December 13, 2020

Steve Keen

Australian. Economist, author, and noted neo-Keynesian thinker and critic of neoclassical economics

1. Why does economics matter?

Well, economics is supposed to be the description of the social system in which we live, and knowing how your system functions is obviously a prerequisite for knowing whether you should alter it and knowing whether it’s malfunctioning in any way. And if you look at previous social systems like feudalism, then it’s fairly straightforward in the sense that you have feudal manses that produced output, the largest self-sufficient. They needed a small amount of trade to enable some things which has done by specialized regions to enable the general production to take place.

But a capitalist economy works with a very distributed production system and distributed income system as well. And so understanding that is a complex challenge and it’s one that’s worth taking on. And you can actually… I think it’s possible to argue that potentially the most complicated, complex objects in the known universe are the human brain and human society. And we should try to understand both. I think we’ve done a far better job of the former than the latter.

2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?

Well, intriguingly, economically… I think one of the best examples of that was actually the phrase which came out of Ben Bernanke trying to explain why economists didn’t see the financial crisis coming back in 2007, 2008, and then saying that there was actually a failure of the engineering rather than failure of the theory. I think it’s completely arse about tit, to use an Australian expression. It was the theory that was wrong, and the theory is what guided policy prior to the crisis. And that policy actually made the crisis worse.

And then in the aftermath, you had a lot of these academic economists criticising the policymakers for the mistakes they made. When if you read the theory, the crisis should never have occurred in the first place.

And it was a complete failure of the theoretical framework of neoclassical economics to even understand that cycles could happen, let alone a crisis like 2007. And so in that sense, the theoreticians created a model of the world, which was almost but completely, not quite completely unlike the world itself, which then determine what the policymakers would do to try to make the world function better. So they would deregulate the financial sector. They would encourage private debt, which is probably my favorite explanation, where the crisis came from… It was a bubble in private debt, driving up a boom beforehand and then crashing in the crisis and causing a dramatic turnaround in aggregate demand. That was completely left out of the economic theory of the mainstream.

The only person who developed that theory in an active way in the post-war period really was Hyman Minsky. And I was… Like my main role as being an interpreter of Hyman Minsky and developing mathematical models of his verbal model of financial instability. But at the same time he was ignored by the mainstream. In fact, Randy Wray, he was going to be I think his last Ph.D. student, said that Minsky used to shut his door when he gave lectures because he didn’t want… what he was saying there, being heard by his colleagues. I think, at the University of Washington or some other university in the States, because they persecuted him and his nonmainstream views blaming the private sector for causing financial crises. So he was only the rebel who had an accurate analysis. The mainstream developed the theory in which these things couldn’t happen. And then that theory is what guided what the policymakers did.

So by speaking of a crisis, by the way, my chair has a failing pneumatic column. As I talk, I realize I’m sinking. So pardon me, doing a manual adjustment, not equilibrium system and getting back to raising a lot again.

So in the one way in which I’ll accept this engineering versus theory division is again the point I made about how policy units like the OECD, like the Bank of England, like treasuries around the world, have to at least wear some of the consequences for making a mistake. And I’ll use my favorite example.

There is your previous chief economist. I think his name was Oliver Cotis. Is that correct? Cotis is certainly his surname and Cotis in June of 2007 published the interim OECD Economic Outlook, saying how the situation now is better than we’ve experienced in many years. The outlook was quite benign and predicted a strong recovery and falling unemployment and rising economic growth for 2008. Now I don’t know what happened to Cotis in particular, but I know from talking to people on the Bank of England who were giving similarly rosy predictions using neoclassical, dynamic stochastic general equilibrium models about what a wonderful year 2008 was going to be. The product of that for policymakers is that they tell the politician this, the politician stands in front of TV cameras and gets filmed saying how great next year’s is going to be, and I intend taking the credit for it. That’s always the subtext, of course. Then they walk into an absolute catastrophe and they go back and say: what the hell was this prediction about? Why didn’t you warn me? And in that situation, the economists who are playing the engineering role used the mainstream theory to interpret the data, the mainstream theory directions and look at to say what a great year 2008 was.

They got bashed around the head and I’m not going to mention names. I’ll just mention that one of the people I’m talking about has the same… One of his names it’s the same of my names… In the Bank of England, OK. And quite candidly said: we got it wrong. Now, if you try to talk to an academic economist saying: we got it wrong. No, no, no, we didn’t get it wrong. We just didn’t predict the size of the external shocks.

