Episode 04: Building real world economics with Steve Keen

00:00:04:

00:00:15: This is what we're saying around the world, virtually everyone who's in power.

00:00:21: has read and swallowed an economics textbook to some extent, And they accept the superficial simplified stuff They learn in first year.

00:00:28: Then there are advised by people who've done PhDs... ...and think that though they know their complexities.

00:00:34: But once you do the PhD's Are ones never had a revelation That I have.

00:00:39: Just think theory is all sound.

00:00:40: So end up with people In politics imposing neoclassical ideas Is what advanced economics supported by people who claim to be experts, but unlike me they haven't been exposed to the rotten underbelly and end up defending this area when we should reject it.

00:00:59: Hello

00:00:59: and welcome to Invisible Handcuffs a podcast that seeks to expose economic ideology underpinning our crisis and explore ways we can free ourselves from its chains.

00:01:10: My name is Katie Shields.

00:01:12: I'm a recovering mainstream economist and your hosts.

00:01:15: My guest this week is Steve Keane, he's a prolific writer teacher blogger and vlogger known as one of few economists to have predicted the Today, you're most likely to find Steve on YouTube or one of his weekly online courses talking about the crisis of capitalism as well as the new real-world economics that Steve is trying to build.

00:01:42: We had this discussion just after Steve's seventy third birthday and in the same week that he appeared on The Diary Of A CEO an episode so far garnered almost eight million views.

00:01:52: So I was delighted to accept my invite at least for now.

00:01:56: more modest project I first came across Steve's work when i was researching why the world had ignored the two study, The Limits to Growth.

00:02:04: Steve hadn't covered deep flaws in climate economics – the strand of mainstream economics used by governments around the world.

00:02:18: William Nordhuis was also one of the core critics of The Limits to Growth.

00:02:22: But while that study had warned a civilisational collapse this century, Nordhuis' own model effectively predicted the exact opposite.

00:02:32: And yet it would be his model that set a template for climate economics, with Steve and I agreeing.

00:02:36: this is one of the core reasons we've had decades of ongoing delay in tackling our crisis.

00:02:42: We talk about why economists prefer that story.

00:02:46: The one capitalism will always save us, particularly technology Even as they continue to exclude energy and feedback loops from environmental degradation into their models, we also discuss what led Steve to reject mainstream economics.

00:03:00: With Steve explaining similar to John Harvey in episode two that it was an encounter with a non-mainstream teacher That let him down a rabbit hole to uncovering more and more flaws In mainstream thinking.

00:03:12: there is a phrase about mainstream economics And I don't know who.

00:03:15: this attributes you too but It goes.

00:03:17: You have to be smart enough to understand it, but dumb enough to believe.

00:03:20: Dave is one of few economists who really has deeply engaged with mainstream thinking.

00:03:25: He understands that arguably better than anyone studying or teaching today.

00:03:30: he's not only a talented mathematician But actually reads the underlying text knows the history engages with the models and unpicks their flawed methodologies.

00:03:40: I think it's quite telling that despite the many flaws he has exposed, not just on energy and climate but also as regards money and debt –the core reasons why most economists fail to foresee The Last Crash–and are arguably failing to foresee the next one- you'd be hard pressed to find critiques of Steve in the mainstream And that is a point we're trying to make with this series because they don't have to.

00:04:01: They are the dominant thought school But….

00:04:03: Their flawed models have real world consequences.

00:04:06: A bit about health warning This interview gets slightly technical in places with Steve discussing some of the maths both behind those mainstream models, as well as the alternative economics that he is building.

00:04:16: He even uses a software he's developed to explain his approach.

00:04:19: if you do wish to engage us at.

00:04:21: You Will Need To Watch That over on YouTube at Invisible Stroke Handcuffs.

00:04:25: I'll also include links to Steve's Patreon site and his online courses.

00:04:33: If this episode leaves you with more questions than answers, then do feel free to leave a comment on whichever platform your viewing or listening to us on.

00:04:39: Or sign up and subscribe too as at invisiblehandcuffs.com where you can also comment in every episode And receive new episodes and articles and other materials that we're producing straight-to-your inbox.

00:04:50: With that please join me in welcoming economist Steve Keane.

00:04:54: Well welcome Steve.

00:04:56: Thank You for joining us!

00:04:58: Also happy belated birthday.

00:05:02: I wish i could reverse the digits.

00:05:04: That'd be one wish for my birthday!

00:05:08: But yeah, we were just talking offline there and this has been a very busy week for you.

00:05:14: so thankyou for taking time to join.

00:05:17: We've spoken about what we're doing but maybe if can start with an answer on economics?

00:05:24: For our audience, can you tell me what kind of economist do are?

00:05:28: How would you describe the economics that... Well I

00:05:30: literally introduced myself as an anti-economist because i'm so disgusted with a state of economics.

00:05:35: That don't want to be identified whether even though I am professor of Economics So The dominant strand of economics in my opinion should have been terminated at least sixty years ago and preferably Even a hundred years ago Because anomalies kept on mounting up against it.

00:05:53: And rather than the theory changing to cope with anomalies, it basically ignored them or became even more distorted.

00:06:00: To work its way around that and consequently you have a paradigm which is extremely complicated... ...and fails to see major events in the economy.. ..and leaves out the major factors that make the economy change in first instance.

00:06:15: So there are two extremes if your like in terms of ideology amongst Approaches to economics because economics is characterized by lots of difference what they call schools of thought which have totally different foundations and, And different objectives too.

00:06:31: You got Marxist at one end who think that capitalism Is there to usher in socialism?

00:06:37: Um you've got Austrians on the other end thinking capitalism has already a utopia.

00:06:42: why would you want to change it?

00:06:44: uh...and then the neoclassicals are the dominant group are similar to the Austrians, but they take a mathematical approach.

00:06:50: that's about the only difference between Austrian and Neoclassicals.

00:06:55: And then my school of thought is called post-Keynesian—and I think it was an inappropriate label because it started with Keynes —but there were many other influences coming through... It doesn't really tell you what we do…I'd call it realist economics because people who end up in this particular school or people have been stuck in departments radical Marxists and conservative Austrians.

00:07:19: For God's sake, let us just describe the system we are in.

00:07:22: Let us get to description right

00:07:23: first.".

00:07:24: So a level of pragmatism applies for this school-of thought that I am part of…and it is where –I think only will hope economic theory is to expand a pragmatic approach.

00:07:34: saying you describe how the economy operates this ideological melange.

00:07:42: And that's why economics is so compelling, but also so frustrating.

00:07:48: Yeah and that's part of the reason we're doing it.

00:07:51: You did engage though with what we call neoclassical economics or mainstream economics today.

00:07:58: How did you get started?

00:07:59: And maybe if you can briefly, and I know you've probably told others this but for our audience briefly sort of describe what was your kind of moment where you just realized that it wasn't the right...

00:08:08: There was a moment.

00:08:09: there's a break in it.

00:08:11: remember where i was on WhatIwasDoingAtTheTimeandthat is that I'd done economics at school In the nineteen sixties sixty-eight sixty eight or sixty nine and seventy.

00:08:22: The concepts You're expected to understand were more complex more advanced back at school in those days, and they tend to be universities.

00:08:30: And that's partly because the actual concepts themselves are false.

00:08:34: but we learned things were how economists derive The idea of demand curves.

00:08:40: using what?

00:08:40: They call indifference curves and have their derived.

00:08:43: What they called production function is using icicle.

00:08:45: once all that stuff We did it school and I wanted do want to make sure into Is zealot for a market economy Because The theory ends up saying that you maximise social utility while minimising the cost of producing the goods and services involved.

00:09:03: So it's a welfare-maximising system subject to constraints, also I mean its a meritocracy.

00:09:09: so everybody gets paid their marginal product which is sort individual contribution to production And it reaches equilibrium.

00:09:16: That must be good thing eh?

00:09:18: Isn't equilibrium an exciting place to be!

00:09:21: All these concepts make economists as outlets for their vision and then they, the way that approach it is.

00:09:27: They want to change the elements of the real world than aren't like a

00:09:30: textbook.".

00:09:31: And that's sort of thing that happens.

00:09:32: so I remember for example i wrote a student essay which has been lost thank god where i said It would be great idea to abolish trade unions and abolish monopolies okay?

00:09:43: That's the sort of mindset it gives you.

00:09:45: Then in July...I think of, uh, nineteen seventy-one.

