the free lunch, that's what we're exploiting. It's the only free lunch we get. You know Ginsburg's summary of the laws of thermodynamics, don't you? Alan Ginsburg? What's that? He said the laws of thermodynamics are summarized, A, you can't win, B, you can't break even, C, you can't leave the game. Nice, yeah. Beautiful summary. Beautiful summary. But the fact that it exists in the first place is the free lunch. So we're exploiting the free lunch, but to be able to do it, we can't put waste back into that system so much that it undermines the free lunch, and that's what we've been doing. And once you respect the fact that we have to, living on the biosphere, the planet we're actually on, we have to enable that biosphere to survive us, because if it doesn't survive us, we won't survive it disappearing. And there's not that realization in humanity in general. And when you say the value of life, you know, all the different living organisms on earth are part of that biosphere. So in order to maintain the biosphere, we have to respect, like, pragmatically speaking what that means is actually respecting all of life on earth, even the mosquitoes? I've got some, no. Parasites, I mean, we are a parasite. When you look at it, we're the mosquitoes of the large organizations. You're a fan of the Matrix movies at all? Sure. Okay, you know the series where the Asians- Look what I'm wearing. Absolutely, I was wondering what the inspiration was. I was thinking- It's not really inspiration. We are living in a simulation. And I have a conversation offline to have with you about that. Okay. You've been misbehaving and we're going to have to put you back in line. So what's Agent Smith says when he's got Morpheus in his possession? He said, I've been trying to classify your species. I've decided you're a virus. Now there's truth to that. We have intruded into everything. We've taken over every element of the biosphere. And we think we can continue doing that. And the thing is we're exploiting it so much, we're breaking it down. And I think it's E.O. Wilson who argued for the 50% rule. He believed that we should reserve 50% of the planet for non-human species. In other words, we'd make 50% of it off limits. Humans cannot go there. And we just let that evolve as it does. And then we control the other 50%. I think he's probably giving too much to us. I think we should actually say like 20%, 25% max. And the rest of the planet, we let life go on and evolve as it does without our interference, without our dominance. Now that's neither a democratic system nor an authoritarian one. It's one which starts off with saying the first thing humans have to do is respect life itself. Okay, so would we do that? We haven't done it, obviously. I don't think the Soviets would have done it if we had a generally Soviet system. We haven't done it under a capitalist. We continue intruding. So I think we have to go through something like a star trek, a star trek in a catastrophic 200 years to realize that ultimately if we're going to survive as a species, we have to respect life in general. And then that means parts of the planet we can no longer touch. While we also try to maintain the planet at the temperature that we found it in what we now call the Anthropocene. So politically, we have to have like in many ways what native societies often have, a vision of the cycle of life, not this exponential progression we've developed over the last 250 years. And again, I'll use another movie, the Avatar type respect for the cycle of life. We need to have that as part of our innate nature. And then on top of that, the political system comes out. Now that political system has to be one that lets us feel like we have a say in the direction of society while that part is sacrosanct. We can't touch it. But we also, because we are now living with so many challenges created by our own civilization, the main threat to the existence of human civilization is the existence of human civilization. It's both a feature and a bug. And therefore, we need to have people who can understand complex systems making those decisions. Now that means it isn't a political system as much as it is an appreciation that the world is a complex system. And therefore, effects which we think are direct effects will actually come through an oblique fashion. And we cannot, there's no simple linear progression from where we are to where we want to be. So you have to see how everything feeds together in a systemic way. And that's why, one reason I designed the software I'm wearing the t-shirt for now, Minsky, is to have, it's nowhere near to this scale. I hope it one day will be. But something which means we can bring together all that complexity, all those systems and perceive them on an enormous screen where we have all the various interacts and we can see what are potential futures. And that then guides us. So it isn't a case of democracy and our side wins a vote and therefore we ban abortion or we don't, whatever else happens. It's seeing what the, respecting the fact that we're in a complex system and being uncertain about the consequences and not making the bold expansionary ideas that we've been doing. So like being a little bit more humble. Humble, humble is a good word. But wouldn't you like to apply that same humility both to the considerations of the pros of capitalism and to the catastrophic view of the effects of climate change? Yeah. And also like I think we can afford to be bold in space. And that's one reason I respect the practical vision of Musk and the so far impractical vision of Bezos. That if we're going, we look for the very far future, the only way we can continue expanding our knowledge of the universe is to move our civilization, the productive side of off the planet. Off site backup. Yeah. So can you actually linger on this? So let's actually talk about this. So first of all, you have the new book, humbly named, The New Economics, A Manifesto. Probably should have chose the title. Yes. No, but I'm joking. But maybe I will ask about why manifesto, but we'll go through some of the ideas in this book. We have been already. So some of it is embracing the fact that the economy, our world, our mind is a complex system. So this t-shirt that you're wearing. Yep. I can help. Is a software. I'll do that. Do you like that? There you go. You're wearing a wife. Okay. Look, what is this? Okay. That's just an infomercial. So this is a t-shirt that says Minsky. After not, not, not my Minsky. It's your Minsky. So no, the Hyman Minsky, not Marvin Minsky. Not Marvin Minsky. Right. So that's sort of AI Minsky is mine. And then a Harmon, it all rhymes. So stability is free open source system dynamics software invented by Mr. Steve Keen, coded by Russell Standish. It's on source forge. It's destabilizing. Stability is destabilizing. So that's sort of embracing the complex aspect of it. Yeah. How can you model the economy? What are some of the interesting, whether detailed or high level, big picture ideas behind your efforts of Minsky? Okay. Minsky. Meaning the software, the modeling software that models the dynamics. Basically what Minsky is doing is system dynamics modeling. So if anybody's used Stella or Vensim or Simulink, then they've used exactly the same family of software that Minsky is part of. So I didn't invent that. That was invented by Jay Forrester is one of the great intellects, one of the great engineers in American history. And the idea of Forrester's system was complex interactions. So he was doing his work in the fifties. People don't know Forrester's work. He actually built the models of the, did the mathematics for the gun turrets on American warships in the second world war mechanical systems, obviously. So he had to work