And there again I will use a name. The name is a country you have some relationship with. He’s an economist called Ireland, based in Boston, wrote a paper, I think, 2009, 2010, looking back at the financial crisis through the lens of a DSGE model and said, you know, and his opinion was to say that this was so different to what we expected, that maybe this calls into question of all these models themselves.

And then he went through a DSGE model and realized that well, the crisis in 2007, I think it was the same as the crisis in 2010 because you had shocks and that’s all that causes deviation from equilibrium in a DSGE model. Shocks to technology and preferences were the same in both cases it’s just the case that in 2007, the shocks got bigger and lasted longer. I mean, come on, that is such an asinine explanation.

And once you’ve given it, why didn’t we have a boom afterwards? If these things are supposed to be distributed around a mean of zero and they got bigger and last longer and negative, then there should have been a real boom after 2007, 2008. That is what, for example, is predicted by Ed Lazere who was at the time the chief economic adviser to George W. Bush. And his prediction in the in the crux of the crisis, and the report to the president of 2008-09, predicted by using regressions - that because there’d been such a severe shock downwards - there’d be a real boom afterwards.

Well, goodbye to that prediction. So all this stuff meant that people who work in policy really got their world view shaken, even if they still hang onto their original beliefs. Whereas in academia, exogenous shocks. So there’s an extent to which because academics don’t have, as Nassim Taleb said, they don’t have skin in the game, they don’t get abused by somebody said I followed your advice and I stood in front of TV cameras and said this.

They get away with it and they go back. They go back into the hole again, the hole being micro economic theory and emerge again later with the revised version of the same old core beliefs. Whereas policymakers, Bank of England, treasuries, OECD… As we’re talking here now… There is some residual recognition that something went badly wrong in 2007. And we have to take a slightly different look at things even if we don’t abandon the entire paradigm.

So I have more time for the engineers and the so-called scientists in economics.

3. What role does economics play in society? Does it serve the common good?

Economics should be about the economy in the same sense that mechanics, if you’re looking at mechanics of cars, should be about a car, not an idealized concept of a vehicle moving on a frictionless surface, which is the the framework that neoclassical economics says of the economy itself.

So. Because we are embedded in the economy ourselves, what we’ve had is a theory which has had political components to it all the way through. You go right back to Adam Smith and the formation of mainstream economic stand, which was the classical school of economic thought. In many ways, you can see Smith’s writings as championing the merchant class and the industrialists against the landlords and the feudal lords. And that was a political role. Then you had Marx coming in and taking the class of a school and turning it from a defense of capitalism against feudalism to a critique of capitalism.

And out of that, you had the evolution of the neoclassical school of thought in the 1870s, which built their ideas on the minority views of Jean Baptiste Say and Cournot to some extent. They were talking about utility maximization and equilibrium. And what you then got was not a model of actually trying to do an empirical, empirically-based, realism-based model of the system in which we live. Rather, it was one that tried to say this system functions as if it’s there to maximize utility and minimize costs of production.

And so you’ve got an ideological side to the mainstream rather than an analytic side. And that… The only other school of intellectual endeavor, where I think you can see a similar development in, would be astronomy. Because if we go back to the days of the Ptolemaic vision of the universe, that vision of the Earth at the centre of the universe and the planets and the stars rotating around it on spheres was a vision of religious perfection.

And when you challenge that, you were challenging the church. And in economics, the same ideological element has driven the model that people have built without them really being conscious even that there is an ideology there. So economics is incredibly important in any generic sense because we should understand the complex social system in which we live.

It’s real important that this is actually worked out. It’s been a way of giving a distorted and Panglossian view of a capitalist economy, which has massively mislead us about how that society functions and the constraints under which it operates. And I think we’re going to pay an enormous price as a species and as a culture for believing this theory, because what it’s encouraged us to do in the end is to far exceed the biophysical constraints of our own planet.

