Steve Keen Says Economists Get Everything Wrong (Especially About Climate Change)

exactly right. Like, you know, we we just got in the US, for example, personal income and spending data, and you know, the story is that income replacement, household income replacement was actually extremely effective and successful in the US, and that's not what you expect in a recession. And it's sort of I think like people are sort of opening their mind and to like, how much of what we take for granted is just policy choices. Yeah? Absolutely so.

I mean one of the big things that happened is we had the COVID shock in we finally had this exogenous shock that economics is kind of obsessed with, and things didn't necessarily pan out exactly the way that a lot of economists would have expected based on traditional principles of how things actually work. So now you know, not only have we had an unusual crisis in many respects, but now people are talking about an unusual recovery as well, and whether or not the future economy is going to

look slightly different. So with that in mind, um, and I guess without further ado, we have the perfect person to talk about all of this, an iconic clastic economist, if ever there was one, and someone who thinks slightly differently to a lot of other economists out there. We're going to be speaking with Professor Steve Keane. He's a Distinguished Research Fellow at the University College London and also the world's first crowd funded economist. He has a Patreon

account where he posts a lot of materials. You can check that out. Uh, Professor Keene, thanks so much for coming on. Thank you, thank you for the invitation. So I guess, um, I'm trying to think where to start, because of course your research is quite wide ranging, and if we're going to talk about the entire state of the current economy, that's a pretty big topic. But maybe just to begin with talk to us about what surprised you over the past year or what stood out to

you in terms of economic developments. In some sense, I wasn't surprised because when the crosses first, I get on my Patreon blog that we should have, you know, the government should pump as much money as they canadate the economy to make it possible for people to not to have to go to work and still make their bills

and not go andankrupt through the whole process. And I suppose, I suppose in one sense that it's not amazing that when a crisis strikes like this, the economic textbook gets thrown out the window where it desperately deserves to be thrown by the way, um and the people are just you know, as I know from what Hank Parlson had to say back when the financial crisis, he wasn't going to let capitalism collapse on his watch. So they throw

the government money book at the system. And of course that happened back in the Great in the Great Recession as well. But we're very rapidly switched over to you the focus back on balancing the government's books and all

this sort of stuff. This time around, the scale of obviously done has been two or three times as big as what happened with the trying to reduce the damage from the global financial crisis and for Actually, a lot of Americans ended up getting a pay rise out of the fact they got six hundred bucks a week from

the government to meet their bills for a while. And I think what actually has started to soak into people is that, hey, maybe maybe the world of financial system doesn't work the way the textbooks told us it works. So I think that's the pleasing thing that I take out of this, that there's more consciousness of that textbook explanation as the Bank of England itself set in two thousand and fourteen is simply wrong. M Do you think

this is a lesson that's actually been learned? Like, we can all observe this, we can all look at household incomes having held up despite the crisis, we can look at the sort of very robust power of you know, fiscal policy. But do you think this is a lesson that will actually be learned or do you think it's a lesson that will be dismissed? You know, Oh, that was a weird crisis because there was this exogenous shock.

It was a health thing. We have to go back next time in a downturn, we have to go back to the old way. I'm already you seeing that happened in the literature, particularly amongst the UK politicians of both Labor and Tory stripes that both talking about the need to balance the books and get you know, fix up so our our future generations aren't paying for our blurreds

during COVID. But I think that the scale of the was so big and the public impact so great that it's going to take longer for that conventional message to be accepted as it was in the past. And I think in some ways they're not going to get a chance to do that because as soon as was out the door and pill sent thing, God, it's not anymore said hold my beer, I'm going to set fire to Canada.

And what's happening right now is making I think, making people think that a whole lot of things they took for granted do not work the way that they have been assured they do. And that includes how economists have said that climate change is no big deal. So I think COVID was a warm up saying that we have to do something to drastically change our impact on the planet. And what we did during COVID, so the government's got the capacity to finance that, it creates the money when

it spends. And that's that's the lesson I hope that we can get to because we're damn or going to need that when we start working out how do we address climate change. I only want to talk about climate change in detail. But before we do that, can you maybe elaborate a little bit on the public debt versus private debt issues, so you make a massive distinction in

your research between public and private debt. So yeah, it's it's It is ridiculously simple once you see from the point of view an accountant, and of course most economists don't do accounting, don't learn about money. I saw Paul Krugman has a new master class program out where the two crucial slides the economics is about people. It's not about money. Well, that's totally wrong. It is about money and how money affects people, and how people affect money.

So when you when you do look at money, you've got to look in double entry bookkeeping terms, and you see what happens when a bank creates a loan, Well, it puts money in your deposit account, which is a liability for itself, and it puts an identical amount of money in its loan account. Saying you I was that money. So it's assets rise and its liabilities rise, and that's how credit money is created by banks, and a very

similar mechanism of flies for the government. When the government spends more than it takes back in taxes, the spending turns up in private bank accounts. That rise increases the liability side of the banking system ledger, and the money is is stored in the reserve accounts that the is transmitted through the reserve accounts that the banks themselves have at the central bank. Well, that means the reserves rise when the government spends, it has a deficit, just like

the loans rise when the private banks create. When they create loans, both of them create money, and in that sense there is no limit on the amount they can both create. The impacts they both have on the economy depend upon what are the inflationary impacts? What are the impacts of having to pay for that extra debt when you buy it as an individual, And when an individual borrows money, you can't go to the bank saying look,

I printed these notes out of my basement. You're you mind if I use those to pay my interest bill. But in the case that the government the treasury, which creates the money by the deficit spending, is the effective owner of the central bank, and that means that it can in fact pay its interest payments. Effectivities an accounting

operation between the treasury and the central bank. So the government has effectively limitless capacity to create money the limits of the impact of that on the economy rather than the physical capability of doing it, and rather than the death the government creates. And that I'm going to finish.