out how to give a feedback system that meant when the boat rolled in one direction, the tarot did not roll the other way. All that stuff was his work. So marvelous engineering. And then he realized if you want to look at even like a factory, a factory is a complex system. So you get cycles generated out of the interaction between different components of the factory that he was first involved in taming, that he built the software to model complex interactive systems. So Minsky is that, the thing that Minsky adds, which is unique as the Godly table, and that's the double entry bookkeeping. So you can model the financial system. Godly, the economist. Godly, the economist, Wynne Godley, another great, great man. So there's like this, you're modeling it as like a state diagram. Yeah, fundamentally. So it's actually, it's circuit diagrams. That's exactly what engineers have been using for decades, almost a century. So you're using a circuit diagram to model the economy. And that's the, so other factories have done it. What they haven't had in the circuit diagram is a way of handling the dynamics of the financial system. So what the Godly table does is bring it, financial flows as being, everything goes from somewhere and ends up somewhere. So you have a positive and a negative if you're looking on the liability side, a positive and a positive or negative and a negative if you're looking at assets and liabilities side and Minsky gets the accounting right for that. So you can do an enormous complex model, looking at the economy financially from the point of view of a dozen different actors in the economy and know that the mathematics is right. Even though what you're building is set of differential equations, which might be 50 differential equations with 350 terms in them. If you've got the Godly tables right, you know the mathematics is correct. So that's the main innovation that Minsky adds. And you're operating there at the macroeconomics level. Yeah, it's definitely macro, it's top down. It's not, it's not agent based. And then this, I'm just opening on a random page that I think is very relevant here. The process, this is referring to Minsky, not the software, maybe the software, I don't know. The process can be captured in an extremely simple causal chain. Capital determines output, output determines employment, the rate of employment determines the rate of change of wages, output minus wages and interest payments determines profit, the profit rate determines the, there's a very nice circuit here. The profit rate determines the level of investment, which is the change in capital, which takes us back to the beginning of this causal chain, and the difference between investment and profits determines the change in private debt. And there's some nice, the Keen-Minsky model and the intermittent route to chaos on page 86 of your book. These are, do these come from the software? Yeah, yeah. I mean, I first did that in Mathematica back in 1992, August 1992. Mathematics is another amazing piece of software. Yeah, I find it, it's very much a programmer's approach to mathematics. I prefer like a program called Mathcad, which is what I'm using for all my, when I do my mathematics on the computer, I write in Mathcad. CAD, C-A-D or cab? C-A-D. Okay. It's been ruined by bad management. They chucked out all the good engineers and I'm still using a version which is 12 years old. If only engineers ruled the world. If only engineers, rather than this particular case, there was a bunch of marketers for CAD software agreed. I'm definitely a fan of engineers. What are the plots that we're looking at here? Wealth rate, private debt ratio, employment versus wages, employment versus debt, income distribution. So this is across years, like different trade-offs. Is there something interesting to say about the plots and the insights from those plots that are generated by the software? That's a particular parameter value is to give that outcome. But what happened when I first simulated the model, I took a model by a guy called Richard Goodwin, who's one of the great neglected economists, American Marxist, mathematical Marxist. What he did was build a model of cycles. He actually wrote a paper called, it's only about a five-page paper published in a book and a very, very obscure conference paper. What he was doing was trying to build a model of Marx. So he wrote it in 1967 and it was putting in a mathematical form a model that Marx came up with in 1867. So it was a centenary birthday present to Marx. And what Marx had argued in chapter 25, I think, of Volume I of Capital, section three, he built a verbal model of a cyclical system. And it's quite out of character with the rest of the book. So when you read Volume I of Capital, people think Marx has got a commodity view of money. He doesn't at all. He simply did – the idea was he had like an onion. You start off on the middle level and you ignore the outer layer, then you bring the outer layer in and so on and so forth. Anyway, in this model, in Volume I of Capital, he normally just – you see, a worker's got a subsistence wage. That's it. But in this little chapter, he said that if the economy is – effectively, he said the economy is booming, then workers will demand wage rises. And the wage rises will cut into the profit so that capitalists will not get the level of profit they're expecting. Therefore, they will invest less and the economy will slump and the slump will mean workers become unemployed and have to accept wage cuts. And it was a model of a cyclical economy. And as it happens, Marx spent his later years trying to learn enough calculus to be able to model it himself mathematically and he never managed. There's Marx's Mathematical Notes on Calculus, which are quite fun to read and if you have a mathematical background. Did he get far? No. So he got too caught up in the whole philosophy and never really got to build the model. But what Goodman realized was a predator-prey model. Okay. The Lochter-Volterra model was the basis of the idea. So what the idea is you have a prey like – and the example that Lochter actually used initially was grass. Grass is the prey. And then you have a predator and the predator were cows. So you start off with a very few cows, lots of grass, and then because of lots of grass, the numbers of cows grow. And then because the cows grow, they start to eat the grass. So the grass runs out, so the cows starve and you get a cycle. And what Lochter was amazed by was that the cycles were persistent. They didn't die out. So Goodman got that vision and he then built a predator-prey model. And I first of all read Goodman and really found it really hard to follow his writing. He's not a very good writer. But a guy called John Blatt, who was a professor of mathematics at New South Wales University, wrote a brilliant explanation of Goodman's model in a book called Dynamic Economic Systems. I read that. It was superb. And he said the way he could extend this was to include finance. So I thought, okay, what I'm going to have is that what Goodman presumed is capitalists invest all their profits. So you get boom when there's a high rate of profit because they invest all that money and then a slump when there's low profit because depreciation will wipe away capital and you'll go boom and slump. So I simply added in, well, capitalists will invest more than their profits during a boom but less than their profits during a slump. And that therefore means they had to borrow money to finance the gap and pay interest on the debt. So I ended up with a model with just three system states, the income share, the wages distribution of income between workers, capitalists and bankers, the level of employment and the level of private