And then in that situation, when those biophysical constraints imposed themselves, I think we’re really starting to see that happen very, very heavily in 2020, we will be forced into a totally different social system to survive the potential collapse of the biophysical substrate on which we’ve built our capitalist economies. And in that process, we will not end up in anything even vaguely resembling capitalism. There’ll be a command economy. And I cited a lot of scientists who’ve had to deal with economists on this and talk to economists like William Nordhaus, who’s got a totally Panglossian view of global warming, and their responses to what he was putting forward as reasonable future scenarios such as the three degree increase in global temperatures over pre-industrial by 2090, or even a six degree. They were talking about the return of the Dark Ages, when he was saying that if you wanted to distinguish one from the other in a graph you’d need to use a very fine pencil to see the difference between a world with and without global warming. That’s sort of delusion has come out of the vision that neoclassical economics provides of a self-regulating system which always returns to equilibrium. Because the real world is nothing like that, wWe are going to very, very rapidly confronted with reality, which couldn’t give a damn about our theories and will then have to pay the price for that.

It does an appallingly bad job and actually does a worse job than it should do.

And this is something I’ve only realized in the last couple of years because I’ve started working myself in climate change, having worked at how to bring energy into theories of production. And of course, it is just one of the many signs of the primitive nature of economics, not just neoclassical economics, the Post-Keynesian as well. We have both schools of thought and now the two dominant schools, the majority of school being neoclassical, the minority being Post-Keynesian… The two schools that normally build mathematical models of the economy.

And both of them have built models of capitalism in which production occurs by combining labor and capital in different ways with no role for energy. That’s completely false. That’s my insight, which led me to develop energy-based models, was simply to say that - as an aphorism - labour without energy is a corpse, capital without energy is a sculpture. You must have energy to enable both of them (labour and capital) to function. So labor and capital are effectively vehicles to enable free energy, which we find in the universe.

We didn’t make the coal deposits. We didn’t build some of those free energy sources to convert them to useful work. That’s the role of labor and capital. And therefore, when you do that, you then have the laws of thermodynamics applying. So there must be waste being produced. This framework completely alters the perspective then you can have on the relationship between the economy and the ecology.

Now, I then started looking at how neoclassical economists had approached this and they could have done a good job. I mean, if you had simply said that there are physical constraints, physical limits, if you built a model like a computable general equilibrium style model, you could have included the reliance upon raw materials, the depletion of raw materials, et cetera, et cetera… The impact of feedback from externalities, meaning pollution, meaning it had less effective production and so on. It could have been done well. Instead, I have to say, I have never read any work as bad as the work done by William Nordhaus because he suffers from an extreme version of what I call the neoclassical disease.

And that is the mistake of confusing what a properly called domain assumptions, assumptions which determine whether your theory is right or wrong for simplifying assumptions, things which if you include them, you get a much more complicated model, but it doesn’t really change the outcome. So in building his so-called empirical data on which he based his theories of climate change, Nordhaus assumed that 87 percent of industry would be unaffected by climate change because it takes place in, quote unquote, carefully controlled environments.

And when you look at the list of economy industries, he included all of manufacturing, all of retail and wholesale services, all of government, etc., etc. The only thing you have in common is they happen indoors. And potentially in air conditioned environments. That’s how stupid and I have no other word for it, stupid… an assumption was made. If that assumption were true, then climate change wouldn’t matter. But this is not an assumption you want to test by saying how the theory works out in practice.

Now, the neoclassical disease comes from Milton Friedman and the methodological argument that you can’t just theory on its assumptions. You can test that on its results. We don’t want to find out the hard way that this assumption is false. Okay, you need something robust now. What if the assumptions that Nordhaus made were shown to scientists, they would have screamed. They wouldn’t have laughed but said: get the hell out of here.

You’re worse than a climate change denialist. You’re trivializing the dangers we face by absurd assumptions. Another absurd assumption was that climate change could be proxy by the temperature and GDP data we see today. So if you look at the distribution of temperature and GDP or gross state product across the United States of America, and draw a scatter-plot of that, you will find a very weak relationship between temperature and GDP tending to show GDP taking per capita, in moderate climates and being lower and cold and lower in hot climates across the states. And you can fit a parabola to it pretty badly, a parabola of the cost function he used. And, once you’ve made that prediction, you’re really saying a ten degree increase in temperature might reduce GDP by 20 percent. That’s literally what his model concludes. So this is dangerously deluded, extremely bad work. And so on that particular front, I think that is the worst work…possibly…without doubt…the worst work in the history of economics. And yet that was given a Nobel Prize. And that advice has been a large reason why governments have not taken climate change seriously. So a complete and absolute fail, not just to Nordhaus, but to the economics profession as well for giving him a prize in the first place. They should never publish this material, period. So I have no problem being emphatic about that. And I know William Nordhaus doesn’t like what I have to say and I don’t care. So that’s pretty universal.