I'm getting a very technical here as I know. No I'm into it, okay, But if you look, if you look at what are reserves, and they think about the main assets that banks have their reserves, that are the deposit accounts the private banks have at the central bank, there are the loans they've made to the private sector, and there are the bonds that they have bought, predominantly treasury bonds. Now, when the when the government runs a deficit, it puts money in the reserve accounts of the banks,

increases their assets. That puts money into deposit accounts. That's where the spending comes from. The public gets extra money out of Then the treasury says we're gonna issue bonds to sell the bonds to the banks to cover the extra debt with money we've created. Well, that is an offer that the bonds, when the banks by them, are also assets, and how do they pay for them. They pay them with the reserves, So the deficit creates reserves.

And then when the treasury says we're going to sell you treasury bonds for that, the treasury bonds an interest, which the reserves normally don't do. The treasury bonds can be traded, which the reserves can't, but can't be traded, so it's an offer that's too good to refuse for the banks. And that's why the banks always more than by more than the subscribe for all the issues of treasury bonds. So there's no way there's any borrowing going

on from the public in that whole thing. It all happens on the asset side of the banking sector, leaving the private sector, non bank sector out of it. So there's no limit to the amount the money the government can create that way and cover by bonds, and that's why we saw something like the thirty or of GDP increasing in inverted commerce government debt. The government created the money that brought the bonds. One thing you mentioned in

that the Krugman master Class. The idea has claimed that economics is the study of people, or that's about people. You say, it's about money. Can you explain that further, like this idea of like centering money as the sort of like key unit of analysis or like where we start in the journey, like understand what what is the significance of starting with money? Yeah, well, he said, let's talk about how Krugman starts without it, first of all,

and why that ends up. We're using all the huge mistakes of mainstream textbooks make and of course come back to emphasize the Bank of England and the bonds Bank of Both of the textbooks are wrong. This is not a raving radical coming out and attacking you know, sensible centrist economics. This is institutions and know what they're talking about telling economists you've got it wrong. You've got to

learn the accounting. So what the animos do and you can see this improvements work and you can see it in Mancu's textbook as they say, well, there's a supply of money and that's under government control and that's fixed, and then there's a demand for money and that's both as individuals demanding money and the government when it runs a deficit, all though demands money. So when they show the government running a deficit, they have a downward sloping

demand curve for money. So the more money you demand, you demand the hider interest rate you have to pay. And the government borrowing gets added onto the demand curve, and that drives up the interest rate. And that's why they make all the arguments about driving interest government spending driving up interest rates, crowding our private spending, causing the

economy to slow down. That's their analysis. And when you do the accounting and you look at it, and I've actually built a software package which is really available called Minsky available on source forge. I'd love to have people in the finance sector as well as academics and students downloaded and take a look at it. And it's designed to do interlocking double entry bookkeeping tables of the You can do it a a corporate six, A company could

do it of its own books. It's designed for macroeconomics. It's there is a free tool and when you when you look at what actually happens, what you see is that rather than government borrowing adding to the demand of money, it actually adds to the supply of money. So all

the arguments that Krugman and co. Make about how deficits are going to create a local expenditure and drive up interest rates, when you take what actually happens and then put it in their framework, rather than that into the demand curve and driving up interest rates, it pushes the supply curve out and drives interest rates down. So their framework is just completely the wrong framework. And so you've

got to start from money. And one of the one of the essential reasons they don't like talking about money is because if you say that bank lending creates money, well, nobody borrows for the sheer pleasure of being in debt. You're borrowed to spend, so that borrowed money adds to aggregate demand. And then when you have people paying debt off,

that causes a collapse and aggregate demand. So if you if you take on board that banks create money when they lend, and then see what they does the overall economy, the whole macroeconomics has to change. Now they're quite comfortable with their I SLM models and their D S G A and the A B C s and all this stuff, none of which have money, and then none of which have banks virtually now I know one or two, and they just don't want to change how they have been

used to thinking, even though reality says they're wrong. Now now we have the formal bodies like the Bank of England and the BUONUS banks saying they're wrong. So it makes a huge difference to understand the accounting. So this goes back to the distinction between public versus private debt. And you know, the suggestion or the implication I think is that public debt is much less of a problem

um in terms of financial stability than private debt. So I'm wondering could you maybe elaborate on that point and then put it into context for us in the current environment. So we just saw massive fiscal stimulus UM in the US, for instance, and at the same time time, I think we're starting to see I haven't looked up the number recently, but I'm pretty sure we're starting to see private sector debt go up UM. So how much of a problem is that and how much does the balance between public

versus private actually matter? Yeah, I think the way to think about the private debt and public debt is like a sea saw because when you look at the mainstream, they treat them as both. Well, they ignore private debt because the attitude as well, private debt is an act between consenting adults and we shouldn't look inside the financial bedroom of the economy. Whatever they want to do is okay by us. But our government debt that's a burden

on future generations. Now, in fact, when you look at it, the burden on future generations is when you know, you die with a mortgage and your kids have to take it on later. So it's private debt that gives that burden on future generations of the of the current borrowers and private debt. When you borrow money from a bank,

you can't repay it and notes you invent yourself. Whereas with the government, the government, when it spends more than it gets back in taxes, can finance that by accounting operations between the treasury, which is part of the government, and the central Bank, which is part of the government. So it is in fact a way of stimulating an economy to have deficit spending taking place, as we've seen

during COVID. Imagine what America would have been like if there'd been no increase in the deficit In fact, the deficit was what thirty or GDP, So without that spending, it would have been a total collapse in the private

sector of the economy. And when you look at the historical record, and I've done some empirical work here, but the best work has been done by the philanthropist American philanthropist Richard Vague, who was a leading bank when his own right and is now he's a formal government position

in Philadelphia. Richard did research into one and a half centuries of financial crises about a hundred and fifty countries around the world, and found over the last hundred and fifty years have been about a hundred and fifty financial crisis. Every last one of them was caused by a runaway private debt bubble, and the only way out of it was to write that private debt off. So the whole focus we health and government debt is just the wrong,

is just becoming out of bad thinking. And equally, one of the things people people, and also what the level of government did is it's now DP in America after after covid or, private debt was a hundred and sixty percent of GDP. So the crazy thing is the thing they're telling you not to worry about is not only the one you should worry about, but it's substantially larger

than government dead in most countries around the world. So I wanna, you know, talk a little bit more about sustainability of government spending and I think it'll actually dovetail or lead us eventually into the climate change discussion as well. But obviously, and as you noted, one of these sort of curbs or you know, where the rubber might hit the road with the government capacity to spend is inflation.