debt. And those three equations are fundamentally like going from the Locke de Volterra model with just two equations and therefore you get a fixed cycle to the Lorenz model where you have three. And therefore what I got out of it was a chaotic outcome. So what you're seeing is a manifestation of chaos, complexity in those plots. But the fascinating, one of the many fascinating parts about it was that as the level of private debt rose, in my model I had capitalists being the only ones who borrowed. But the people who paid for the high level of private debt were the workers. The rising banker's share corresponded exactly to a falling worker's share. So you can infer from that that the workers are the ones paying? Effectively, the workers end up paying for it. They get a lower level of wages. And the basic dynamic is that capitalists, when you have a three social class system, your income goes between workers, capitalists and bankers. Now in the system, the good one did, they're just workers and capitalists. So if workers' share rose, profit capitalists' share had to fall. But when you have three social classes, then capitalists' share can remain constant while workers falls and bankers rise. So that's what actually happened. Because capitalists, the simple way I modelled it was there's a certain rate of profit at which capitalists invest all their profits. Above that they borrow more, below that they pay off debt. So what would happen is when you got back to that point, then the level of investment would be a precise share of GDP and therefore you get a precise rate of economic growth. But if there was a higher percentage going to bankers and offset by a lower share going to workers, it didn't affect the capitalists. What you get is the cycles sort of diminish for a while because there's the other, so the income distribution effect is important. So the workers pay for the increasing level of debt. But the other side of it was that the cycles would diminish for a while. Now what you get is a period of diminishing cycles, then leading to rising cycles. And technically this is known as the Pomer Manorville route to chaos. And it's one particular element of Lorenz's equations of fluid dynamics. So what they found was in examining laminar flow in a fluid, you have a period where the laminar flow got more laminar and then suddenly it would start to get less laminar and go turbulent. And this is what actually goes on in the model. So in my model of Minsky, so what you have is a period where there's big booms and cycles and then as the debt level rises, the booms and slums get smaller. And that looks like what neoclassical economists call the Great Moderation. So when I first modeled this in 1982, I finished up my paper which was published in 95 with what I thought was a nice rhetorical flourish saying the chaotic dynamics of this paper should warn us against regarding a period of relative stability in a capitalist economy as anything more than a lull before the storm. Now I thought it was a great speed of rhetoric. I didn't think it was going to fucking happen. But it did because you had this period from 1990 through to 2007 where there were diminishing cycles and the neoclassicals labeled that the Great Moderation and they took the credit for it. They thought that the economy was being managed by them to a lower rate of inflation, a lower level of unemployment, less instability over time, and they literally took credit for it. And I was watching that and thinking that's like my model running and I'm scared as shit that there'll be a breakdown. I ended up not working in the area for a while because I wrote debunking economics and I got involved in a fight over the modeling of competition in neoclassical theory. That took me away for about four or five years. And then I got asked to do a court case in 2005, end of 2005. And I used Minsky as my framework for arguing that somebody who was involved in predatory lending should be able to get out of the debt they were in. And I explained Minsky's theory and I used this throwaway line of saying private debt has been rising exponentially. And then I thought, well, I can't as an expert just make a claim like that. I've got to check the data. And the debt ratio was rising exponentially. And I thought, holy shit, we're in for a financial crisis. And somebody has to warn about it. At least in Australia, I was that somebody. So can you, given this chaotic dynamics idea, can you talk about the crisis that's ahead of us in the future? So one of the things, I mean, it's a fundamental question of economics, is economics about understanding the past or predicting the future? You can construct models that do poetic, like in 95, poetic. Yeah, and then you can watch years fly by and some of the predictions in retrospect that you make turn out to be true. But all kinds of gurus throughout history have done that kind of thing. You can call yourself right and forget all the many times you've been wrong. Let's talk about the future. What kind of stuff, you mentioned about the importance of the biosphere, but what other crises are ahead of us that a chaotic dynamics view allows us to predict? Well, what really I saw coming out of it, leaving aside the ecological, wasn't a crisis. It was stagnation. Because what we got out of the crisis was caused by a rising level of private debt. Now you reach a peak level where the willingness to take on debt collapses. And so you go to a period where debt is rising all the time. So credit, which is the annual change in debt, and that's credit as part of aggregate demand and aggregate income. So credit goes from positive to negative, and that causes a slump. So can you describe why that causes a slump? Credit goes to negative. If you ask Paul Krugman, he'll tell you credit plays no role in aggregate demand. Give me a second. Credit plays no role in aggregate demand. The vision that the neoclassicals have of the banking system is what they call loanable funds. Is Paul Krugman, by the way, the knight at the front of the army that is the neoclassical economist? Yeah, fundamentally. Okay, sure. Okay. He's politically reasonable, which makes him more dangerous than those that aren't. He's politically... Yeah, there's quite a lot of people that would disagree with that characterization of Paul Krugman as he's politically reasonable. You should see the people behind it. The alternatives. Okay, fair enough. That's not a negative or positive statement. That's just he can be feisty as well. Oh, he can. He can. But he's like the human face of neoclassical economics. It doesn't deserve having a human face. It's anti-human theory. But he's the human face. That's what you really think. I got you. All right. Well, so but the credit does not have any effect on aggregate demand in their model. And you're saying that's not the case at all. It's absolutely crucial to aggregate demand. So what they model is, again, the example of you lending to me or vice versa. If I lend money to you, I can spend less, you can spend more. So credit is the change in debt. So if I lend money to you, then there's a level of private debt rises. So there's an increase in credit. But that increase in credit comes at an expense of my spending power. So you can spend what I've lent you, but I can't spend what I've lent you. So credit cancels out. But when you look at – that's learnable funds. But in the real world – and the Bank of England has said this is the real world and the textbooks are wrong, categorically in 2014. When the bank lends, it adds to its asset side and says, you owe us more money. And it adds to its liability side and says, here's the money in your bank account. Now, you spend that money. So what happens when you do your sums, credit