00:09:50: We had a new lecturer for the microeconomics course

00:09:54: and you just explained difference between micro then and macro?

00:09:56: Micro

00:09:57: is supposed to describe their behavior with individuals or firms whereas macro's are supposed to be about the emergent behavior in the entire system of the economy.

00:10:06: so micro talks about marginal cost and marginal revenue and marginal utility And then macro as opposed to being about aggregate demand, aggregating income prices inflation et cetera, etc.

00:10:18: Okay so the micro course.

00:10:20: we had a new lecturer Frank Stillwell who's still a good friend and he in doing his PhD started to break away from the theory.

00:10:30: So he taught us some stuff on that first year course.

00:10:32: you don't normally get taught And what he taught was called The Theory of Second Best.

00:10:37: This is actually a conventional economic theorem.

00:10:40: I think one of the people got a Nobel Prize for their work.

00:10:45: they did, Lancaster and somebody else.

00:10:48: And what that showed was if you're using conventional economic theory—you took looking at it —the example he gave is The Wage Bargain.

00:10:55: So the conventional theories says the best outcome for everybody are atomistic employers as we used to call them.

00:11:02: so no employer associations or trade union but then get competitive market demand supply which will give us Workers get paid their marginal products and you reach equilibrium.

00:11:14: Okay now But what do we would watch?

00:11:17: You could deal with the conventional theory or show that there's a trade union What would happen is that the wage would be higher on level of employment will be lower, okay.

00:11:25: So that's why your anti-trade Union.

00:11:28: Now what Frank showed in that lecture was that when you include this as monopoly buyer of labor As well as a monopoly seller of Labor then you get to The point.

00:11:39: if equilibrium isn't given by The equality of supply and demand as it is in the conventional theory.

00:11:45: It's given by what we call a marginal revenue product on motion, marginal social products curves And its actually indeterminate.

00:11:52: there are range of outcomes between workers getting alot and capitalists getting alot.

00:11:58: If you abolish one or other You make which situation worse In terms of social welfare.

00:12:04: So if your two steps from economic nirvana Then taking one step towards makes things worst And I remember just being in shock when that was said to me, because they thought it's crazy.

00:12:16: Because the underlying theory says you best to abolish trade unions and monopolies... When you take into account the realistic fact there are both employer associations and trade unions, abolish one or other and make things worse.

00:12:30: so the only way he can actually make thing better is change everything different about real world into textbook simultaneously although this is crazy!

00:12:39: check my textbook, there was nothing about it in the textbook we were using.

00:12:42: I went down to the library to read the original paper because at that stage i started studying mathematics so the mathematics wasn't particularly a challenge for me.

00:12:50: and as if makes sense this is realistic why am not being taught about it?

00:12:53: And then I started distrusting textbooks from that very point.

00:12:57: Then I started looking through journals and found what's called The Capital Controversy Debates.

00:13:03: This also something I hadn't heard of.

00:13:05: That basically said conflict, a theoretical conflict between Cambridge University in England and MIT in Cambridge United States.

00:13:17: This is called the Cambridge Controversies for that reason.

00:13:20: And people in UK were criticising this theory and the people at MIT were defending it.

00:13:26: The paper I found was one by Paul Samuelson who's probably most important neoclassical economist of history on his impact upon the discipline And the paper was called The Summing Up, and he actually conceded defeat.

00:13:41: Okay?

00:13:42: Now this is... I could cover the story as to why but it's quite remarkable.

00:13:45: you find a line says if all this makes us make people nostalgic for the old-time parables of neoclassical thought we must remind ourselves that scholars are not born to live an easy existence.

00:13:56: We must appraise and respect the facts of life!

00:13:58: And i thought fantastic now let's read his textbook.

00:14:03: So in he wrote that paper in nineteen sixty six.

00:14:05: I think i had the nineteen seventy version of the textbook, not a mention.

00:14:10: I'm being lied to!

00:14:12: The theory that it gets...the sip official stuff people get taught in conventional economic textbooks is leaving out all these complexities which undermine the theory.

00:14:22: so thats when I became broke away and went from being believer in neoclassical theory into an absolutely strident critic about two weeks.

00:14:33: And Samuilson, I think if i recall correctly isn't the quote...I don't care who's the president of United States.

00:14:39: As long as I write The Textbook because it's attributed to SamuILson?

00:14:42: Exactly

00:14:43: he wrote that in a preface to a teacher manual that accompanied his textbook and said because he mentioned a poet then says some scholar may have been.

00:14:53: I remarked that you know yeah..i dont' care Who writes the Laws.

00:14:57: as Long as I Write the Economics Textbooks and thats true.

00:15:00: this is what we're seeing around.

00:15:03: Virtually everyone who's in power, with the exception of Donald Trump has read and swallowed an economics textbook to some extent.

00:15:13: And they accept this superficial simplified stuff that they learn first year... ...and then there are advised by.

00:15:18: people have done PhDs….

00:15:20: …they know their complexities but those who did the PhDs were ones never had the revelation I had.. ..and just think the theory is all sound!

00:15:29: So you end up with a few people in politics imposing neoclassical ideas is what they think as advanced economics and their supported by people who claim to be experts but unlike me, that haven't been exposed the rotten underbelly.

00:15:45: And then end up defending the theory when I should be rejecting it.

00:15:49: Yeah very much.

00:15:50: a thesis of this project I think about seventy percent, i read somewhere of decision makers will have done some kind of introductory course in economics and like you see it's not what i discovered as well.

00:16:03: It's not that economics... You sort-of start with a basic simplified picture.

00:16:11: seems to happen is that you start with a basic picture and then use more and more maths, and specialise in an narrower way.

00:16:17: And never really gain the broader...

00:16:20: It's quite complex process.

00:16:22: it goes on because if anything I remember objecting into assumptions like perfect competition.

00:16:28: my first year lectures once i become a rebel.

00:16:30: so no its a simplifying assumption.

00:16:32: don't worry drop it at future level.

00:16:34: So keep ongoing.

00:16:35: You'll get a more realistic theory.

00:16:37: but reality attempts they made to prove various core propositions in the theory failed.

00:16:45: I mean, it's all nonsense.

00:16:47: mathematics look sophisticated but actually had an anomaly that couldn't solve and then make a set of crazy assumptions to get over there... And this is what happened.

00:16:56: so the assumption should be in first year are mild compared with garbage expected to assume in subsequent years.

00:17:04: But once you've been conditioned believe its describing perfect system people become anew.

00:17:09: or do the fact they're making crazy assumptions to get this idea of perfection.

00:17:13: Yeah, I'd like to go into a little bit more especially how it impacts climate economics which is where i first came across your work and realised that's quite a technical conversation we are having in our...I'm struggling with myself on how we communicate problematic these kind of fixation on equilibrium The bit of the economy that economists I think miss most, which is the planet and energy.

00:17:41: So

00:17:42: can you help our listeners understand how economists think about energy?

00:17:50: or perhaps don't think about what your contribution to this has been?

00:17:55: Yeah they pay no attention to an energy at all.

00:17:58: And these are because... They used have some understanding back when computable general equilibrium models.

00:18:04: They've abandoned that now and they use what's called dynamic stochastic general equilibrium model, where they go from having like a hundred commodities to single commodity through time – you know?

00:18:13: And then they see equilibrium through time instead….

00:18:16: That work means it doesn't even imagine how production occurs.

00:18:23: but their production system says you combine capital on labour in the factory with technology.

00:18:30: Okay, now there's no inputs from the natural world in that assumption and they don't see any problem with that.

00:18:36: but when they do It include energy.

00:18:39: They say well maybe we should take a look at energy.

00:18:42: okay So they tack energy on.

00:18:44: I have capital as an input.

00:18:45: labor is an important energies and then put other than This.

00:18:50: this is a mathematical trick of raising The Inputs to a powering arc squaring or cubing all that sort of thing.

00:18:58: But they they do it in such a way that the exponent is equal to the share that industry has in national income.

00:19:06: So when they just do labor and capital, they give labor at point seven coefficient and capital of point three.

00:19:14: And what that says is one percent change In Labor will cause zero point seven percent Change in output.

00:19:23: then a one-percent change in Capital will causes zero point three percent change in output, but when they include energy as well.

00:19:29: They slice the energy off from capital and say capital is now at zero point two five.

00:19:35: Energy is zero point fives.

00:19:37: what that says is a ten percent decrease in energy will reduce GDP by.

00:19:44: was it with zero point five percent?

00:19:47: So energy's pretty unimportant and I literally say And production is quite insensitive to energy.