And right now we have some elevated inflation, say in the US, but there's a you know, strong argument that you know, to use the economists word, that it's transitory.

But how do you go about thinking more broadly Okay, forget you know the data right now, but how do you go more broadly thinking about how to conceptualize the ability to spend without generating undesirable inflation or actual like you know, how to you know, reconceptualizing fiscal capacity, Like do we have any sort of way to put numbers on this or like how do you go about thinking about where those limits are? Yeah, I mean that is something which cost because we have a modern monetary theory

is a description of how current financing occurs. But what we've had is a practice with that, with that and ignored, and you had constraints on how much money government can spend. The whole effective austerity type programs I've had ever since the days of Reagan and Thatcher. Now if you say, well, we actually understand it, that would mean that the policy now becomes to get the maximum level of employment you can get. Pology of a job guarantee is part of

that program. And the issue about inflation is that inflation tends to be something which comes out of competition over the over the income shares of the economy. When when as we look back, the last time there's major inflation back in the seventies, you had economy going gangbusters compared to what it's done ever since, low level of unemployment and high level of capacity utilization, and that means a

strong demand on raw materials inputs. And you had in seventy three, part of course, part of the Kipper War, you had the price of all being increased from tots fifty a boarrels ten and then you had in eight another another boom where the price went from ten dollars to forty. Well, that takes money out of capitalist stands, means less investment can take place, and you have a slump in the economy. Equally, you had low unemployment, so workers demand large wage risers, and those wage risers also

fed through to inflation. So you need this very very strong basis in effect in aggregate demand out of a strong bargaining position for workers to get hold of the extra bargaining power to get from lower unemployment, to get bargaining power and demand higher wages, and that's what tends

to set off inflation. So in that context where we are right now, where miles from that happening, because the working class unions are being smashed, there's no real bargaining power for the individuals until you're in a really really tight market. And we're temporarily saying that, but I don't

think there'll be a sustained flow through of it. But if you did get to the stage where you had job guarantee very lower unemployment, people who didn't have a lost their private sector job would get a lower, lower paid but still job guaranteed income. That would potentially increase the bargaining power of workers and you could have struggles over the distribution of income, which would lead to inflation arising.

So I think in that situation, you've got to start talking about really in national agreements over income distribution, the sort of thing that the Swedish government used to do back in the sixties and seventies when they dramatically industrialized in Sweden by having a sort of agreements between capitalist workers and the government about how to develop a Swedish

society over time. So once once you realize that you can have full employment, then you've also got to have some agreement about the distribution of income and how money is spent. And you know, I'm not going to suggest that's going to be an easy thing to do. So if we if we actually start getting the government using the capacity it has to generate a level of aggregate demand that gives you full employment, then we're going to have to work out what's the power relationship between workers

and capitalists in America. And it can't be as extreme as it's got to be in the last thirty or forty years. Will be to one little caveat there. It isn't the industrial work capitalist who have got that power. It's the financial system. So we're gonna have to take on financial capital, and that always sends it to be a lot more fun than you'd like it to be. I mean, what are the chances that we actually got a real discussion on that issue in the US, and

what are the obstacles to people taking that on. Frankly, I don't think we're going to get that conversation. I've got to take my head off to Stephanie Krlton and the modern monetary theory people have made been very successful and raising this to the stage where Congress even has debates about it, and you've seen some Congressman realizing, well, they don't have the constraints they thought they had, and they're changing their attitudes. But the political pressure back in

the opposite direction is enormous. So I'm not convinced that we're going to get a conscious decision to go about doing it. But a bit like COVID before COVID struggling, I'd say December twenty of two thousand and nineteen, if you ask anybody with the government shod on a deficit of of GDP next year, they would have kicked you out of the room. That's what the government ran next year. GDP.

And if you look back at the last time we had spending on that scale, I was during the Second World War, and the impact of that, you know that that was when we realize we're in an existential crisis. Was either spend the money or you know, start saying highlhead lap. So we spent the money, and nobody discussed that there was too much money being spent buying that next German tank or or whatever is being constructed with with the government money that was being spent on private

corporations to build tanks rather than cars. So when you're face an existential crisis like that, you tend to throw the real book out the window. And that's when you look at what happened with how people actually involved in doing that, People like barns Barnsley Rummel and people who are running the Federal Reserve. Back in the night and forties,

they realize there were no constraints on government spending. There was a tag that there's actually a paper called taxes or obsolete for government spending by the President of the Federal Reserve of New York and nine. So that since necessity is the mother of invention, now if you don't

have necessity ideology comes back in. So I think if if we didn't face any future existential threats, there would be this pressure to return to the old balance the books, government spending as a burden on the future, that ideology would come back. But I don't think it's going to get a chance. So can I ask the I guess the flip side of that question, which is, you know, we're talking about physical capacity, and how do you create

appetite to expand that. How do you actually um tackle the private debt problem because you have this massive financial sector that is incentivized basically to keep creating debt because every time they do that, they earn money. How do you go after that? And like, what is the political appetite to take that aspect on? I think the political apposites on the zero because if you look at politicians themselves, the main people they talk to people on the finance sector.

So eisenhow used to talk about the military industrial complex. I talk about the political financial complex. And therefore what finance wants is what politicians tend to allow, and finance wants to create as much debt as it can because that's how they make money literally literally by creating the debt but for themselves. Figuratively, the more debt the private sector takes on, the more income that the private sector has to pay to the financial sector, so that their

opposition to reducing debt is enormous. But the trouble is we've now we've now reached levels of private debt which are historic in the history of capitalism. So America. I've got data in America going back to eight and thirty four, and the level of private debt we've got now is greater than the peak level of private debt compared to g DP during the Great Depression, which was the previous peak driven by a massive deflation between thirty and thirty three.