is part of aggregate demand and aggregate income. And that's something I first solved in 2019, I think. I only recently proved it mathematically. So what that means is credit is a component of aggregate demand and credit is also very volatile. So consumption demand never goes negative. Investment demand never goes negative. But credit can go from positive to negative. And when you take a look at the long run of American history after the Second World War, there was no period until 2007 where credit was negative. It was a positive component of – a positive number. And therefore, when you do it as a percentage of GDP, it was a positive percentage of GDP. It peaked at 16% of GDP in 2006, 2007. It fell to minus 5% in 2008, 2009. So you had a 20% of GDP turnaround in aggregate demand. Now when you plot that against unemployment, the correlation of credit to unemployment across the period from about 1990 to 2010 is about minus 0.9. Okay? Enormous negative correlation. Now, according to the neoclassicals, it could be close to zero. Empirically it's bleedingly obvious it's not. And it applies to every country in the world that had a financial crisis at that period. So it's bleedingly obvious in the data. And they ignore it because credit's not part of their model. And you're saying it's causation. That just – Causal. It is causal. Today we sit there, it's extremely high inflation. What does inflation – what role does inflation play in this picture? Is a little bit of inflation good? We talked about money creation at the beginning. What's a little bit of inflation good or bad? A lot of inflation good or bad? How concerned are you about – A little bit is good for a simple reason. Again, it's taken me a while to get my head around this. But if you think about how people say what are the functions of money? They say money is a unit of count, a count that you're measuring. It's a means of exchange. And it's a store of value. Now yes, okay, it has those three roles. But the last one is contradictory to the previous two because – and this is where we see this with the Bitcoin phenomenon. If you want to hang on to money as a store of value, then if prices are falling, the value of money is rising. And it's actually in your interests as a store of value to hang on to it and not spend it. So that contradicts its role as a means of exchange. Now if you have money which depreciates – and this was actually tried in the Austrian town of Wargol during the Great Depression. If you have money that depreciates, then if you don't use it, you lose it fundamentally. So it has a high rate of circulation. So there's a monetary theorist called Silvio Gazzel and he wrote this proposal that money should depreciate. And he was ridiculed and opposed and derided, but Keynes said he was a great intellect. And the mayor of the town of Wargol in Austria during the Great Depression was facing an unemployment rate of 25% pretty much. Germany had the worst experience in the Great Depression in the world, as bad as America, slightly worse than America. And so he thought, how can I stimulate demand here? So he produced a script which could only be used for buying goods and services in Wargol. And it could be used to pay your local rates. But it was depreciated by putting a stamp on the money if you didn't use it. So what happened was people would pay their rates. They needed to pay their rates using this money, so they used the script. And because it depreciated, you'd use it rapidly. So people were using that money, this alternative to the Austrian shilling, and the economic activity in town took off and unemployment fell to zero. And it was an absolute miracle, and everybody loved the Wargol experiment, and the Austrian central bank sued them for establishing an alternative form of money and shut it down. Unemployment went back up to 25% again, and Austria voted, you know, what, 99.6% for the Nazis, something crazy number like that when Hitler marched in. So the Wargol experiment showed that a depreciating currency led to a high rate of circulation. But of course, we're not talking Weimar Republic levels of inflation. So when you get that much inflation, and that's normally caused by, as the Weimar inflation was caused by, the reparation terms imposed on Germany, fundamentally by France at the Treaty of Versailles, they paid a large part of that with just basically printing the notes. And you went into this crazy period of hyperinflation. So hyperinflation almost always occurs when there's a massive destruction of physical resources and the monetary authority tries to pay back literally over it, and then you get hyperinflation, that's total social breakdown. So a moderate level of inflation inspires the means of exchange usage of money, but undermines the store of value usage of money. And that dilemma is why we have this antagonistic attitude towards inflation. Yeah, I mean, you're describing as a tension, but it's nevertheless is, like money is a store of value and a means of exchange. And I don't, you know, to push back, it's not necessarily that there's a tension, it's just that depending on the dynamics of this beautiful economic system of ours, it's used as one more than the other. If there's inflation, you're using it more for the means of exchange, there's deflation using more for store of value. But that doesn't, I don't see there's a tension, that's just how much you use it for those different... But it ends up saying that overall, for a level of effective commerce, a bit of inflation is a good thing, because that's depreciating the money slightly and encourage its use. Yeah, but so the argument that Bitcoin folks use or gold standard folks... The HODL, yeah. The HODL. Again, HODL is not an argument. That having an inflation of zero is actually achieving that balance. Yeah. So like, yeah. But they're actually in favor of negative, they want it to appreciate rapidly. And there's a negative inflation. But the value of the money rising relative to commodities, that's what they want. That's the HODL philosophy. Well that's more of like an investment, I don't know if that... Yeah. That's more of an investment philosophy than the fundamental principles of why they believe in cryptocurrency, in the enforced scarcity, it's a model. The concern there is that when you print money, the public policy is detached from the actual, from value. Yeah, well you get... I mean, this is where again it matters to get money creation right, because the government's not the only money creator, banks are as well, private banks. And if we obsess too much about limiting government money creation, what we end up getting, if there is money creation going on, it's private banks doing it, and you get an increase in private debt. And fundamentally, private debt and its collapse, collapse of credit when it stops growing, that's the fundamental cause of financial crises. So... Yeah, but the question is, what's the cause for the collapse of the... Well I think this is like the Austrian thinking leaves out the debt deflation. And that's like, I think one of the most important papers ever written was by Irving Fischer, called the Debt Deflation Theory of Great Depressions. Fischer was somebody who accepted the neoclassical vision. He wrote the pre-efficiency market hypothesis, efficiency market hypothesis. He had his own PhD called the Theory of Interest. And in that he argued effectively for a supply and demand analysis of the financial system. And he argued for equilibrium. He said when you're working with a commodity market, then the sale and the transaction and the exchange occur at the same point in time. When you're working with a financial market, then the exchange occurs through time. So he said he assumed that debts