In other areas, things like gender bias and so on, the thing which economics leaves out in it’s having an equilibrium framework, it tends to leave out feedback effects. And it can’t see ways in which biases can amplify distributional issues. So I think, I’ve forgotten his last name, but (Tylade Lindward) I think it is, at University of Missouri, Kansas City. He did a brilliant PhD applying system dynamics to the question of racial education results -b black versus white kids in America. And what he showed was that if the teachers themselves start with an attitude expecting black students to be less capable than white students, that actually feeds into how those students develop over time and generates the outcome that they get lower results than the white students do. So those sorts of feedbacks drive you a long way from anything resembling an equilibrium situation. And you can only really only handle it with a non equilibrium system dynamics feedback type approach.

The equilibrium framework the mainstream uses just doesn’t let that into into the equation to begin with. So in so many ways, we had just the wrong framework for analyzing what a fundamentally dynamic in equilibrium, a dynamic and evolutionary issues with the equilibrium tools. So categorically, I think economics done appallingly bad job on those issues and again, tends to obfuscate rather than to clarify.

5. As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?

I think we should have a Hippocratic Oath in economics, like we have one in medicine, because there is… In many ways first do no harm.

An important starting point. And if you give a diagnosis which leads to real damage, then you should wear the consequences of doing that.

Now, we’ve had bad economic advice leading to consequences like that in the Soviet Union. I think if you look at the failure of the Soviet system, then obviously the economists were a large part of that, and they wore some of the consequences of that themselves. But, in the market system, on the capitalist side, nobody’s warning any consequences yet. That has being badly wrong about the economy. For example, we gave Nobel Prizes to (William) Sharp and the other developers of the efficient markets hypothesis. The efficient markets hypothesis was based on the argument, based on the model of a single investor with perfect foresight of the future, having access to riskless, and risky assets - meaning assets with a mean and standard deviation of more than zero for their returns over time. So basically shares and then bonds, and then working out that this agent would choose a combination between the risky assets and the non-risky assets, depending on their risk aversion, to maximize their returns.

And as inadequate as it was, it was a reasonable model of a single individual and their expectations about the future. Now, how did he get to the stage having a model of the entire market? He assumed all investors agree on the prospects for all shares. That was a crucial assumption in the model, so there are no bulls, there are no bears. There would never be a conversation at the dinner table anywhere in the world comparing IBM’s prospects to, for example, Tesla’s, because everybody would agree about those prospects. You wouldn’t have a conversation because you all had exactly the same opinion.

Now that violently disagrees with the real world and Sharp himself in a later paper admitted that if he dropped this assumption that we all have exactly the same expectations about the future, quoting Sharp, the theory is in a shambles. Now, we actually had in some sense…we’re in the consequences to that…because… I’ve forgotten the actual individuals (Nobel Prize winners) involved in Long Term Capital Management. I think it was back in 1997, they made a series of extremely levered bets. I think they were backed by less than five billion dollars. They had 1.2 trillion dollars under management. They made a series of bets based on the return to equilibrium for a whole range of the positions they were in and they were wiped out. And the only way that we didn’t have a huge economic crisis at the time in 1997, I think it was, was because Greenspan came in and forced the rest of Wall Street to rescue what was left of Long Term Capital Management.

So this is another classic case where… yes…they wore the consequences to some degree, but nowhere near as much as they should have because they encouraged all the speculation and instability where then they had to live with for the last 40 years, 50 years.

So I think we do need an Hippocratic Oath for economics. And again, using Nassim Taleb’s phrase, they need skin in the game. And if that happened, I think they would be much more likely to check whether their assumptions made sense or not than they do at the moment.