So we have this enormous overhang of private debt, and what that means is banks are a bit reluctant to lend because they now realized there's a possibility they won't get repaid, and the non bank public is reluctant to borrow because they were already carrying an enormous amount of

debt even with low interest rate. So that combination means you've got very stagnant demand coming from the credit from credit when credit is part of a small amount of credit demand is a healthy part of a growing economy. But if you look at Chaumpado is argued in favor of the private banking system. The main argument you made was that the banks should be providing money to entrepreneurs or they don't, but that's what they should be doing. So what we've got is a huge overhanger private debt.

We shouldn't have left private debt anything like level all it's at. I think it should to set. A hundred and seventy was the peak when America was during what we call the Golden Age of capitalism, between the late forties and the the early seventies, the level of private debt began at about GDP and something between and seventy of GDP. That's money you've borrowed for recent for realistic reasons. You've got working capital for companies, you have money for

households to buy large consumer items. You have some funding of entrepreneurs. That's a creative role of the financial sector. When you get to the hundred and seventy percent, you can regard that is pretty much parasitic behavior. And what I proposed, and I've worked, I've done a Minsky model of how this could actually work. We need a modern debt be We can't just write the debt off because

they would cause the banking system to collapse. We can't just give money to people who borrowed money from the banks and say how you're get off with that, because people who didn't borrow, people who were frugal, can say, you know, that's moral hazard. What what? Where's mine? Or My agument is, let's use the capacity of the government sector to create private money and use the government government money, fear boast money, and use that to replace credit boast money.

So you give everybody in the country, every adult, the same amount of money. If they have debt, they must pay that down off their debt. If they don't have debt, what I would require is that they by newly as corporate shares, where those corporate chairs are used to pay down corporate debt. So you could reduce both household debt

and corporate debt quite substantially. You wouldn't change the amount of money, and the economy just changed that rather than being mainly backed by credit and private debt, it's now mainly backed by FEA and government money creation capability, and with that you would dramatically reduce the inequality that we've

got in society. You'd also stimulate the economy by putting, because there's more workers to be receiving the money than there are bankers and capitalists getting the same sum per head. You'd stimulate the economy of as workers have to spend faster than bankers or capitalists, and they'd be, as I've modeled it, quite a substantial burst of the economy with no additional money creation. So we could do it, and

I'm certain we won't. Do you have a what's the dollar amount, like say in the US, and how do you how would one go about driving the rate amount? When I when I said whether you, I wouldn't necessarily do it in one go because unlike a standard economists, I'm not confident in my idea is going to work magically, so I'd like to do a test run. But if

I did the whole caboodle. The model that I did was giving every adult American a hundred thousand dollars over one year, where a hundred thousand said, if you're in debt had to be used to pay debt down. If you weren't in debt, you had to buy corporate shares, which we used to per cancel corporate debt. Now, that worked out to a hundred thousand dollars per person, which

is about a hundred and ten percent of GDP. And if we did it, we'd reduce the level of private debt from a hundred and sixty hundred and seventy down to sixty sevent of GDP, which is back on the sweet spot for the golden capitalism. And that of course would mean a shift in the allocation of debt, so

private debt would fall, government debt would rise. But when I modeled it, what the would result I wasn't expecting is because this meant there was much more money in the hand of workers and middle class people than beforehand. The economy went into a boom, and the boom meant

the debt ratio fell. So we're not worried about the level of debt, We're worry about the ratio to GDP and the impact of the In my model, the impact of this hundred thousand per person was the first of all, boost government debt by a hundred percent of GDP and

dropped privacy the debt by the same amount. But over the next ten years or so, the level of debt debt dropped back to you had a hundred percent fall in the level of total debt from say is that the monte about two hundred and six hundred and sixty six private debt and a hundred percent government debt. That was a reduction in the debt burden. So it's a way of doing it that would actually work and stimulate

the economy. It caused more profits for firms. Even the bankers could come out okay because if you sold jubile bonds to finance it, the interest rate in the jubile bonds could make up with the fact they weren't getting interest on the private debt that had been canceled by the modern debt tubile. So it's all doable. I justcent sure it won't happen. So we were talking about attitudes towards UM fiscal spending and how they might be changing, but possibly UM not to the degree UM that you'd

be advocating, Professor Kean. But I know you've been critical of the European Union over the years, and I'm curious how you feel about it now and whether or not you see some attitudes changing towards UM fiscal cohesion. I think the European Union was always The European Union was a good idea. The Euro was a big mistake, and that might aitian. That hasn't changed because the whole logic I'm talking about a private and public debt assumes you have a treasury and a central bank that can back

whatever you do with your fiscal policy. Of course, when when the country of the European Union joint formed the euro they gave that right away, and you have this sort of supernational central bank. There's no supernational treasury, there's no supernational spending. So in that sense, all those governments have turned themselves into effectively being in the same situation

as a private borrower. And we're seeing how disasters that's been, particularly for Greece, but also for Spain and Italy and Portugal. There's been a beneficiaries have been the ones who've got like Germany. You did very very well, thanks very much, out of the fact that countries like Italy could no longer devalue their currency when they had a trade deficit

with Germany. So I'm still a critic of it, And of course when you see how it first of all handled the COVID outbreak and then the vaccine rollouts, and then the idea of providing people with money to enable them to pay their financial commitments when they couldn't go to work because of COVID. It was it was I was going to use the word starting with cluster and

ending with duck was trying to avoid it. But you do nowhere did nowhere near as well as America, which is always the model for the European un or even UK at that stage, even though the UK managed the stuff uprow COVID royally. So I'm no great fan of it. What I have seen is again experiences teaching them some lessons. All the things they were worried about happening out of

large levels of government spending haven't occurred. So in that sense, there's been a bit more realism creeping into the European Union. But it's still one of the first things I would do is go back to the Lira, go back to the pace, so go back to the mark and just use the Euro for internal trade in the European Union. But again they seem to be so wet it to the idea of this supernational currency that that's again not quite as unlikely as a modern that do you believe

it unfortunately pretty unlikely. You know, before we delve a little bit into the climate discussion, and obviously it's you know, it's part of this discussion. I want to go back to something you said. You know, there's sort of like I guess it's like the politics of full employment. Like there's that famous essay the Political Aspects of full Employment

by clerch Key, and he's sort of anticity. You know, you said that, you you talked about, Okay, if the government were to ever really be in to take a permanent fiscal stance where it's always going to maintain aggregate demands such that we have full employment somehow, that's when the real political fight begins. And of course we're already seeing that. I mean we have, like you know, we're nowhere near anything resembling full employment in the US right now.