are repaid, all debts are repaid. And he assumed that equilibrium through time was an essential part of his assumption. Now then the Great Depression comes along. And he has become a major shareholder in the rank Xerox because he invented the Rolodex. He's a tinkerer. And so he had taken out shares on margin, and he was worth about $100 million in modern terms when the Great Depression hit. And 90% of that was share market valuation. He'd taken out margin debt just like everybody else. And with margin debt, you could put down $100,000 and buy a million dollars worth of shares. So he got this huge leverage into debt. Now that when the financial crisis hit, the level of margin debt in America had risen from half a percent of GDP in 1920 to 13% of GDP in 1929. It then fell to zero again. That's why the stock market crash in 29 was so devastating, that scale of margin lending. And everybody was being wiped out. They were selling Rolls Royces for 20 quid. You literally have photographs showing people doing that. Because a margin call comes in, you've got to liquidate everything. So he said the danger of a debt deflation is what we have to avoid. And that means you don't want too much private debt to accumulate, and you don't want falling prices because the falling prices will amplify the impact of being insolvent to begin with. And that's what we saw in the Great Depression. That's partially what we saw in 2007. But we didn't have anything like the level of margin debt. Margin debt was reduced from 90% to 50% ratio after the Great Depression. So there were limits on how bad it was in 2007. But the danger is still the period of deflation amplifies your debts. I call it Fisher's paradox. He didn't write those terms himself. But he wrote a line saying the more debtors pay, the more they owe. And this is because you're liquidating to try to meet your own debts. When you liquidate, the price level falls. You will end up having a lower level of monetary debt, but a higher level of debt when you deflate it using the price level. So the biggest danger in capitalism is a debt deflation. Far more dangerous than inflation. And the cause of debt deflation is? Too much lending, too much bank lending, too much private money creation. And if you take a look at the 1920s, Calvin Coolidge explained the boom of the 1920s on his surplus. He said, my government running a surplus of 1% of GDP pretty much from 1922 through to 1930 is the foundation of our stability. It should be continued. What he didn't look at was that over that same time period, on average, Americans were borrowing 5% of GDP per year from the private banks. So you had a housing bubble at the beginning of the 1920s, which Richard Vague covers beautifully in the brief history of doom. And then you had this huge rise in margin debt as well, gigantic increase in margin debt. So all this borrowed money was being spent into the economy. And this is where credit becomes part of aggregate demand. And it's both not just for goods and services, it's also for shares and houses and so on. So a huge valuation effect. But then when the margin debt turned around, when people would not take out margin debt anymore, the demand for margin debt disappeared. And then it was what we call badly a positive feedback loop. It's actually an amplifying feedback loop. And that caused a collapse. So what elements of that do you see today that we need to fix and how do we fix it? We have to regard the level of private debt as a target of economic policy, just as much as the rate of inflation or the rate of unemployment. What is the moderate amount of private debt that's good? I would say something anywhere between 30 and 70% of GDP. What is it currently? In America, it's 170%. Of GDP? Of GDP. Oh, that's nice. I've got the data after we talk, but I can show you the data in this. And it is just this huge increase in private debt that first of all caused the boom, but then financing the credit ultimately causes the slump. And so if we remove the rate level at which debt can reach and we stop speculative lending and basically have a lending for both innovation, investment and essential consumption items, we won't have the slump on the other side. We can get rid of financial instability. We can't stop financial cycles, but we can stop financial breakdown. So we should really be focusing on the instability and getting that under control. By the way, as you point to your laptop, my laptop, I have a lot of, how many computers do I have? A lot of them, but my little Surface, whatever the heck this thing is, is getting definite size envy. Because your laptop, you said is 18 something inches. 18.4 inches. 18.4 inches. You know, I don't think I've ever seen one that big, and I'll give the internet that one. All right, that's for the graphics, so it's a gaming laptop. It's basically a desktop. It probably weighs like 40 pounds. You have to- Eight kilos? Eight kilos. So you reckon eight or- Oh, wow. Okay, yeah. Okay. Eight kilos, that's, you know, you're pushing 40 pounds. You see the power supply for it? It's over there somewhere. The power supply weighs about twice as much as your laptop. Yeah, and you have to power it on with a crank. Pretty close. You have to like pull it. Is it gas powered or is it coal? Well, I think it's probably a nuclear power station inside. Nuclear, yeah. A nuclear diamond in the back there. Okay, so let me, before I forget, just let me ask you about, we've covered brilliantly the nuance disagreements you have and the wisdom you've drawn from Karl Marx, but there's also, like you mentioned in popular discourse, a kind of a distorted use of different terms, and one of them is Marxism. Yeah. Today. Is there something you could just speak to about, you know, increased use of that word and is it misused? Does it concern you that there's a lot of actually young people that say they're sort of proudly Marxist? Yeah. Are they misusing the term? They are definitely misusing the term if they don't understand the use value, exchange value dialectic I went through earlier. So if I could- And they don't. If I could just pause, the idea of socialism and Marxism as used in sort of popular lingo is basically, you know, a lot of people have a disproportionately hard life. Why can't we help them out? Why can't we be kind to our fellow man? That's a short embodiment of an idea as opposed to some super complicated, elaborate model of the economy and politics and all that kind of stuff. Yeah. I mean, we could do that by using the insights that come out of modern monetary theory, which I've confirmed just using my simple Minsky models. And that is that, to use the term, you see a feature, not a bug. A government running a deficit is a feature of a well-functioning, mixed fiat credit economy, not a bug. The government should normally run a deficit because that's how the government creates money. We've also had this obsession from mainstream economists of running a surplus, which is what caused the Great Depression. Calvin Cooler's doing it for eight years. Because of that obsession, we've cut back on social services. We've cut back on health. We've cut back on education. We've cut back on infrastructure. Now all that stuff predominantly affects the poor because the rich can afford to buy it themselves. So if we had somebody which realized that the government should run a deficit, it's a feature, not a bug, of a fiat money system. And that's where Eons made one mistake recently. Okay, but I'm not going back to first principles. That deficit enables you to provide enough of a decent standard of living for those who don't come out on top in the capitalist game. And with that, you wouldn't have the angst of the young people. Now we still have the climate