00:19:54: Nothing could be

00:19:55: so... So this is coming back, too what you're describing there as I think we learn in our first year economics the Cobb-Douglas Production Function right where you

00:20:03: have capital

00:20:04: and you have labour and these combine together or mix them up then get output?

00:20:09: And that capital because i think it's important understand which a K can remember from my equations.

00:20:15: It's always for me a little bit unclear what that was supposed to mean, and you're saying it doesn't actually...

00:20:23: That's machinery.

00:20:24: Yeah?

00:20:24: It means machinery.

00:20:25: but they want ... A fasts that goes right back to Riccardo or does not start with the neoclassicals as starts with Riccato is to trivialize capital and to confuse physical capital with monetary capital.

00:20:42: okay now monetary capitol I can use one hundred bucks you know, buy a bicycle or I can use one hundred bucks and go for trip to some other.

00:20:51: You could use money for any purpose at all.

00:20:53: it's funnable.

00:20:54: they treat physical capital the same way.

00:20:56: so he can move physical capital from one industry to another without loss.

00:21:00: now that's nonsense.

00:21:01: And thats' one of essential failings in neoclassical economics.

00:21:03: you cant't move capitol From One Industry To Another Even The Way They Define.

00:21:09: Do You Know Lionel Robbins Is A Definition Of Economics?

00:21:12: Okay,

00:21:14: it says that economics is the study of a process of satisfying ends which basically unlimited ends with scarce means.

00:21:24: Which have alternative uses?

00:21:26: Yes Now what's the alternative use for a blast

00:21:30: furnace

00:21:31: can you make a cappuccino with?

00:21:33: yeah

00:21:34: Is others.

00:21:34: if he won't actually really want to be realistic about What we're doing its machine things which do not have alternative users.

00:21:41: And therefore, you can't reallocate capital from one industry to another.

00:21:46: If you're going to change the weights of industries in your economy, you've got to invest more and money over time at less than other.

00:21:53: So it's not a question of allocation or resources which is what neoclassicals teach their students all about.

00:21:59: its creating new resource isn't letting others degrade through investment depreciation.

00:22:04: Okay so that there's complete fantasy And because that fantasy fails, you can't support the weight put on top of it.

00:22:15: Then there's just crazy assumption after crazy assumption to maintain a facade being scientific and well grounded.

00:22:23: but its all fantasy.

00:22:25: We have this kind of basic idea in neoclassical economics that the main inputs are capital and labour, and they're infinitely substitutable.

00:22:34: And apparently you can move them around all the time... ...and there's not really any concept of time in that either right?

00:22:39: So from one month to next you could go from being a wine producer to textile producer.

00:22:44: but if we come back to energy a little bit because So I got into your work.

00:22:52: I first discovered you through Your Work on Climate Economics, which we'll get to.

00:22:55: but then i started reading some of the other critiques of economics and I came across your work On Energy.

00:23:04: so as you said there energy is kind of it's missing from this model.

00:23:10: It gets mixed up in technology.

00:23:12: Can you talk a little bit, because this is something that I kind of was drilled into me at university.

00:23:19: And then later when I was doing my work on the limits to growth and I noticed that... A lot of the critics from economists were around technology.

00:23:29: The fact what model had apparently not done Was take in account technological change.

00:23:35: Technology can basically be substitute for.

00:23:39: I think as Jay Forrester put it, you can basically use technology to overcome limits indefinitely.

00:23:47: New innovations will come along.

00:23:48: whenever there's a constraint innovation we'll get rid of that constraint and then have growth.

00:23:54: And am i right in thinking the work you've done shows this isn't true?

00:24:00: They leave energy out, okay?

00:24:02: But if they do include energy then the added on as a third factor of production.

00:24:06: So you have capital times labor time's energy where their reach raised to a power of an expander that reflects the share they have in national income.

00:24:13: now when you look at that means that they're predicting like a ten percent fall and energy would cause zero point.

00:24:20: five percent falling GDP.

00:24:22: Ten percent fallen labored causes seventy percent fall in GDP.

00:24:26: so energies fairly trivial.

00:24:27: That what they end up.

00:24:28: concluding I never was satisfied with bringing energy as an extra factor of production, because what it implied was you could have a factory but workers and machines inside hit up the lighting bolt.

00:24:40: And goods will come out at the other side.

00:24:42: just didn't make sense.

00:24:44: so i thought how do you actually incorporate in there?

00:24:46: The little insight that came to me that enabled me to do it was saying labor without energy is a corpse capital without energy.

00:24:56: So rather than the energy being an additional factor of production, it's an input to both labor and capital in different forms obviously without which they can do no work.

00:25:05: Now when I do that for example uh i increased like the exponent They use for energy In their model is point zero five or point zero four.

00:25:13: Percentage of then energy makes up with GDP.

00:25:16: When I put it through this thing?

00:25:21: that you can substitute capital for labor and if you don't have enough capital, you can substituted labour.

00:25:31: No!

00:25:31: You can't.

00:25:32: there are fixed

00:25:33: technologies.".

00:25:34: And they trivialize the importance and leave it out of their models almost all the time including ones working in climate change so-called So.

00:25:43: they're completely ignorant about the role of energy.

00:25:46: What this means is to put us into a false sense.

00:25:48: security because what we tell them does not matter.

00:25:51: if energy falls by ten percent A few extra workers will make up for the loss of energy, and then there's no problem.

00:26:00: Now when you look at data it couldn't be more removed from that model.

00:26:04: so the data shows is a one-for-one link.

00:26:07: if energy goes ups, so does GDP by same percentage.

00:26:11: If Energy Goes Down So Does GDP By Same Percentage.

00:26:14: because common phenomenon to me was I wouldn't... When I plot real data get something i would not dare if I was trying just to make my case, to count con students.

00:26:26: So this is the level of energy measured in megatons of oil equivalent between nineteen seventy and two thousand twenty.

00:26:33: This has gross world products.

00:26:35: measure them two thousand fifteen American dollars that they're both rising.

00:26:39: you can see similar characteristics.

00:26:41: so then say get a huge correlation coefficient because there are going on the same direction but when you look at They're the same magnitude and that's unusual.

00:26:55: So if you get a six percent increase in energy there, where we'll probably go to five percent increase In energy down here of the COVID You have like a twelve at ten percent fall or get it a ten percent Fallen GDP ten percent fallen energy usage.

00:27:13: so they absolutely lock step with each other.

00:27:15: The correlation is crazy point eight seven now according to neoclassicals actual book should be point zero five

00:27:22: Right.

00:27:24: Yeah, it is crazy and I think in particularly talking... The reason that kind of wanted to get under the technology beat was also how it links to AI which we know as an incredible consumer of energy.

00:27:34: but just before that can you explain this solo?

00:27:40: When the Cobb Douglas production was first drafted by Cobb & Douglas since nineteen twenty-eight they fitted three time series to the Cobb Douglas function, and they had an index series for output.

00:27:56: Index Series For Capital, index Series For

00:27:58: Labor."

00:27:59: Okay?

00:27:59: And so all started at a hundred and they rose different numbers over time.

00:28:05: They claimed in that correlation coefficient was extremely high when both rising but also de-trended But didn't de-trend to actually remove the trend.

00:28:21: The trend was still there, so the correlation coefficient they got is because they hadn't properly detrended the

00:28:26: data.".

00:28:28: So if things had done their stats properly that would never have published a paper okay?

00:28:32: Okay now but nonetheless it became dominant amongst economists because It encapsulated what they thought about the distribution of income.

00:28:41: They thought workers get their marginal productive labor, mid-capitalists gets the marginal product capital and you know welfare maximizing socially optimal outcome.

00:28:53: So that's why they fell for it.

00:28:54: and then Solo said, well we've left out technology or better ring technology in.

00:28:59: And what he did was you had an output series of income An Output Series For Labor A Series For Capital.

00:29:09: But He Didn't Have Anything For Technology.

00:29:11: So He Said Well The Technology Is Going To Be The Difference Between the Two.

00:29:14: Now It Turned Out That'S What's Called The Solo Residual And the solar residual is about seventy percent of the change in output,

00:29:21: okay?

00:29:21: Completely trivializes uh...the other two inputs.

00:29:26: Sorry just to clarify.

00:29:27: so this solar residual essentially that which can't be explained by the other two yeah

00:29:31: Yeah.

00:29:31: So if I put increases there's a portion of that as attributed to labor being whatever more productive.