We always already see major pushback against you I major frustration among companies at their ability to hire easily. Right now, What what do you see, like how brutal could it get? You know, as we get as labor markets get tighter and tighter, what do you expect to see or if this current person, if this currently currently remarked conditions persist. What do you expect to see on the part of the sort of like capital class, bosses, etcetera, pushing back

against these policies. Well, they could will and truly try to do that. That's definitely the case. It could be quite destructive of the stability you're trying to bring about through modern monetary theory to begin with. That's why I think you've got to include the idea of an income

compact at the same time as part of it. It's also why I focus on not just looking in terms of workers versus bosses, but workers versus bosses versus bankers, because we're the real and this is intensive on my mathematical modeling of what I call of Minsky's financial instability hypothesis. One thing which came out of the model was that the rising level of debt where I had had firms of borrowing money to actually invest in real factory. So it was the sort of borrowing borrowing for the sort

of reason you'd want to see. But you could have such a level of euphoria during a boom that capitalists borrow more than they could repact during it. During a slump, and you've got this ratcheting up the private deb and you finally had a debt crisis. But a side effect of this was again was not not built into the models.

What's called an emergent property is that even though it was the firms therefore the capitalists doing the borrowing and the workers did no borrowing at all, it was the workers who paid for the higher level of private debt because increasing the little level of private debt led to a falling worker's share of income. So the transfer of money wasn't from firms to bankers, it was from workers to bankers, and the firms were sitting in the middle.

So I would want to reduce the power of the financial sector and say, if we make the financial sector less powerful, less of a burden on both households and firms, both workers and capitalists can benefit from that. We've got to reduce the size of Wall Street. Wall Street as a burden on American capitalism, not a shepherd to the

golden future. But nonetheless, I can just see if you had full employment, and you had the animosity that exists now between American workers and American core operations after last thirty or forty years, if you gave power to the workers by having full employment. There could be a lot of we're going to get even now type attitudes amongst workers in terms of you know, you want me to

come and work for you, pay me more money. There there could be those those things leading to a conflictual approach and then coming back and trying to screw the bargaining power of the workers by bringing back unemployment once more. So, by no means do I see a rosy future where

everybody's holding hands and singing coombay are. This could be unless it's done sensibly, you could you could have an outbreak of political conflict coming out of the change and the power balance that appreciating what mm T means about government spending and the capacity to generate full employment actually means okay. So speaking of non rosy futures, that's probably

the perfect segue to finally talk about climate change. So you have been incredibly interested in this topic and also incredibly scathing when it comes to Some other economists work on the actual price or cost of climate change, including a certain Pulitzer Prize winning economist who's done a lot of work in the Pulitzer Prize is close It was a work of fiction, but he's actually in a William Northhouse Norbel Prize, which itself is a worth of fiction

because it's not a Norbel Prize. I'm sorry this is as a good slips the right line, though I think we stick with that. The Pulitzes are great because it actually it's a work of fiction. The Norbel Prize and Economics is not a Norbel Prize, and what Lord House does is by more is fiction than anything related to fact. My media bias showing here entirely focused on one day

Joe Pulitzer for all thoughts. Okay, I have a bunch of questions on this, but like one, why your intense interest in the space, and secondly, what is it about economics in your traditional economics in your opinion, that makes it ill equipped to deal with climate change or to model it propperately? Well, the first question, I've been fascinated by how we actually include the physical reality of production and economic models ever since the seventies, when I first

became a critic of the main stam economics. Of course, at the same time Limits to Growth came out, which I thought was a superb piece of work. I understand system of dynamics, and I was doing working as doing mathematical studies at the time, so I thought it was superb and then economists trashed the hell out of it. And the economist who did most to trash it was one William Nordhouse who wrote a paper called Measurement without Data.

So that was the beginning of my interests. I didn't engage in the academic work on it until two thousand and sixteen or seventeen, when I was working with some economists, a guy called Bob Airs, who's a physicist who has been trying to bring energy into economics for a long long time. And then we're working with Bob. I was saying, how do we bring the role of energy into how

economists think about production? Because if you look at not just the way that neoclassicals do, but even my more realistic post Kanzian school of thought, they might output is being generated by labor and capital. Now you can't produce anything without energy. So the fact that it wasn't there just didn't make any sense to me, and it pushes

how do you bring it insensibly? And what would happen if you look at work by Stielets and Solo To very mainstream economist back on the seventies, they said, well, let's just add energy in as another factor of production. You put labor and capital and energy together and you get output. Well, yeah, okay, I'm going to throw I'm going to throw a hand grenade into a factory and see how many widgets I can produce that way. You can't just add energy like you put machines or workers

inside it and work. Walking through Bob's house one day, which is full of statues, a little flash of insight popped in my mind. Labor without energy as a corpse, capital without energy as a sculpture. In other words, energy is needed as an input to both labor and capital to allow them to do work. Ten minutes later, I've done this idea of bringing energy into models of can

models of production. So I thought, with that done, the paper was published in two thousand and nineteen with the innocuous title of the Note on the Role of Energy and Production, I thought it was time for me to engage in this discussion about climate change. And then in two thousand and eighteen Northhouse got the so called Nobel for it. Well, and my initial reaction was, at least,

they're giving a Nobel Prize for environmental work. But then I thought I'd better read the literature, which is I always dive in even if I can't stand near classical economics. I still read it, and I couldn't believe the garbage I was reading. Quite frankly, I'm not going to be polite about this. This is the worst work I've read in fifty years, and the fact that it was given a Nobel Prize is not a reason to trust the research. It's a reason to shut the Nobel Prize down under

shut mainstream economics down as well. It's that bad. So what is it for people who aren't familiar with the work once you've daved into it. What are the What are the claims that Nordhost is making that you think it's so discrediting of the Nobel Prize. Well, the main climb claim that he makes is how trivial climate change is going to have you have an impact on the economy.