6. Does economics explain Capitalism? How would you define Capitalism?

Economics explains a model of capitalism, neoclassical economics. I think that’s a PhD course in economics . Two intersecting lines. It’s all about equilibrium and how you dress it up, you ultimately come back to the belief that the market economy returns to equilibrium after a shock. And that’s the mental framework for mainstream neoclassical economics. It’s a model which is internally flawed. And this is what I’ve wrote up in my book, Debunking Economics, in great detail. Because when you see where the theory began back in the 1870s, particularly with Leon Walras. He built a model of a market economy based on an extension to the Paris Bourse, which was the trading house that had a range of individual commodities, where there’s a gold trading desk and a flower trading desk, et cetera, et cetera, and you bring all the buyers and all the sellers together. There’s a bourse official there who is charged with setting the process so that supply equals demand and each of these isolated markets. And then Walras’ model was to say, let’s imagine a single big room where everybody comes in with all the commodities they’ve got, all the ones they want to buy and sell with their own demand schedules and supply schedules. We have an auctioneer who happens to work costlessly, of course, who then starts with a random set of prices and then, where supply exceeds demand, he’ll drop the price, and where demand exceeds supply, he’ll increase the price. And this process of jiggling and alteration Walras believed would lead to equilibrium. And he actually went to get the endorsement of the world’s leading mathematician at the time, Henri Poincaré, that this turning process would converge. And Poincaré pointedly refused to agree with that.

Then about 20 or 30 years later, with the use of applied mathematics, working out what are called the Eigenvalues of a positive symmetric definite matrix, which is the sort of matrix you need to describe that turning process, a pair of mathematicians prove that the dominant Eigenvalue is positive. And what that means is the system is unstable, either the prices are unstable or quantities are unstable. That process will not converge to equilibrium. So, rather than saying, oh dear, because we’ve undermined our own theoretical starting point, we need a richer model where maybe we don’t reach equilibrium or there’s some other force involved, it was basically washed over. You only read about that sort of stuff in books like mine these days. Equally, there’s what’s called the Sonnenschein-Mantel-Debreu Theorem, which showed that if you have a whole bunch of individuals which have downward-sloping individual demand curves, when you aggregate them - and you therefore have to allow that changing relative process will change incomes - you can get any curve you want described by a polynomial. You do not necessarily get a down sloping-demand curve. So, these are huge theoretical holes in the edifice of neoclassical economics which have been just completely ignored.

So we have a theory which is internally inconsistent and has been solved, apparently in the same way that Aristotle’s followers solved his problem of his model of the universe, which had the Earth at the center and the stars and the planets on perfectly spherical spheres rotating around the Earth. They added spheres on spheres - epicycles. And this effectively what the neoclassicals are doing, adding shocks, random shocks, to their equilibrium models and then presuming the system will converge to equilibrium again. It’s a mythical model. It’s a realistic model of capitalism as Ptolemy’s model was of the solar system. So it’s neat, it’s plausible and it’s wrong.

And it’s a proof itself wrong internally and it hasn’t reformed itself. And I’ve given up on ever expecting them to do it. So I don’t care whether I know classical economists when I say this stuff, because I’m really talking to the young students, particularly the ones who came after the 2007 crisis, with formed Rethinking Economics, saying, don’t listen to those guys, they’re deluded. You might as well listen to Aristotle or Ptolemy on the Universe as listen to those guys on economics.

You’re just following up on that. What do you think it would take for them to change?

Oh, I don’t think they will. And again, this is where I think a lot of reading of history, the economic history of philosophy, of science is very useful because that’s what Max Planck himself realized when he by accident, invented quantum mechanics. If you look at how we went from the Maxwellan vision, which was an incredibly sophisticated vision of the electromagnetism, there’s no disparaging Maxwell whatsoever here.

One of the predictions of Maxwell’s equations was what’s called the blackbody radiation phenomenon. The amount of radiate energy from an object at a range of different frequencies. And you got basically what looks like a pimple. If you look at the shape of the spectrum of energy results coming out and using Maxwell’s equations, you could figure out one side like that or the other side like that, but you couldn’t get that pimple shape. So to get that pimple shape to fit the data, Planck did what’s known as integration of the complex plane and came up with something where there was an energy coming in contact .

Now, he didn’t know what the hell it was. It was well before we had any of the philosophical and mathematical canons since Planck. But it fitted the data. It explained the black body radiation problem. And Planck tried to convince his fellow Maxwellian physicists of this. And he finally gave up and wrote some of the best lines in the history of science, such as science progresses one funeral at a time. And the thing is, in science that does happen, in a genuine science, where you have genuine respect for empirical findings when these question your own assumptions.

And so the young students who came through accepted quantum mechanics, we finally got Einstein and quantum mechanics and everything coming out of that. And the old Maxwellian physicists who were still functional because… as approximations, Maxwellian theory, works very, very well. I didn’t think about, you know, microscale or universal style.