00:29:37: A portion of it is machinery That goes into capital.

00:29:39: and then There's another big unexplained Change.

00:29:45: And they call it the measure of their ignorance because, like...they can never measure.

00:29:48: They derive from other series.

00:29:50: so they derived the solar residual as a gap between changing income versus change in capital and change on labor.

00:29:57: And about seventy percent or more result ends up with the residual.

00:30:01: but its a fallacy Because what Solo did to that paper he said is because we don't have data technology.

00:30:10: I've got to drive And to derive it, I've got to assume that Cobb and Douglas have the exponents right.

00:30:17: Okay?

00:30:18: So from that point on nobody ever went back in check where they had the exponence because you just assumed their right.

00:30:22: then everything turns up into a solar residual.

00:30:25: Now i have gone back and checked the data and there was an exponent's wrong.

00:30:29: so its another way.

00:30:30: which theory is... It'a house of cards.

00:30:34: I didn't know that part.

00:30:36: But for me, what struck me with this if i understand correctly?

00:30:39: Because what I found strange about this residual is you already kind of had capital... If machinery is not... Machinery

00:30:46: embodies technology.

00:30:47: exactly.

00:30:47: it's stupid to separate the two out.

00:30:50: okay because the way the technologies are embodied You have a new machine which can handle wire-hagile pi levels of energy input and the technology is actually built into the machinery.

00:31:00: So we use Ks.

00:31:00: how many machines there are, but what's happening over time as the capacity of those machines to process energy is rising so that technologies actually embodied in it was no need for the solar residual.

00:31:12: my interpretation of solos residual Basically, if you assume that the technology is in the machinery then what he's missing.

00:31:19: That energy which has been the main driver right of all the industrial production we've seen it allowed us to do like You say its turned the corpse into a machine.

00:31:26: Yeah It allows us To Do The Technical Innovation But Without The Energy And The Resources You Can't

00:31:31: Do It!

00:31:31: You can't produce anything yeah.

00:31:33: and now the other thing about the solo residual.

00:31:38: When you take my argument that labor, the energy is a corpse capital of that energy as a sculpture then You're not saying the inputs are labor and capital.

00:31:46: The inputs are labour Modified by the amount of energy that work consumes over year Modified By the fraction Of That That Actually Goes Into Production.

00:31:55: And Equally For Machinery It's The Number Of Machines.

00:31:59: Have We Measured That?

00:32:00: ModifiedByTheEnergyConsumptionPerMachinePerYear ModifiedbyTheFractionOfThatThatThat's Turned into Useful Work.

00:32:07: And so when you do that, then find the so-called solar residual.

00:32:11: You can actually come out and say it's actually a contribution of energy to production... ...and then rearrange it and get the Cobb-Duckers' production function at one end times.

00:32:20: the energy throughput for representative machine in particular time….

00:32:24: …that is why we have that rising A – they are not even aware if this is what it is!

00:32:31: Yeah?

00:32:31: It saw in greens in this idea that all we need to do if we're struggling to get growth, what we need is innovation.

00:32:41: We can forget about the energy intensity of that innovation because it's not there.

00:32:46: so whatever will use AI and on the Labour side I'll be talking with a feminist economist who wants to bring us into this but also what we miss to that labour as well, or the people who are going into factories.

00:33:03: To tie this up with a very linear equilibrium way where economists look at the world and I came across your work was because you had been talking about how We should have moved away from this very linear view of the economy a long time ago, and you started talking about system dynamics which is what I discovered when I was doing my research into The Limits to Growth.

00:33:27: So can you illustrate why something like a systems dynamics approach to understanding an economy would be more helpful?

00:33:35: One way we could think about it.

00:33:37: there are two big ideas that came out in the nineteenth century equilibrium and evolution.

00:33:42: Now who on their right mind would look at a capitalist economy and see equilibrium.

00:33:50: It's anything.

00:33:50: but it's evolutionary change, and dramatic evolutionary change over time in instability that systems comes out of that.

00:33:57: so evolutionary systems don't reach equilibrium.

00:34:00: they continue changing.

00:34:01: we're always far from equilibrium.

00:34:03: So you should be EV rather than EQ coming out the nineteenth century.

00:34:12: But economists who'd locked themselves into this way thinking equilibrium their alternative to evolution and that's leaving out all the interesting stuff about capitalism, but system dynamics shows you causal relationships between one factor in another.

00:34:31: When we put a system model together what are saying is this particular flow causes this stock Causes other stocks to vary in importance and so on, and so forth.

00:34:43: So you're drawing a causal isn't just of a loop diagram It's a causal loop diagram.

00:34:49: see okay saying what causes what?

00:34:51: now What I've also worked out fairly recently is that?

00:34:55: You can get exactly the same results from system dynamics.

00:34:58: That did.

00:34:59: she could get that from taking macroeconomic definitions And turning into dynamic statements.

00:35:05: Okay having simplifying.

00:35:08: So assumptions link together the different definitions and you get The fundamental models of post-Kansy in economics.

00:35:15: Okay, maybe we can just kind of them backtrack a little bit because I know that You're working with systems dynamics.

00:35:20: now.

00:35:20: what he talked about About it is um What I found so interesting about the model when i first discovered the limits to growth And I looked at world three model.

00:35:28: It's like you say.

00:35:29: you have an actually not very complicated, not a huge number of variables but core elements of the economy and they had resources.

00:35:39: And food and population and health each were connected to each other.

00:35:44: if one part of the system changes another parts change also.

00:35:49: what you said there I find really important which for me seems to be missing again when i look at the neoclassical economics models is this difference between stocks and flows.

00:35:58: Actually, Danela Meadows said that was the thing economists don't understand.

00:36:01: is they think in flows not stocks.

00:36:04: They think of GDP rising every quarter or year and what energy has been used to produce that?

00:36:12: What problems might be building up?

00:36:14: are we improving the health of population over time with this GDP our potentially degrading long term?

00:36:21: so yeah I don't know if you can talk a little bit more Yeah, to the way that you're approaching this.

00:36:27: And maybe we can also get in here too climate economics which is where I think some of the worst examples are.

00:36:33: very linear

00:36:34: thinking comes in.

00:36:34: Absolutely worse.

00:36:35: yeah it's like.

00:36:36: i've invented a software package called Reveal and its one many system dynamics programs.

00:36:41: The unique feature has is capacity model financial flows using what be call godly tables.

00:36:46: so thats an innovation no other program have had but basic idea was showing things as flowcharts.

00:36:51: um uh... Very simple model And I don't have energy in this, but like...I can explain.

00:36:57: Energy comes out of the capital output ratio and this model that's what a capital output ratios is.

00:37:02: The inverse if efficiency with which machines turn energy into useful work So it does turn up there.

00:37:07: so i've capital determining output Output determining employment Employment attending rate of change wages Wages times labor determining profit.

00:37:17: Profit determines investment.

00:37:19: Investment determines borrowing because firms when they want to invest more than take back and repayments, they borrow money to do it.

00:37:25: They've got a pay interest which also gets deducted from profits.

00:37:30: investment.

00:37:30: net investment then leads to increase in the capital stock.

00:37:33: And if you simulate this model Then you get a process Which is non-equilibrium.

00:37:38: so?

00:37:39: This system will actually lead to a financial crisis as It happens because there's a rising level of private debt which is happening here diminishing and then rising cycles, as you can see over here.

00:37:51: And at some point the place will get a crash complete crash in the economy.

00:37:56: so that's sort of modeling I do.

00:37:59: What i think is interesting.

00:38:01: we'll show this to what extent our viewers would be able follow all important in this kind of building up the economy based on the real world, looking at what is actually happening?

00:38:17: What are the dynamic relationships between these different elements to the economy and coming up?

00:38:22: because those people that maybe have not put together you know I've done economics as unfortunately had to go through it though.

00:38:29: That line goes like this That simulation, which is what you get out of the kind of models that you do.

00:38:37: It's also not really possible if I understand correctly in the economic models that Neoclassicon has worked with because they're typically working with historical data or data across space and time pulling a trend from there.

00:38:53: so you can't get those kinds simulations on what might happen.

00:38:59: You know, historical analysis.

00:39:02: That was

00:39:02: the problem.

00:39:03: that would be good

00:39:05: okay?

00:39:05: The

00:39:05: real problem with them is they force equilibrium on the model so it happens...the equilibrium of their model is unstable.