So in his Nobel Price speech, which people can find on the web quite easily, he said that the with no abatement of the impact of climate change, just letting the economy roll on. If there if there were no damages from climate change at all, then you get a certain level of GDP if you include the damages from climate change on our productive capabilities, a six degree increase in temperature would cause an eight point nine fall in

g d P six degrees temperature. This is that's published in the paper in the American Economic Review, one of these specialist journals, in two thousand and nineteen, I think, and in his Nobel Price speech he actually says the optimal temperature changes of four degree increase in temperature over pre industrial levels. Now, I just I couldn't believe it.

How the hell does you reach those results? So I dived into his research, and there's a particular paper in called too Slower or Not to Slower the Econimics of Global Warming or Economics of Climate Change, And in that he assumed, simply assumed that seven percent of industry would be unaffected by climate change because it happens in what he called carefully controlled environments. That he lumped all manufacturing, all services, all of government spending. He even lumped mining

in there. The only thing those things have in common is they happen undercover. Except you know, he didn't everythink about open cut mining. Obviously, He's simply saying a root will protect you from climate change. Well, I'd like the people of Alberta and Calgary and Vancouver and Spokane to come and have a conversation with William Nordhouse about how much of root protects you from climate change. It is an absurd assumption. But this, this is what economists do

all the time. They want to They make what they call simplifying assumptions, which actually, if the simplifying assumption is a genuine superfyling assumption is false, you have to you have a slightly more complicated model if if these assumptions are wrong, the whole world is different. And that's the sort of assumption they defended simplifying. So you did that first of all, he said, simplifying assumption a root will

protect you from climate change? And then another one he did said, well, we can use the current relationship between temperature and income across the United States to say what's going to be the impact of climate change, as if what we're experiencing now in terms of the before climate change hit, in the fact that Florida is poorer than New York, and New York is richer than North Dakota

though the temperature differences there. He said, you know, you might get an attempt to see increase in GDP if you move from North Dakota to New York, and at ten per cent fall if you go from New York to Florida. That's all that's going to happen. If we have a six degree increase in temperature to get us from North Dakota to New York and another six to get us from New York to miam that is insanely stupid.

And those assumptions are essential part of coming out and saying that a six degree increase in temperature will only reduce to PAY by eight points. No interesting, I think it was, it'll eliminate our spaces. That's closely to what the impact will be. So there's something you said there about traditional economics, uh, not dealing that well with the physical.

And this is also something we've been talking a lot about on odd lots like this idea that for instance, UM, some classical ideas of the benefits of free trade for instance, and competitive advantage don't actually take into account transport costs. So in a year like when we suddenly see um borders closed and gridlock and shipping and shipping costs going up quite a lot, Uh, classical economics isn't well equipped to deal with that, or to work around it, or

to sort of synthesize it. I'm wondering, are you looking at that aspect of the economy as well, like this idea of things being more complex than traditional economics has allowed. Is that something that has proven in your mind? Oh? Well, and truly yeah. I mean the whole idea of the fact we've got these incredibly long supply chains when they're up to a hundred countries involved in manufacturing an Apple iPhone, or the Apple iPhone stops being made when cloud cloak

COVID hits. There's an incredible fragility in the economy we've designed to make it incredibly efficient. Efficiency is the enemy of resilience. An efficient bear has no fact when it goes into hibernation and therefore starts. So you have to have buffers. You have to have surplus resources to be available, surplus beds, for example, so that when when climb, when you go pandemic hits, you've got room and you've got

root extra intensive care beds. Instead. We've seen the panic we've been through because we trimmed it down to the stage where there was only slightly more supply than you would get from demand in a normal situation, normally doesn't exist anymore. So yeah, it's it's incredibly ignorant about the physical world. And this is why they can make the stupid assumptions they make about manufacturing. All you need is a roof to protect you from climate change. Well, if

you can't get energy, your faculr machine stop turning. If you can't get workers, because the temperature where you're living is simply incompatible with human life, there will be no

workers to manage those machines. So there's a there's a physical unreality to mainstream economics, and that's why one part of another group called the Institute for Biophysical Economics trying to say we have to build a physically grounded, biologically realistic model of the economy because we certainly haven't got it now, and that's why we've let ourselves up the

climate change guid garden path. Yeah, I want to talk more about that because you know, you mentioned and you're sort of like the idea of like, okay, capital as we know it physical capital without energy is is a statue which I thought it was a really nice way to put it, and that we can't just think of like energy as yet, you know, wrap that into capital or just sort of another one of the factors of production.

What happens when you introduce energy into the equation, So as you describe, okay, we need to labor, capital and energy, what are the new outputs in sort of like the models once you break it out that way, well, once you get like, for example, if you know the what they call the cab Douglas production function that the mainstream uses. One of the mysteries they've had for a long time is that that that that attributes output to being a

factor of your technology times labor times capital. And they always thought that, you know, the labor and capital would be the main sources of change and apple. But the phone is actually technology, and they call it what they call the solo residual. Now, when I put my energy as an input to labor and capital into that function, what I get is that the so called technology, which it still is obviously a form of issue of technology, is the energy consumption level of the typical machine of

a particular generation. So if you look at the energy consumption of a James what steam engine, that was about ten tons of cold per day. If you look at the elon Musk's Falcon rocket, that's about effectively ten tons of kerosene per second. So that's where the dramatic increase and income has come from. We really are benefiting out of all of us work as capitalist bank as the works are benefiting out of using far more energy for production. But what that then gives you is, well, how sustainable

is that? And when you have energy as an input to production, in this sense you also get the necessity of both waste energy and waste materials. You can't produce output without energy and matter. You therefore can't produce useful output without waste energy and waste matter dumping into the environment. So you then have a link between the economy and your ecology. And of course the question is there's many

many questions out of it. What is the impact of using all that energy and using all that matter on the sustainability of the ecosystem And you would be thinking about that right from the outset. We have been completely blindsided by that over the last fifty years, and in the perfectly two generations of humans, we've troubled or quadrupled alert on the planet. And that's where we're seeing things

like the impact of climate change driving up temperature. That's carbon dioxide is one of the forms of ways to we dump into the environment, and we're now seeing the impact of that in an incontrovertible way in Canada right now. But you therefore have to think in terms of the physical constraints of a production system on a planet, and we have completely ignored that and we're now paying for it.