parameters within which we have to survive, but a decent level of government funding would mean the angst that you get when people say, I want to be a Marxist, and they've got what I call a cardboard cutout version of Marx in their minds. That wouldn't be happening. So it's potential to have a good society where the government runs a deficit that finances the needs of the poor, where the rich get enough to indulge and take care of themselves. And you don't get this breakdown. If you try to cause the government running a surplus, then the burden of that is borne by the poor, middle class and poor, and that will lead to the angst we're now seeing. Beautiful. That was a beautiful whirlwind exploration of all of economics and economics history. Let me ask you, you tweeted, I think, we are the opposite of ants, individually intelligent, collectively stupid. We need to develop systems thinking fast to counter our limitations. That's really interesting. Do you really believe we're individually intelligent and collectively stupid? I do. Can you elaborate on, I mean, some of that is just cheeky tweets, but... It's a cheeky tweet I've had in my mind for a long time. It's just, it's one that actually went moderately viral, not enough, but moderately viral for me. But nevertheless, what if you could analyze it as if it's some deep, profound statement you made in a book? Well, the reason is that we are incredibly individually intelligent. Things like these devices we're playing with now. That's the creation of individual minds. Creative individual mind and a collective labor over centuries that led to this level of technology. And that has to be respected. It's incredible stuff. But at the same time, I think what humans are, if you want to distinguish humans from other species on the planet, we don't weave webs, we don't make bird calls. What we do is we share beliefs. You don't think that's a catalyst for intelligence? Yeah, it is a catalyst. But what it means is we can delude ourselves as much as we can inform ourselves. So because we share beliefs, we can do things in a collective way. And if we believe that if we take the incantations of the witch doctors and we happen to have a couple of spears and things, we can go and attack the local tribe of lions and drive them out, and we become the dominant species. So it works at the stage where we were in competition with other species on the planet. Now that we're the dominant species, then our beliefs get in the way. You agree with Einstein who said there are only two things that are infinite, the universe and human stupidity. And he wasn't sure about the universe. And he wasn't sure about the universe, right. That's right, he wasn't sure about the universe. Yeah, so you think that the collective, I mean, there's an infinity to the destructive and the stupid, the inhumane that's possible when we humans get together. But it feels like there's more trajectories, there's more possibility for creation. There are. I think that's why we have to, I say if we were built around the idea that our role as a species is to maintain and extend life on the planet, and if not find it elsewhere, then seed it elsewhere. Then that is a vision which makes us creative and confines the worst elements of our capacities to share beliefs. So that's what my hope is, that we'll reach that stage. But I think we've overshot it so badly that my real fear is we'll end up blaming technology for the type of world we find ourselves living in in the next 20 to 50 years. So you think technology is going to be part of the solution? Part of the solution, yeah. But if we go through and blame it, which is quite possible, we'll blame the technology rather than blaming too much of the technology. And the too much comes down to what economists have told us, that we can just continue consuming infinitely on a finite planet. And Kenneth Boulding said that beautifully. If somebody believes that you can have exponential growth on a finite planet, they're either mad or they're an economist. So you made a long journey, for which I'm deeply honored, from this distant place. The activities. You've got to go there one day, you'd enjoy it. I will. I'm afraid if I go there, I will stay forever. And so... No, it's a bit too... There's more vitality back in this economy, so you'd come back. Okay, maybe. You know, I'm not a fan of the economy or money or any of that nature calls me. Let me... So I'm honored that you make that trip. You've also said that while you're here in Austin, you're going to go to this American factory that makes cars here in Austin, and also visit Starbase. So let me ask you about expanding out into the universe. Is that something that excites you? You mentioned about the economics of it. Do you think... What do you think Marx would think about this? Economically speaking, what is this? Is it a good thing? I think it's vital. We can have capitalism in outer space far more successfully than we can have it on the planet because we don't face... When we dump the waste, it ends up in the sun. Not a problem. So it means the potential... We don't undermine our own productive capacity if we're doing it in outer space. So the destructive element of waste has a lesser impact in outer space. Far less, yeah. I mean, who cares if we throw a bit of our iron back into the sun again? It'd take a fair bit of it to turn it into a... What would be the next stage, it'd be a red giant. And we have to get away because if there's a red giant at some stage, the sun will head out past the orbit of Mars, I think, certainly past the orbit of Earth. So to have the longevity of not just human life, but life that evolved on this planet, we have to be able to take it off planet ultimately. So if you think in the really long term, then it's our responsibility, if we're going to maintain life, is to establish life off the planet. What do you think about robots and AI as part of the expanding out into the universe? Oh yeah, we have to. I mean, that ends labor. You can't go for... Your daddly jaunt can't be from here to the asteroid belt and back again for dinner with your family. So production would be entirely mechanized. There'd have to be a handful of people who service the machines. So it's about production and automation. What about elements of consciousness that make humans so special? What about that persisting within the machine? I mean, I'm still a skeptic about us ever being able to create a machine which is truly conscious. If I can throw my... It's only two cents worth. That would really piss off Karl Marx, by the way, if we create machines that are conscious. Exactly. This is actually part of the... There's two good logical arguments against the labor theory of value. One of what it becomes, machines become intelligent. And the other was that if the declining rate of profit applies in socialism, it'll apply as a rate of accumulation... Sorry, in capitalism, it'll apply as a rate of socialism as well. A guy called Khalid made that argument. So his argument was just unsound. But yeah, intelligent machines would completely screw Marx up. Do you not like that world where machines have not only intelligence, but consciousness as well? Yeah. I know that's one of your interests and one of your potential endeavors. And the Kurzweil idea that there's some singularity we're approaching as we just get increasing processing power. It's not processing power, it's imagination. And I think... Whatever the heck that means. Huh? Whatever the heck that means, yeah. I mean, you would have had imaginative insights. I mean, your papers on like in motor... In automating motoring between the hyper-intelligent machine or the machine-human interface where the standards can be lower for the machine