So they disappeared and we got the new quantum mechanical relativity ultimately as well, a vision of the physical world and economics… You went through the 1920s. We went through the 1930s. We’ve had this financial crisis in 2007. And I can quote Paul Romer here, another Nobel Prize winner, one of the few that I think has got any reasonable claim to deserving some respect on that front, saying that when he was learning macroeconomics back in the 70s, I think it was the 70s and 80s.

So we’ve gone backwards for the last 30 years. So rather than progressing and confronting those points where the theory is internally inconsistent and is empirically false, rather than confronting them, it’s continued refining itself to go back to its basis in neoclassical microeconomics. And I remember many times I’d be talking about economics after the financial crisis, which was something I was warning of from December of 2005, and speaking at seminars and so on. And I often get a young neoclassical - they tend to be the most rabid - saying something to me like, oh, you know, there’s a lot of the macro, but micro is pretty good… Garbage!

Have you ever seen how many firms actually have rising marginal cost? The answer is less than five per cent. OK, the empirical data finds declining marginal cost curves. Do you know you can’t even derive a supply curve without perfect competition? I mean, there’s mathematical errors in that, and so you just can’t convince them. Their belief system is so plausible that they return to it all the time. And the fact that it doesn’t fit the data is jumped over by leaving out significant events like 2007 as an outlier. And I think, they’ve got reasons for leaving COVID out as an outlier. That’s fair enough. But the 2007 crisis, to blame exogenous shocks, when the external shocks are coming from the finance system! You know, so, no, I don’t see any chance in getting them to revise their opinions. The only real hope I’ve got for economics is other disciplines such as engineering, physics, chemistry, biology, meteorology, because they’ve got the technical skills necessary to realize what an appallingly bad job the economists have done in coming in and taking over the field from them, without the ideological baggage that the economists mainly, often unknowingly bring to the party.

7. No human system to date has so far been able to endure indefinitely - not ancient Egypt or Rome, not Feudal China or Europe, not the USSR. What about global Capitalism: can it survive in its current form?

No. And that’s not because… It could have survived, if we’d taken the warnings of the limits to growth seriously back in the 1970s. Because it was clearly clear then that we were on a trajectory of overshooting the limits of the planet. And if we’d brought in a range of policies at that stage, including population control as one of those policies and a transition from fossil fuel to non fossil based fuels starting in 1975, an orientation to reduce unnecessary consumption, to improve our capacity to handle pollution, et cetera, et cetera. If we’d followed all those policies in 75, we could have continued on indefinitely. Instead, and this again is where William Nordhaus plays a major role, Nordhaus disparaged and trivialized the limits to growth by misunderstanding it, particularly sending up his predictions on population and arguing that if you look at the equations, you get predictions for population growth increasing with wealth, when it actually fell.

And he was challenged on that by Jake Forester. And Foresters’ reply was not published in the economic journal. It wasn’t accepted by the economic journals. So it completely undermined Nordhaus’ trashing of Limits to Growth. But that disparaging treatment of limits to growth dominated how it received. And we then have gone Hell-for-Leather trying to encourage maximum rate of economic growth, which means we’ve now overshot the planetary boundaries and we’re seeing many illustrations of that. I mean, of course, you know, we’re talking right now when America has got a crazy combination of weather crises right now on the West Coast, they have unprecedented bushfires turning, not just burning in forests that never burned before, but in the process of turning those forests into deserts or savannahs, whereas they were once, you know, heavy, heavy forests.

On the other side, you have the cyclones. We’re now up to Zeta (??) on the naming convention. We’re a month ahead of the most extreme number of storms in a year, easily going to defeat that. And if you look at where the Gulf Stream is… pardon me, not the polar vortex, but it’s the polar circulation system… That is dipping right down to Texas right now.

So, on one side of it, you’ve got bushfires burning in California. On the other, you’ve got snow landing in Texas. So why is this happening? It is because, by increasing the amount of energy retained from the sun, we have changed the major weather patterns of the planet. And the one we’re most obviously changing rapidly, is the Arctic summer sea ice, which means rather than having ice which reflects 90 percent plus of this solar energy falling on it, we’ve got blue and virtually black water absorbing pretty much 90 percent of the energy.