Given that framework, what's your solution for it then, Because of course the challenge here is always that, um, well, first of all, people don't seem to appreciate the physical aspect of economic growth. But secondly, uh, it's that sort of classic commons problem right where everyone can abuse the environment because they individually benefit from it. So how do you actually fix that? Well, I think we could have fixed it if we listened to the limits to growth

arguments fifty years ago. We could have fixed it gradually using market mechanisms like carbon taxes and carbon pricing would have been feasible, and also constraints on population growth and a whole range of other issues that when the limits growth through their simulations, they had about I think about fourteen simulations, and three or four of them led to a sustainable future where we continued having up to three

times the standard of living. The average standard living they got for the whole planet was about three times the standard living at an American in nineteen seventy, and since Americans in nine and seventy, most of the martine better off today than they were back in nine in seventy. Given the skew and income distribution, that would be a

pretty a pretty darn nice world now. Instead, because we're delayed it for fifty years and troubled or quadrupled a load on the planet, I think we're in massive overshirt and to get to a sustainable level, we've got to go backwards. We have to have our people are calling the growth, and we're not going to do it voluntarily. Again. I think we'll do it because we're forced into it with events like the Canadian heat wave and worse to come. I can't that that will be something which has to

be done by a command economy. You can't do it using market mechanisms. So I think in that sense we've got ourselves into another war. But it's not that it's not the war on climate. It's a war to restore the climate, and that means really a war on our over consumption on the planet. And you know, the only way I can see it happening is people that people truly realize that this is an existential threat, not for their children or their children shouldn it's an existential threat

for anybody alive today. Thinking back to the beginning of the conversation, of course, and you know, there has been like there's a big turning point, perhaps from a fiscal perspective, in rejecting austerity. And you pointed out to that, you know, at times of like extreme crisis, such as prior to wars, necessity changes people's perception of like what the government is

capable of doing. And I think that, like you know, right now the political debate around climate there seems to be a lot of impulse to address it, but not a lot of impulse to do what you've just described, which is essentially a form of de facto austerity, except

it's not about um. The pre you know, the pretext or the argument is not fiscal sustainability but sort of ecological sustainability, Like how do you build the politics though for what you're describing, it would for most people like be uh, you know, a sort of an austerity regime. It won't be done in any voluntary sense. I mean people, most people clearly uninterested in economics. I've got, I've got

used at the time. It's only obsessive like us who really want to know how the economy operates at all times. Most people a bit like me with a car. I only want to know how the energy works when it stops working, you know, Otherwise ourssum it's just going to continue ticking over and I hop in the car and turn the engine on and driveway on going and turn it off again. And I don't think about all the

complicated mechanics involved in making that possible. So the same thing applies to the economy for most people, and therefore they can't see any need to restrain their own spending. They won't voluntarily turned vegan, they won't voluntarily walk rather than hop in the car and drive to the local shop. It's going to be a thing, I think, Holly hell, if I don't do that, we're all going to die. Now.

If you look back to the the the Second World War, that realization hit England after the Phony War period, when they had to suddenly evacuate what was left to their army out of Dunkirk, and you had very rapid rapid procession Pole and falls, France falls and suddenly really held us is serious. We've got to throw all our resources at trying to defeat this enemy. And then in that situation people accepted rational. Now, I think the same thing

is going to apply here. We are going to need some serious crisis, and then when it does, people will suddenly realize this isn't something for two or three centuries in the future, which is what William Nordhouse literally says. He says limited small damages, relatively small damages in the next two centuries. That's in one of his published papers.

It's not relative small damages. They're huge damages. They're becoming if we're lucky in the next thirty years, if we're unlucky in the next ten and when that realization hits then it's an existential threat. Then in those situations, people are willing to accept constraints on what they can do to drastically reduce our level of consumption and give us some possibility of throwing our resources rather than producing more and more plastic furniture. All this junk we we consume

drastically reduced. It is just a center true consumption, and all our resources are directed at creating non carbon generating energy systems and reducing our load on the planet, trying to restore the biodiversity, to restore the things like the artic which we're obviously losing, the Arctic summer see us,

we're losing right now. Everything has to be going to VACTU trying to restore the stability of the climate that we have just with the Holocene climate that we evolved our societies and we've got to rebuild that for our societies be able to continue existing. Only once that realization hits I think will anything be done. And in that case, we're not going to be getting there ahead of it. We're going to be in cata catastrophe catch up mode.

I want to see it happened as soon as possible, just so we reverse direction before it gets even worse. What about this sort of like liberal optimists would say, well, nuclear power and carbon sequestration and other technologies that can address some of these things without the sort of like extreme austerity regime that you're describing. I assume your skeptical of those paths. What I'd like to hear why yeah. I mean to two reasons. First of all, where's the

engineers for this. I have a lot of engineers on my Patreon website, and some of them are totally pro solar and some are totally pro nuclear. And I've come out in a balance of both saying, yes, if we had a well designed energy system, we'd have both nuclear things like thorium reactors rather than uranium, but those and

and lots of solar power and wind as well. But the reality is we haven't produced one thorium reactor since the very first trial one was done before America scrapped the thorium for uranium reactors because that way you could make nuclear weapons. So we simply don't have the technology or the engineers able to produce them as rapidly as

we need to. And then it's actually easier to produce the solar power, because so long as we can make the solar cells out of the factories, the work of installing them as trivial compared to the work of building and installing a thorium nuclear reactor. So in that sense, I see solar is a more immediate way of addressing our need to get away from coal. But the other

trouble is it isn't just carbon dioxide. The whole focus on carbon diox that actually suits to some extent the climate change trivial arcers like Born Lomborg and Norderhouse and all that mob because it's leading out things like an impact on biodiversity. Now you may you may that have seen this was a segment recently on snot ocean snot off the coast of Turkey, huge disturbance to the bio the biological patterns in one of the ocean between the