00:39:15: Okay but this is a typical thing every time I do anything trying to find equilibrium and if i've got an unstable equilibrium They made that advice into a virtue by using it as a way of explaining the trade cycle, but without shocks.

00:39:27: their models just sit permanently in equilibrium.

00:39:31: Just got to flat line okay?

00:39:34: If you get a flat-line and your dead there's no dynamic system that does not have endogenous cycles.

00:39:41: so when you're living... Endogenous

00:39:43: meaning

00:39:43: coming from a dentist... Cycles from inside of D don't need to be shocked from outside like our.

00:39:48: circadian rhythms change or sleep rhythms change.

00:39:51: all these things were changing all And if you get a flat line at any point, well yeah.

00:39:57: You are dead okay?

00:39:58: So the idea that equilibrium rules is basically saying death rules.

00:40:02: no it doesn't.

00:40:02: life rules.

00:40:03: so life is cyclical and then the cycles turn up easily in these models because you're not trying to force an equilibrium outcome on the first instance.

00:40:11: have spoken

00:40:17: with them.

00:40:18: I've met Randers a few times, haven't met Dennis but i've met him in Sydney University back on the early two thousands and he said that when they came up to model they thought economists would really like it system dynamics because it would free them.

00:40:33: This is the wild three model, sorry I should also say throughout our Yorgenlanders and Dennis Meadows were members of a team that built the Limits

00:40:42: to Growth Model.

00:40:43: But they thought whatever economists might have thought are limits for growth.

00:40:46: he thought they'd be delighted defined but didn't see him equilibrium anymore.

00:40:50: instead got immense hostility.

00:40:52: who led the hostile fight against them was William Nordhaus.

00:40:56: Yeah, which is something that I discovered and actually what brought me to your work.

00:41:02: And this for me it's also fascinating... ...I've made this point as well when i have been asked about the works we did on uncovering their reaction to limits of growth.

00:41:12: For me too This was a new way of looking at the economy that the MIT were bringing through.

00:41:20: They weren't necessarily ideologically driven, ideologically different in the sense they cared about the world.

00:41:24: Dennis and Dinella Meadows had just spent a year travelling through India... ...they'd seen poverty, environmental degradation….

00:41:31: …they also saw environmental degradation in the United States.. ..and they did care about it!

00:41:35: And thought here's another way to look around the world and kind of naively put it out there.

00:41:40: And then we're subject to really quite awful, un-painful attacks on Danella Roosevelt quite emotionally.

00:41:49: Anne William Northhouse a famous climate economist Godfather of Climate Economics built the model that was used by the Intergovernmental Panel on Climate Change won economic equivalent of a Nobel Prize in twenty eighteen.

00:42:03: I believe What I discovered from Nordhuis is that, yes he'd been one of the economists who had most vehemently attacked The Limits to Growth.

00:42:13: Spent then about another two decades working on his alternative which was an integrated assessment model in the lingo.

00:42:21: and can you talk a little bit about what you've discovered getting into this world?

00:42:26: Oh it did absolutely trivial empirical assumptions made by Nordhaus like when i first decided to critique their work on climate change.

00:42:35: It was after I'd worked at that role of energy in production, so...I regret this now but i thought at the time that I really can't dive into this area unless I've made a positive contribution to it.

00:42:45: So once they did The Energy Logic That Was Published In Two Thousand and Nineteen with Bob Ayres And Rick Russell Standish ...And uh.. I Thought Okay Now I Can Read Them ..And What I Expected Was , I Have To Explain To The Public Why Its A Bad Idea To Use A Ramsey Growth Model.

00:43:01: This is the basis of all modern neoclassical models.

00:43:06: Is a paper in nineteen twenty eight by mathematical prodigy called Frank Ramsey and That was a model where he said what does the optimal savings level for our country?

00:43:15: So trying to work that out using Neoclassicle concepts.

00:43:18: now, that is incredibly complicated And I thought this is gonna be hard.

00:43:22: and then I read Richard tolls two thousand nine paper The economic effects of climate change.

00:43:30: And I got to one paragraph, and again i know where it was literally right here.

00:43:45: And as soon I saw that, it was in shock.

00:44:01: So I realized...I haven't even bothered explaining the technical side of DICE's model because its empirical assumptions they make are crazy.

00:44:10: and so if Ramsey Growth Model is a perfectly accurate description of capitalism The numbers made up for climate change have no bearing whatsoever on climate change.

00:44:23: They're trivial too.

00:44:26: That just horrified me.

00:44:28: you know, somebody has to warn about these bastards and as usual it's me.

00:44:34: There was a quote from your latest book which I'll put also into the notes on Patreon rebuilding economics.

00:44:43: You're right, on talking about how Neoclassical Economists review other economists' work that they read the method by which the results were derived from assumptions rather than casting a critical eye over their assumptions themselves.

00:44:56: So again you can go back to when I was doing my first dissertation in economics and looking at comparative advantage And i always trying find papers that would help me sort of get into core ideas and assumptions behind this theory of very, very complicated maths.

00:45:15: Which I had not done much in my bachelors and managed to get through it without doing too much math.

00:45:21: so... It was frustrating because that couldn't interact with this.

00:45:25: And when you talk about the work on climate economics To me When i read these papers and told probably the worst I think he came up with ten degrees of warming would be acceptable.

00:45:39: Yeah, crazy numbers

00:45:42: For me, again is that the method works and they'll put this analysis out there.

00:45:47: This paper which will then go to peer review And it would say something like these results are consistent To a confidence interval of whatever point whenever?

00:45:58: It was sound incredibly reasonable.

00:46:01: But what has happened is that a viewer has looked at the math and thought, this is good mathematical model.

00:46:07: The numbers add up And they've not looked to assumptions which as you see are nonsense.

00:46:11: You can't use historical or data

00:46:14: across space.

00:46:17: That's what their doing.

00:46:18: This is like looking at two different places in the world.

00:46:21: How does GDP affect, how does the weather basically effect economic output?

00:46:26: Also often any time where there hasn't really been a massive impact from climate change and moreover even if they're were... And this also comes back to something that Danela Meadows refused to use GDP In The World.

00:46:39: Three model for Limits To Grow because it's something that compounds lots of different things including damages we might pay in places that are being hit by climate change purely because they've had to build back, but the well-being and long term productive outcome of that economy could be massively damaged.

00:46:59: The paper that Nordhaus wrote as I understand it was measurements without data... Measurement

00:47:05: with our data?

00:47:06: Yeah he's had a hide.

00:47:07: just say there is no data behind limits for growth

00:47:11: Right, which I think gets to another.

00:47:13: And again it's a challenge just sort of explain how fundamentally problematic is that the economists take this approach.

00:47:20: because he comes back to this idea that economic neoclassical economics as method right?

00:47:25: It's applying this particular method objectively To The World Which Is Often This Form Of Regression Analysis Or Timesies Analysis Putting Together Past Trends To Sort Of Project Into The Future And what the limits of growth was about, it's looking at relations and simulating potential futures based on these relationships.

00:47:47: So there was a lot of data there but I think seemed to get Nordhaus that they hadn't used this particular method of historical

00:47:56: trends... What they had done is spent several years working with domain experts in each area as included into model Produced a set of index numbers starting in nineteen hundred going to nine ten seventy which reproduced the model and then they ran it forward.

00:48:11: So there was enormous work to work out.

00:48:12: The relations between nineteen hundred and nineteen seventy that's empirical data.

00:48:17: so as usual not houses claim is just bullshit completely false.

00:48:23: I don't think he even knows that.

00:48:24: his making fallacies because he doesn't even know when he's making absurd interpretations of climate research.

00:48:33: I think the guy has got a serious dose.

00:48:35: what's called the Dr.

00:48:36: Pangloss disease, whatever he looks at you know they all joke about his painfully optimistic and their parents decide that can't let this kid just go through life expecting everything to work out.

00:48:48: well we've gotta wake him up.

00:48:50: so give them present which is box full of horse shit okay?

00:48:54: And opens it absolutely mortified because his Christmas present is full of horseshit and he's happily digging through the horse shit.

00:49:02: And they say, what's going on?

00:49:03: I said well all this horseshit there must be a pony in here

00:49:05: somewhere.".

00:49:07: Now that's how it seems to interpret anything he reads.

00:49:15: so my favourite example was Tim Lenton's work.

00:49:26: research are leading efforts on tipping points.

00:49:29: And there's a paper in two thousand and nine, which was the survey paper that Tim did with several other people where they surveyed People On Nine Major Tipping Points of The Planet That They Thought Could Be Triggered In This Next Century.