That now means that particular cold focus has disappeared. The only large cold object over there, around which the polar vortex can rotate, is Greenland. And there’s been a shift in that vortex of something of the order of 10 to 15 degrees in a very short period of time. And therefore, that polar vortex is now, when you get the move towards winter in the northern hemisphere, moving much more further south and you start getting these crazy, crazy effects.

So we have mucked with the system, with the planet’s climate system so badly that when we realize how much damage we’ve done and we start getting positive feedback from the climate system as well. And the breakdown of the ice accelerating the breakdown of Greenland is one of those effects. And then the Gulf Stream, polar vortex, all these things changing, we’re going to potentially undermine the capacity of the biosphere to support human civilization, if not life in general.

And the economists, as I say, particularly William Nordhaus, but the whole group of so-called climate change economists under that neoclassical banner, they’ve got a primary responsibility for this. And so I don’t think capitalism can survive what neoclassical economics has set it up for.

8. Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?

Well, we’ve got a complex… I mean, because if you have to think of what are the strengths of capitalism, it’s almost the exact opposite of what neoclassical economics talks about. So rather than equilibrium, it’s far from equilibrium behavior. Rather than stability, it’s innovation and change. And capitalism does, to a large degree, provide a stimulus for innovation. And that’s extremely useful. That’s something which is a reason why our technology has advanced as far as it has, where the Soviet system was a comparative, obvious comparative failure.

And the same thing could be said about feudalism beforehand. There was nowhere near as much progress under feudalism or under socialism in technology as under capitalism. So you want to harness that pressing of boundaries that they’re looking all the time for new technology replace old technology. That’s a very positive contribution from capitalism. But capitalism will not stop at its boundaries. You have to say: there you do not go. And I think, not in the next few decades, while obviously would be too busy coping with the crisis, of course, for ourselves rather than responding properly to this. But I think: if we actually as human societies survive what we’re gonna go through, then we’re going to have laws saying: this area off balance for humans, period. I can envisage a large proportion of the planet being reserved, again using our technology to make that reservation, so that humans aren’t allowed there. And that is not the sort of thing capitalism would do without constraints. So you have to have a sort of a Gaia Philosophy, saying we know that if we let capitalism expand, it will destroy the biosphere.

We can’t allow that to happen because capitalism can’t function without the biosphere. Therefore, we have to limit how far we can transgress on the physical world. And there you do not go. And that’s not capitalism.

Well, Steve, thank you very much. Do you have any concluding thoughts or is that have you said you’re everything you want to say?

Uh, the concluding thoughts are that the tragedy is that we developed economics back in the 1870s when pen and paper were the only analytic source we had. And if you look back and read people like Jevons in particular, but also Walrus and Marshall and ask: “why did they use equilibrium as an organizing principle”? It wasn’t because they believe capitalism reached equilibrium. It’s because they could see no other way to analyze it, because they didn’t have sophisticated mathematical tools and computing devices that could actually calculate those trajectories. They really didn’t think that equilibrium would be a crutch.

They went on it not in the the 1800 because well, in the 1900s we developed more advanced techniques they could handle non equilibrium situations. And economics completely failed to do that. It’s still dominated by the notion of equilibrium, whereas we do have the technology and the computing systems to be able to analyze far from equilibrium systems very easily. That’s predominant in every other disciplines except economics. You can find it in meteorology, it’s in physics, of course.

Imagine trying to work out the behavior of a nuclear reactor using the assumption that it’s under equilibrium.

I mean, a joke, just give me a break. But we’ve got the tools to do it. And if we do it… What has happened is an analytic crutch that has become an ideological principle and the ideological principles built back into the analysis. And you can’t escape that self-referential trap of thinking: everything happens in equilibrium and the real world and the actual planet which we live, everything happens out of equilibrium. And we do have the tools and the technology to do that.

And with that understanding, we would never have gotten to the situation we are now.

About Steve Keen

The major influences on Keen’s thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay. Hyman Minsky’s financial instability hypothesis forms the main basis of his major contribution to economics which mainly concentrates on mathematical modelling and simulation of financial instability. Keen was formerly an associate professor of economics at University of Western Sydney, until he applied for voluntary redundancy in 2013, due to the closure of the economics program at the university. In autumn 2014, he became a professor and Head of the School of Economics, History and Politics at Kingston University in London. He is also a fellow at the Centre for Policy Development.

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