and higher for the human. That's an insight you would have had at some point, and then you've worked it further. So I've had insights like that as well, and I have no idea where they come from. They just hit me in the head and I write them down and they solve the problems that I didn't even know my mind was working on. So how can we get a machine to do that? I do not know the answer, but one thing I think is a potential is I think we have to create AI that has feelings, AI that wants to survive. Because if you think how our intelligence evolved, it's on this planet in a struggle between predator and prey. And intelligent became a survival technique. I find the ideas of Ernest Becker with denial of death really powerful, which is that humans not only have emotions and are trying to survive, they're able to ponder out in the distant future their mortality. And that is a driving force for even greater creation that animals are able to do, more primitive animals. And so there is some element where I agree with you. I think for AI systems to have something like consciousness, they have to fear their mortality. Exactly. And I think that's, if you do it then, you can't produce an AI whose behavior you can control. I mean, when you have kids, you can't control their behavior. That's the trade-off. You give birth to an anarchist. One of my favorite instances in my family life is one of my, I like all my nieces and nephews, but one's got a real quirk to her. And I was standing over her cot when she was literally like about six months old and she was gurgling away to herself. And her father waved his finger and said, stop making that noise. And this little six-month-old kid goes, and I said, boy, you're going to have issues with that one, mate. Yeah. Anarchist was born. Yeah. And so you can't control this life you give birth to. And that's, I think, the threat of AI. That's terrifying and exciting. It is. And I think we should take that risk at some stage. But I think to do it with what actually let artificial intelligence involve in this environment in which it fears its own death. Yeah. Yeah. I think there's a lot of beauty there, but there's also a lot of destruction that's possible. So you have to be extremely careful. That's kind of the cutting edge of which we often operate as a humanity. Let me ask you for advice. Can you give advice to young people in high school and college? Maybe they're interested in economics. Maybe they have other career ideas. What advice would you give them about a career they can have that they can be proud of or a life they can be proud of? Mainly in a career, I say don't do an economics degree. I say if you... There's a little book... Econ Comics. Econ Comics, Taking the Con out of Economics. So they should start with that and then say screw it to an economics degree. Yeah, because what you learn is an obsolete technology. Learning economics at a university is like learning to make astronomy. Okay? Universe-centric equilibrium, epicycles being added to make your models fit the data. So it's not that economics is not a discipline worth deeply studying. It's that the university education around economics is bad. So I'd say learn system dynamics. Do a course in system dynamics, which you can apply in any field, and then apply what you learn out of system dynamics to the issues of economics, if that's what interests you. So get a sort of base engineering education. A base engineering education. That is far better than doing an economics degree. In terms of life, my life is pretty chaotic in many, many ways. My friends and family will tell me that at every opportunity. But the thing is, I once had a... I'll tell you an example of a really funny incident that occurred to me, because I led this student revolt at Sydney University, as I mentioned, when I was 20 years old. And then in my... I think about 28 or so, I went to a restaurant one night and I found a bunch of guys, all guys, who'd done accounting at the university, but also had been part of the student revolt. So they hadn't seen me for about a decade and they said, what have you been doing, Steve? And I talked about what I'd done. So I'd been a school teacher for a while. I then worked in overseas aid. I was doing computer programming at the time and I'd forgotten what else I was doing at that point. So I explained it to all of them. And they were at a Bucks night, one of them having a wedding coming up the next week. And one of them said, I wish I'd done that. And there was silence around the table, it was obviously silent agreement. And I looked at them and said, hang on guys, look at the downside of my life. You know, like, you're getting married, I don't have a girlfriend right now. You've all got secure jobs, I'm unemployed, okay. You own a house, I haven't even got a car, you know, look at the downside of my life. And the bloke was the kingpin of that group, a very innovative bunch of guys in the student revolt. And he said, Steve, we would still all rather have done what you have done. And they did accounting because it was safe. Always get a job, they were bored shitless. Did you have a sense that the chaos you're always jumping into was dangerous or was it just the pull of it that... I simply couldn't not do it. It was part of me that I couldn't swallow this economic stuff. Once I was exposed to why it was so wrong, then I was on a crusade to make it right. And that's been part of my nature all through my life, I don't know why. So it wasn't that I made a choice to do it, it's that I couldn't be true to myself without doing it. And I find a lot of people get caught in a life where they're doing it because it works for some financial or other reason, but they're not being true to themselves. And as messy as my life is, as much shit I've got myself caught up in, and there's a lot of that in my personal and financial life right now, which is a pain in the ass. I would rather have had that nature than not. You would rather take the pain in the ass than not. Let me ask a dark question. What's the darkest place you've ever gone to in your mind? So in all that rollercoaster of life, have there been periods where it's been really... I've had to cope with depression in the last five years since I started reading Neoclassical Economists on Climate Change. Sorry to interrupt. I'll come back to that one. So that's where my wife's going to come into this story. So I was reading Richard Toll, a paper from 2009 called The Economics of Climate Change, Journal of Economic Perspectives, I think. And I read this section where he says that one of the ways they tried to calibrate what climate change was due is they assumed that the relationship between GDP and temperature over space would apply over time as well. And I read that and thought, that is so fucking stupid. Because all it's saying is that if there's a 10 degree temperature difference between New York and Florida and a 20% difference in income, then a 10 degree increase in temperature will cause GDP to fall by 20%. It is so insanely stupid. So when I read that line, I just did this. I was in shock at how stupid it was. My wife, who's Thai and brings in treats for me all day, walks into the room and she speaks in a staccato English and says to me, why are you like this? And I said, I'm just doing this work on climate change. And she interrupts me and says, oh, why you do that stuff? Nobody's interested in climate change. You can't do anything to change it. If we die, we die. And that's perfect Buddhist grounding. And I thought, well, I can't argue with her again. So that sort of stopped me on the depression. But that's the darkest point when I looked at it and I thought that this arrogance, this stupidity, this humbug in the economists