00:49:42: And their various likelihoods.

00:49:45: Finally, the conclusion says society may be lulled into full sense security by smooth projections of damages from climate change.

00:49:53: Our work shows several tipping points which should be triggered this century.

00:49:58: The most dangerous are the Arctic summer sea ice and Greenland, but at least seven of the other nine could surprise us by having an early tipping

00:50:07: point.".

00:50:08: Well, the way that Lordhouse read that he said that... This survey found there were going to be no serious tipping points for three hundred years until temperatures risen by three degrees Celsius.

00:50:20: Now how the hell can you read what was written in that conclusion.

00:50:25: And my result is he doesn't read this stuff, he skims and looks for what he wants to

00:50:28: say.".

00:50:30: But here's writing papers—and these papers are being peer-reviewed —are getting into the public domain then used for decision making.

00:50:40: In fact I think the DICE model with the Trump administration...I don't think the EPA or environmental protection agencies is doing much anymore, but at least under Biden still they were using the dice as a monlier models to make decisions on things like carbon pricing and things like subsidies.

00:50:58: So these are... so it's not just Nordhaus.

00:51:02: I think this why i thought this quote about you know the assumptions was so important that its only neoclassical economists reviewing other neoclastical economist work and getting it through.

00:51:13: And when critiques come from outside the discipline, they are not accorded any

00:51:19: weight... They don't include criticism inside either.

00:51:22: You had Rodney, you have Pont Pindick to Canningo and quite a few others having a stand in attacking them saying that we can't use a quadratic for their damages over climate change!

00:51:34: The most recent paper that Nordhaus published I think was twenty-twenty four with Barrage.

00:51:39: We reviewed the literature and a quadratic is quite well supported.

00:51:43: So I'm sorry, can you explain what?

00:51:45: Quadratic as y equals x squared.

00:51:47: so it's the simplest.

00:51:48: like linear equation of y equals X. The simplest nonlinear equations Y equals x-squared.

00:51:53: And then the question is there's going to be a constant before that eight times x square how big is A?

00:51:59: and so What he says?

00:52:00: his damages from climate change are gonna equal very small constant.

00:52:04: That's da multiplied by the temperature change squared.

00:52:08: what he says is, for example a six degree increase in temperature will reduce GDP and twenty one hundred by I think about seven percent.

00:52:16: Okay now that means the constant is like point zero two really tiny constant claimed to have derived from empirical data.

00:52:27: but it started out weather versus GDP across the planet.

00:52:31: It's not about climate change at all.

00:52:33: so they're using a function which implies no sudden tipping points.

00:52:37: again In the manual for the Dyson in two thousand and thirteen Nordhaus said of a damage function.

00:52:43: Is it quadratic?

00:52:44: And contains no tipping points, but this is consistent with the survey by Lenton.

00:52:48: That's when I knew he had to be bullshitting because there was no way a climate scientist would say so.

00:52:53: So i went looking For the linen paper and found that then I got in touch with Tim and said you know This has got any justification?

00:53:01: He said absolutely not.

00:53:03: Maybe just to sort of also put this in context the seven percent or whether it's a three percent Or seven percent reduction in GDP by twenty one hundred is other than it would have been

00:53:13: in twenty-one hundred.

00:53:13: So yeah, It's another mythical number.

00:53:16: so it's really easy to convert into rate of growth prediction.

00:53:18: But the normal thing economists are gonna show you with their prediction Is what percentage rate of gross can I be next year?

00:53:24: What Nordhaus started doing and nobody has deviated from it the group producing these garbage papers, but they say we tell damages as a gap between two hypothetical numbers.

00:53:39: GDP in twenty one hundred without global warming and GDP in Twenty One Hundred with Global Warming.

00:53:45: They're both hypothetical who haven't happened yet okay?

00:53:49: And The idea that you can have a figure for GDP Without Global Waring is crazy because the planet we are on, the global warming has occurred.

00:53:56: so it's a crazy combination.

00:53:59: When when he first did his estimates, this is back in the paper in nineteen ninety one.

00:54:03: He said that three degrees of warming by twenty-one hundred would reduce GDP in twenty one hundred by one quarter of one percent.

00:54:10: So really like if you imagine like let's say Let's say GDP today as a hundred and GDP In Twenty one hundred it's thousand.

00:54:19: so factor of ten increase which Is The sort of rate of growth we actually experience.

00:54:24: then he saying rather than there being a thousand?

00:54:28: It'll be a nine hundred and ninety-nine point seven five.

00:54:34: So you end up with absolutely trivial predictions, so in that particular case the damage to the rate of economic growth from three degrees of global warming was about point zero two percent.

00:54:46: when we measure change in GDP measured at one decimal place this is two orders of magnitude below level you can measure.

00:54:55: he set framing Most of the neoclassicals that are following them have been stuck inside the same framing.

00:55:03: So rather than referring ensuring quality, refereeing ensures group think.

00:55:09: Yeah That's one one of the outcomes we've identified as well in this work.

00:55:15: and it's sad in a way I think because a lot of interviewing And having interviewed some environmental economists and climate economists so mainstream neoclasical for their research very committed people, very keen to do good in the world.

00:55:31: Yeah

00:55:31: that's right but they'll enter...

00:55:35: They're entering a good faith and going into a topic thinking that their getting the tools are leading cutting edge tools for this work.

00:55:44: And then we come out with outcomes like these.

00:55:47: So there is couple of things I found particularly important In revealing kind of flaws on this thinking With the Nordhaus model.

00:55:55: One thing was There no feedback GDP over time to the global warming that is taking place.

00:56:04: This what I find kind of stunning, if you use these models which are based on this idea there's some kind of optimal temperature increase because economics has also back to the Lionel Robbins quote.

00:56:18: it was about allocation of scarce resources and they're used as trade-offs.

00:56:22: so What we might spend our resources doing today to mitigate a client's climate change, that has a trade-off because maybe be doing more productive things with their time and in ten or twenty years' time when have this amazing product of economy will be much better place to tackle climate changes.

00:56:40: We'll do it then.

00:56:41: so you end up putting off...

00:56:44: Exactly!

00:56:45: ...whereas again what Climate Science would say is act early and therefore you will mitigate the worst outcomes.

00:56:53: And also, what a more stock flow kind of based look at the economy would tell us is that if we build infrastructure today... You don't wait until thirty years or so to see whether it's nuclear, solar or whatever capacity you need!

00:57:12: So for me this whole thinking has fed into delay in action, right?

00:57:21: Because this is coming out in the nineteen nineties and it very much must have coloured all of their climate negotiations as well.

00:57:27: Absolutely.

00:57:31: One thing you point your made about how sincere they are.

00:57:33: that's a problem.

00:57:35: They actually believe there doing good.

00:57:38: My next book which I hope to finish by June It will be a squeeze but The title is How Economists Will Destroy Capitalism.

00:57:46: And i start off saying don't overate sincerity.

00:57:49: The most sincere person you'll meet is somebody chasing down the whole road with an axe trying to cut your head off.

00:57:53: And so, they're the most dangerous people on the planet are people who sincerely believe something which was false and normally think about religious fanatics being in that situation.

00:58:05: but it's actually economists of the most

00:58:10: the neoclassical model, and I'm conscious as well a bit of time here.

00:58:14: So to be able talk about what you're trying do including books and other things that your working on... A final link for me it was also your work that introduced me to alternative theories around money?

00:58:26: And i don't know if there's a link but personally think so too.

00:58:31: in these cost-benefit analysis climate economists are doing because they have this idea.

00:58:38: It's a scarce resource and therefore we have to use it most productively.

00:58:43: So can you tell me how do economists or new classical economists get money wrong?

00:58:48: They

00:58:49: treat money as commodity, okay And also everybody can save the commodities simultaneously.

00:58:59: In real world money is relationship.

00:59:03: The bank has deposit account with you.

00:59:07: That's a liability the bank is required to honor.

00:59:10: If you ask for your money back out, they've got it.

00:59:11: give-it to you.

00:59:12: so these liabilities and assets Give mutual obligations And you can create mutual obligations quite easily.

00:59:21: just simply agree to taking on debt that creates money.

00:59:24: So there completely wrong about the money creation process.

00:59:27: their models Just don't make sense.

00:59:30: They're false according to accounting when you check them up with my account software so that it's completely false models, but they argue you've got to conserve this thing which is money.

00:59:42: No!