meant that we were potentially jeopardizing the lives of billions of people. And Christ knows how many other life forms. And having that knowledge is the most depressing experience of my life. That ideas, simple models combined with arrogance can lead to the potential destruction of human civilization. That was a very heavy. And then your wife came in with... And broke me out of it. Nature wins in the end. Yeah. And that's sort of accept the flow of life. You should really enjoy that book, The Earth Abides, because it's got that same beautiful sense to it. Life will survive whatever we do. I mean, they talk about the people... I was actually talking with a good mate of mine, an ex-geologist, and he's now a professor of economics. And he said as a geologist, he really hated people talking about the Anthropocene Epoch. And I said, well, it shouldn't be the Anthropocene Epoch. It'll be the Anthropocene Event. Anthropocene Epoch is millions of years and it'd be a huge period of life on the planet. And we might be snuffed out in 10,000 years of human civilization. And that's not much slower than the meteors wiping out the dinosaurs. The dinosaurs lasted for a long time after that event. So we're like, we'd just be a layer in the surface of the planet with plastics and strange metals like that at some point. So we're just an... Life will abide. Life will survive us. But there's so much life we're going to take down with us in this whole period. And there's so many of our own lives we're going to terminate for no good reason. I'm looking at this Richard Tull character. I'll definitely have to look at some of his papers. It does look like, boy, is he oversimplifying and do a lot of people... Oh my God. Check his one on the Anthro... on how good it'll be to lose AMOC. That said, I'm going to approach all of these topics with humility. And I would like to have some conversations if people can recommend. My default position is always with the scientists. But even above that, my default position is with those who are humble versus those who are arrogant. Yeah. This idea that because you're a quote unquote expert, you deserve to have arrogance is a silly idea to me. Again, going to the broader view of life on Earth, nature. Nature's the only one that gets to be arrogant and it chooses not to. So let me ask you about love. What role does love play in this whole thing? Did Karl Marx have a model for that? Karl Marx was madly in love with Geneva on West Island and wrote a love poetry to her long before he wrote Das Kapital. And he was infatuated with her. They ended up also impregnating his housekeeper. So there's a son of Karl Marx who was the son of the housekeeper, not the Jenny. There are numerous daughters. So he had a complicated view of love. Oh yeah. There's a dialectic on love there. He had an idealistic view with Jenny. And he was rejected because he wasn't... not by Jenny. She was madly in love with him as well. So it was a real passionate love affair from the very outset. But then of course you have children, lots of them die. There's a huge amount of tragedy in his life as well. He and Jenny were forced out of Chelsea by a cholera epidemic. My vision for London back in the 1850s and 60s was Calcutta in the 1970s. That's really what life was like. So there's a lot of hardship in his life as well. And he was always poor. So only Ingalls kept him alive financially. He applied for one job outside of... he never got an academic job. He was pushed out of Prussia as a newspaper author. But he also applied for a job as a clerk in the British railway system and was turned down because they couldn't read his handwriting. So I think I'm a bit similar there. So yeah, there's a lot of love and passion. But in general, what do you think is the role of love in the human condition? It's vital. It's, I mean, that feeling of passionate desire and respect for somebody else. And there's perverted forms of love as well, so I'll leave that out. But somebody having a really deep bond which goes beyond just sexual attraction. I've had that four or five times in my life with different women at different times. And I've stuffed up the most important one very early on. That feeling is incredible. And you couldn't have life worth living without that. So it's an essential part of who we are. But what we have to do is to transfer it not just to the rest of our species, but to all the species. And that's, I think, what's vital. And how do we maintain that over generations? And I think that idea that we can actually hang on to that general sense of respect and not lose it again. Because the amount of life we've terminated on this planet, the warlike side of humanity, that is too much of a defining feature of our species. It's the opposite of love. It's hate. But it's pleasure in inflicting pain on others. When you see people killing others in a warlike environment, they're enjoying themselves. It's rarely, sometimes it's self-defense. But when you've spoken to people who've been involved in combat and been involved in riots and said, when you see somebody rioting, bashing people up, they're enjoying themselves. It's not anger they're feeling, it's pleasure. There's a dark aspect to human nature. Very dark. But there's also the capacity to rise above that. And I think, like I put this on a spectrum, between chimpanzees at one extreme and bonobos at the other. We're too close to the chimpanzees. And bonobos are just having fun, having lots of sex. Every time they do anything, they fuck first and do the work later, and then fuck afterwards to celebrate. Fuck first, ask questions later. It's like that Scent of a Woman, one of my favorite films, where Al Pacino gives advice to a cat. He says, when in doubt, fuck. It's good life advice, for a cat especially. We mentioned that death seems to be maybe fundamental to creating a conscious AI. Do you think about your own death? Are you afraid of it? I'm afraid of going through it. Not the other side? You're not afraid of being on the other side? I don't think there is another side. I'm agnostic. I'm atheist when pressed, and agnostic. The one thing that I think I can understand why religion exists is that the whole thing that something exists is itself a dilemma. You have to take on faith that reality exists, whether it's a simulation or actual reality, it exists. That itself can't be explained in any scientific manner. You can talk about anti-protons and protons and the sum being zero and so on, but why did it even happen in the first place? You simply have to take on faith. There was darkness before, and there's darkness after. I don't know if you're going to be alive on the other side of that darkness. I think individually, no, but the way you can live on is by what you do to human consciousness. How do you hope people remember you? As someone who managed to integrate economics with an appreciation for life. Well I have to say, as a bit of a callback, you're one deadly bastard. It's a huge honor that you would come down and talk to me. You're a brilliant person, you're a hilarious person. The humility shines through, the brilliance shines through. Thank you so much for spending this time. Well thank you, Alex. You do the same for humanity. When I saw that email from you, my eyes popped out on my head. You should hold your judgment. I got to show you the sex dungeon I have. I'm waiting for an invitation. I'll send my wife over. Awesome. Can't wait. All right. Okay, mate. That wraps up this conversation with Steve Keen. To support this podcast, please check out our sponsors in the description. And now let me leave you with some words from Karl Marx. To be radical is to grasp things at their root. Thank you for listening, and hope to see you next time.