00:59:42: You gotta use the same which as money.

00:59:45: and so by conserving we haven't created enough money in that sense for

00:59:49: infrastructure.".

00:59:51: And then what their theories of global warming are doing?

00:59:56: They're saying oh don't worry about leave it for later... So I think economists really do blame them Nordhaus in particular, of course.

01:00:03: But all the cabal around him as well for delaying action on climate change because they completely misunderstand what it is.

01:00:11: and so They're telling us that You know like seven degrees of warming if you see this survey by Howard and Sylvain have neoclassical economists working on climate Change.

01:00:21: Okay So they asked there's no.

01:00:23: two thousand of them.

01:00:24: three hundred and eighty answers particular question Of what's going to be the impact of a trajectory towards seven degrees?

01:00:32: two centuries hence and the median prediction they gave was a twenty percent fall in GDP, in twenty-two hundred.

01:00:38: And the average is twenty five percent.

01:00:41: so there's saying seven degrees of warming will affect the rate of growth at GDP by just slightly more than the accuracy with which we measure change in GDP today.

01:00:52: So it's trivializing the whole thing.

01:00:53: you read climate scientists my favorite paper their resume in Ramanathan from and they say one-and-a-half degrees of your warming is dangerous.

01:01:02: So it's a labrador, so one on half as dangerous.

01:01:05: three is catastrophic and five is existential.

01:01:09: now there saying five degrees we probably won't exist as the species.

01:01:12: And here are the economists saying seven degrees will reduce the rate of economic growth by point four percent per annum.

01:01:20: And what I think is interesting as well, is how this consensus and climate consensus has remained pretty stable over time.

01:01:26: I mean, I read the first IPCC report recently because i wanted to compare Nordhaus' four degrees of warming with a First IPCC Report... ...and it was basically one degree of warming roughly by the end of the century where we should aim for.. ..and his outcome were four degrees are not really understanding the difference that can.

01:01:45: just coming back to money, because I do see this as a really central assumption.

01:01:50: And getting the sense actually more and more that this lies in part of whatever problems today—this idea that money is scarce you've got to save it!

01:02:00: In particular what we learn from neoclassical mainstream economics textbooks still today public spending, so public money.

01:02:12: If the public sector is spending then that's taking away spending that a private sector could potentially put to more productive use and I think this assumption has also built into these climate models about we shouldn't spend too much unproductively whether putting in cycle lanes or whatever.

01:02:30: because hey do something more productive over here with AI and in twenty years we'll be able to pay for fusion, so what is a better way of thinking about money?

01:02:39: Money's a promise.

01:02:41: The bank promises you take your money out on the account whenever you want it.

01:02:47: when you buy off somebody or transfer some of their money that's transferring from you to them.

01:02:57: The private sector creates money and so does the government.

01:03:00: So, the private sector create money by lending up more than it gets back in repayments... ...and the Government creates money by spending more.

01:03:09: then they get back into

01:03:09: taxation.".

01:03:11: So, a government should be running a deficit because that's how it creates fiat-backed money….

01:03:16: …and instead with this lot—because there are poor deficits–they treat their government as like household.

01:03:23: And so if a household spends more than it earns, that's going to go bankrupt guaranteed.

01:03:29: But they say well the same thing applies for government?

01:03:30: No it doesn't because the government actually creates the liabilities as the rest of us use his money.

01:03:36: and in fact one way that a government marks its territory is where its currency is accepted through trade commerce and its currency has a liability with the government.

01:03:45: So governments expand their region by expanding where their liabilities are accepted for commerce.

01:03:54: And in that case, you want the government to be creating fiat back money.

01:03:57: so it's a complete perversion.

01:04:01: now there models just completely irrelevant and elaborate.

01:04:06: well they look elaborate They're simplistic really but then ends up telling us we've got known We can't afford to spend on education health and welfare because he might run a deficit.

01:04:17: So, this ludicrous attitude means you undercut the social welfare side of government.

01:04:25: You stop producing in infrastructure and don't get pure scientific research done by trying to save money.

01:04:34: that is destroying our capacity to create productive resources over time including those which could actually address climate change?

01:04:42: And this is something that Keynes understood, right?

01:04:44: So coming back to the fact you did describe yourself as a post-Keynesian.

01:04:47: Keynes's book was called The General Theory of Employment Interest and Money.

01:04:51: Okay now he didn't handle money all that well frankly in that book.

01:04:55: But but he saw the importance of money.

01:04:57: He said what money it...the amount of money we wish to hold.

01:05:00: there's a measure how much we just trust our own expectations about the future.

01:05:05: so You had a real idea about expectations and money being and expectations which are wrong because you can't know the future.

01:05:13: So this was a large part of Keynes' argument.

01:05:16: Now, the neoclassicals couldn't understand Keynes.

01:05:20: John Hicks reinterpreted Keynes using supply and demand diagrams And that became what was called Keynesian economics in the nineteen fifties and sixties.

01:05:29: But it was complete distortion of Keyes and Hicks himself finally admitted in nineteen eighty one eighty two That his model they call the Model Of Keynes wasn't actually a model of Keyne's.

01:05:39: It Was A General Equilibrium Model he invented two years before we read any of Keynes' papers.

01:05:44: So the whole argument about it is wrong, which is one reason I invented Revell.

01:05:49: so what i've got here Is a four-sector view of the economy.

01:05:53: you have got The banks Households and Firms central bank on the treasury And this software's designed to show that What as an asset for One person has a liability?

01:06:04: For somebody else.

01:06:05: so they Have debt As an asset at the Banks for example then that is a liability of the household sector.

01:06:12: And if you have deposits, which are a liability off the banks... That's an asset for the households' sector.

01:06:20: and then if want to show how it bank lending does Then Bank Lending involves banks putting so loans dollars per year into your deposit accounts Okay?

01:06:35: They also put Loans Dollars Per Year Into Your Debt.

01:06:42: You can't get the money without agreeing to get into debt.

01:06:45: And so that's, That is created using a debit and credit approach that accountants use.

01:06:52: Okay now I'm gonna add in government sector.

01:06:55: So this shows private banks will create money if loans are positive In that model okay?

01:07:01: So it's creation of money that way.

01:07:02: But what the government does with taxation?

01:07:06: It takes money out your deposit account.

01:07:08: So you got minus tax coming outta here.

01:07:12: When you pay tax, it reduces the amount of money in your account.

01:07:17: You don't get any other compensation for it.

01:07:18: so its actually reducing your net worth.

01:07:21: So I'm just going to have this as a private sector net worth there and that's gonna reduce your net-worth minus tax.

01:07:31: The question is how does that get into the banks?

01:07:34: It has now turned up here.

01:07:36: Well theres also assets called reserves which are the bank account of private banks at the central bank and that Central Bank also has an account there, which is the treasuries.

01:07:48: That's a liability to the Central Bank in asset off-the-treasury.

01:07:52: And now if I'll just actually have The Central Bank net worth here and the Banks Net Worth up here on the treasury down Here so the tax?

01:08:02: okay tax reduces deposits.

01:08:03: it Also reduces reserves.

01:08:05: we get a minus tax here And that's because it gets transferred to the Treasury over here.

01:08:12: So what you find is taxation increases the net worth of government, okay?

01:08:18: Now nobody objects at that- Yeah Because we all know that taking tax out your account reduces your net worth and increase as governments.

01:08:25: Let us now add spending.

01:08:26: so I have Government Spending Here.

01:08:29: Then its actually a basic reverse in process.

01:08:32: You are going spend from this accounts.

01:08:34: there will be minus spent here.

01:08:36: That puts the Governments net worth down, the spending gets transferred to the reserve accounts.

01:08:44: That turns up over here and that's credited to people's deposit accounts.

01:08:48: And that means government spending increases the net-worth of the nonbank sector.

01:08:54: Now that is exactly opposite what you read in Textbook Economics.

01:08:58: It tells us if the government runs a deficit it takes money away from private sector.

01:09:02: That is one hundred percent wrong!

01:09:06: for the household sector.

01:09:07: So this is what you need to do, understand money properly and that's why I invented their software because i was so sick of the myths people were making using supply-and-demand curves trying to understand the banking system.

01:09:20: Thank You Steve.

01:09:21: we'll definitely include it in this or brings me into this different understanding of government money.

01:09:32: And also, not just that government spending is putting money into the private sector but it's a different quality... ...of spending.

01:09:40: It usually spends on things which then support the productive economy whether its helping people be healthier so they can go to work roads, whether it's cycle lanes with this kind of infrastructure.

01:09:52: Whereas the private sector?

01:09:54: who decides where the private-sector creates money and is creating money as lending?

01:09:59: I think the latest data that i saw from positive money if you follow them a think tank in based on the UK That ninety percent bank credit creation right now going to non productive economy mostly mortgages for assets, the financial sector.

01:10:16: Can you talk a little bit about?

01:10:17: because one of things that you've been famous is predicting the financial crisis?

01:10:22: It's just that private banking sector makes money by creating debt in the first instance.

01:10:28: so they want to suck us into as much debt as possible and businesses will put a limit on how much debt they'll take on because their making profitability decisions all and they have to service it over time.

01:10:46: But we'll borrow, to buy a house because we expect the house price rise And that leads to an amplifying feedback between change in credit at level of house prices.

01:10:58: That's what ends up... The banks end up financing Ponzi schemes.

01:11:01: They cause house prices to rise.

01:11:04: We borrow money from them To do It!

01:11:05: We pay their interest In the process A generally huge amount Of debt Which just makes houses more expensive.

01:11:13: So the price of houses in terms of all other goods has risen by a factor of five since nineteen seventy and that's all because of banks lending too much money to buy houses.

01:11:23: Yeah, yeah where they can get their most return.

01:11:26: I was shocked about this data as well because i was calculating it as well.

01:11:31: if you compare then with wage growth or income growth is doubled just over.

01:11:36: so we have massive wedge between cost-of housing and income.

01:11:43: And if you then add in women coming into the workforce over this time, it basically wipes out all the gains of woman entering the work force.

01:11:50: so we've been sold this great emancipation story!

01:11:54: We end up actually worse off working more doing the care-work at home done the unpaid work and also do any other work.

01:12:06: So maybe we can get on now.

01:12:07: then to what you're trying to do, because the question is so.

01:12:10: What conclusions did we draw from these critiques?

01:12:14: And your not just criticising the neoclassical economics... You are trying build this new economic.

01:12:22: You've shown me the Ravel software that you were working with but yeah.. Maybe talk a little bit more about your goals there.

01:12:31: Yeah well the whole thing is that Neoclassic Economics has to go.

01:12:46: It's as bad for the understanding of the economy, as Ptolemaic astronomy was for understanding the universe.

01:12:52: In fact, Ptolemac astronomy is probably superior to neoclassical economics because at least it gets a location and planets roughly right but its completely false Reduction in the level of productivity, of our economy.

01:13:19: Undermining manufacturing promoting services and speculation and gambling on asset prices.

01:13:25: The world people are born into today is a very speculative And personal gain oriented system which only works for those who've got money In first place.

01:13:36: So it ends up being massive source of inequality.

01:13:39: Less innovation People were more stressed.

01:13:42: It's an awful situation But we're locked into it because we believe in supply and demand curves.

01:13:47: So I'm saying you can't just criticize them, but have a complete alternative theory.

01:13:51: so i've worked out how to do that like the micro level for example.

01:13:54: these teach students marginal cost rises.

01:13:58: no it doesn't.

01:13:58: empirically its constant or falling.

01:14:01: You need enough of this theory.

01:14:04: make a profit and I've done the mathematics on that is extremely simple, it basically shows products are differentiated.

01:14:10: they're not uniform.

01:14:11: Homogenous production's another stupid assumption completely false.

01:14:15: but with differentiated products firms have constant or falling marginal cost.

01:14:19: therefore if you successful in getting larger level of sales reduce your per unit costs increase profitability which gives an evolutionary advantage over other firms.

01:14:31: So there's an evolutionary non-equilibrium theory of the firm that comes out of it.

01:14:35: You get a class based theory of income distribution, social classes were something in the neoclassicals wanted to get away from because That was part of classical school at Marx used.

01:14:45: you need a system with Social Classes Income Distribution driven by power and bargaining capability money flows energy being vital And Non equilibrium behavior being the hallmark of the system.

01:14:59: then that's what I've been.

01:15:00: I think i've actually managed to get it virtually everything finished except the theory of trade and that's what i hope to finish writing at the end of this year.

01:15:07: I made teaching online these days.

01:15:08: so if you find, see there is a webcast stevekeen dot com.

01:15:13: pardon me over-the-top marketing.

01:15:15: okay its very heavy handed.

01:15:16: but then teach three courses.

01:15:18: uh in that i teacher an introductory course with nine lectures Then have long course which has got over sixty lecture like entire.

01:15:27: it'll turn to about a hundred lecture course at some point.

01:15:29: It's basically an entire sort of masters level education in non-orthodox economics.

01:15:35: and then I have a seminar, a live seminar run every week as well... And i do them twice once for the western hemisphere and one for the eastern hemisphere.

01:15:45: so that's the main way people can find me.

01:15:47: uh..it does cost money to get in there but you know ...you get realistic economics and this is actually a great bunch of the crowd that's turned up there.

01:15:59: So, I'm also teaching into a small course at University of Amsterdam but mainly what...

01:16:06: Can you share with us if people are coming and what sort of numbers they're getting?

01:16:10: Over

01:16:10: a thousand people have signed-up so far!

01:16:12: Wow okay

01:16:15: yeah it's a lot of fun.

01:16:16: i thoroughly enjoy their research projects inside its some marvellous work Great.

01:16:23: Well, that was actually going to be.

01:16:24: my question is you know where?

01:16:25: what are people doing with this?

01:16:26: What's your hope?

01:16:27: and or these are saying they're there go into work on afterwards?

01:16:30: well some People one of my successes a guy called Tyrone Keynes have all things has built My models to the stage were he's tied everything Everything I made as a parameter.

01:16:41: He's made it into a variable And yes extremely sophisticated models for The economy in Joggerna cycles coming out of them.

01:16:47: so here off on that tack and doing growing at length.

01:16:51: And then inside the group, people have developed an AI.

01:16:53: they can create models.

01:16:55: so you say what do want to build?

01:16:56: It'll then build a model for ya.

01:16:58: another group producing a syllabus which I think would work for non-belay audience.

01:17:04: effectively it's...I cant keep up with number of projects their started.

01:17:11: internally

01:17:12: its incredible.

01:17:12: there is alot more innovative than your average economics course.

01:17:17: Well, no.

01:17:17: I'd love to maybe catch up at a later date about that because i do feel like a lot more people need To get this kind of grounded real world understanding Of economics and really appreciate everything you're doing.

01:17:29: Maybe just the final question Do your feedback for us?

01:17:33: Is it worth... You said That you've given Up on universities.

01:17:36: I guess part of me Still hopes we can Get some Universities to change.

01:17:42: No, the neoclassicals dominate universities and they dominate the referring system.

01:17:47: They dominate research grants.

01:17:48: There's just no chance of getting decent stuff at a university when you do like I did it Kingston And also Western Sydney there will be some government policy driven by Neoclassicle economics which destroys your financial viability.

01:18:02: So the reason i left western sydney was because The Government in Australia deregulated first-year student intake, and they'll believe this should be left to the market.

01:18:11: We used to get a hundred twenty.

01:18:13: as soon as that change was made we got sixteen in our department were shut down.

01:18:16: so there goes my program.

01:18:18: then I go to England Kingston University.

01:18:22: And what does your UK government do?

01:18:23: They also de-regulate first year students intakes.

01:18:27: So it took longer for them to destroy humanity's program at Kingston or other what are called post ninety two but it destroyed their student numbers, so we can't get a decent toehold.

01:18:40: The only universities which are going to teach non-neoclassical economics is going to be regional universities where you know if your living in Leeds or you go to Leeds University.

01:18:49: well Leeds is pretty good and so is the university of West England at Bristol and you get some decent stuff at Greenwich as well.

01:18:59: But mainly speaking you're gonna get a neoclassic course no matter what.

01:19:03: So my advice to people is so study something else.

01:19:07: If you're interested in economics, come and learn from people like me offline.

01:19:11: don't bother.

01:19:12: the university are gonna get brainwashed by mainstream economics thinking.

01:19:17: Don't bother with it.

01:19:17: do another degree.

01:19:19: Thank You very much Steve really appreciate this And yeah thank you for everything that your doing.

01:19:32: If you've enjoyed this episode, please consider liking and following us on YouTube or your favourite podcasting platform.

01:19:38: And by subscribing to our website at TheVisibleHandcuffs.com where you can also find the show notes for more about the project.

01:19:45: with that Thank You For Listening.