Mediterranean and the and the Black Sea. And this is the sort of damage we're doing by the runoffs we have, the fertilizer runoffs are putting into the ocean, the way we're wiping out species. That layer of snot is in some places apparently up to a meter thick. It means that any fishment ooth that are going to starve have lose oxygen and and we're going to have mass die offs. So it isn't just the carbon, It isn't just the

energy issue. It's the whole pressure of putting on the boss sphere and we have to restrain ourselves in ways that humanity in general, it isn't just under capitalism, humanity in general has never practiced restraint, and until we do,

we're not going to have a sustainable future on the planet. Sorry, I have one more question based on that, but a big part of our conversation has been how do you change attitudes, whether it's towards um physical capacity and the deficit, or towards climate change, or towards the relationship between capital and labor. What do you think is needed to change or to shake up classical economics and maybe change the way um economists are are viewing a lot of these issues.

I think economists wal lost cause, frankly, because once you believe this stuff, it's a self contan belief system. And this is not just being critical of economists, it's something about humanity as well. Max Plank, who's the guy who discovered quantum mechanics by solving what was called the black

body radiation problem using complex mathematics. He realized that part of the solution involved energy being discreet coming and what we now call quanta, rather than being continuous, which was the assumption of the Maxwellian physicists that he was raised and all these colleagues were Maxwellian physicists. Now, he tried to persuade his fellows that, you know, they had to think of energy and discreete units of quanta rather than

being smooth, and they simply couldn't do it. And he finally wrote a wonderful line which is summarized by saying science advances one funeral at a time. That works in sciences because the experiments that prove that the Maxwellian thing didn't work, you can do those experiments thaying it exactly the same results. You can reproduce what sciences did back then to find that the old theory doesn't work. And so when students come in, they've got these professors who

are still teaching them the old stuff. But these students are aware of that us that the old stuff us and solve this new problem. And so when the professors get to the stage they've got to replace themselves. They retire or they die. They've got a higher new star students as staff. And those students are dedicated in a new way of thinking. That's why his science progresses one funeral at a time. But in economics, you can have a crisis like the Great Depression, and it becomes a

history nobody knows about it. You can't reproduce the Great depression, we have the Great recession. You can't reproduce that and see whether postcamcing approach would work better than a new classical approach. So we tend to forget history, We forget the experience we've done in the real world in which we live, and then new people come along and get

taught by the same old neoclassical lot. And the neo classical vision is a beautiful vision of an effectively an anarchist society with no power to corrupt everything, and where there's no need for government. It's all done by the market, and it's all nice, anonymous and egalitarian. And that is such a seductive vision that these nerds who come along and fall for this stuff end up reproducing it again. You can't get rid of them. So I say economics

does not progress one funeral at the time. We have to replace a lock stock and barrel. And I'd be sending these economists off to go plant trees somewhere, or maybe teach a few mathematics classes to history students, rather than you can't convince them, you can't convert them. But with the last people to realize the world has changed, well, Professor Keen an absolute pleasure speaking with you. Thank you so much for coming on odd Blots and really fascinating conversation.

So thank you and thank you for the inside of a lot of Funapple. Wasn't it got a bit hairy? There? Have? It didn't get to Harry? No, that was great, really good. Okay, great, Yeah, it's really good. Thanks so much, Chess So Joe, uh, really a fascinating conversation and there's so many bits and

pieces to pull out of it. One thing I really liked well, in addition to Professor Keane's emphasis on the physical, which again has been one of our themes for this year, this idea that economics actually doesn't do a very good job of taking that into account. But I really like the distinction between public and private debt, and if you just look at the way the world works, it's absolutely true that like classical economics seems to put much more

emphasis on public debt than it does private debt. Like even if you look at the European Union and things like the Masters Treaty, like that is all about constraining government debt and doesn't say anything about private debt. It's incredible how backwards so many people's intuitions are about I mean,

it couldn't be more spotted. There's so much, as you say, the Mastic Treaty embedded in the law of this idea that like the public debt specifically must be contained, so much you know, fearmongering about like fiscal expansion and having to pay for it, etcetera. It's almost like it's it really feels like it's a hundred and eighty degrees backwards when you look at you know, any crisis, how often it originates in the banking system, the private sector, household debt.

It's so forth. It's kind of like amazing, how consistently back how totally backwards. A lot of people's and tuitions are about this totally And I'm just thinking back to like Spain during the Eurozone crisis, the problems that were entirely on the banking slash private debt side, and meanwhile the EU is sort of wringing its hands over government

debt ratings and things like that in fiscal austerity. It's I kind of wish I'd known of Professor Keane's work back in you know, I guess two thousand and twelve like that would have been a really helpful framework for actually viewing the Eurozone crisis. And like, you know, I really think I've said it many times. It's so like I do think that within sort of like more like eellectual economics, economic circles, there does seem to be like

a certain sneering at accounting. That's just like what the person in the back office does, like balance his books. But it's consistent. Who is it a Stephen Clapham. Clapham we talked to, Like so many of the most interesting conversations we have are rooted in accounting. I want to just you know, like going back to like the climate portion, because it's really interesting. Like I do feel like there is a lot of like I would say again, sort of liberal climate optimism that it's sort of like we

can get two things. I want green new deal. Green new deal implies a new deal everyone's jobs, sort of a message of abundant green. We can do it in a way that um, you know, environmentally friendly. And Professor King's message is at this point and I think, you know, no one wants to hear it, and I don't. I don't know. I don't have an opinion whether it's right or wrong. But no one wants to hear. That's essentially like the only message, like extreme austerity is the answer

to the sort of too ecological crisis. Well, it's again like sort of totally at odds with classical economics, which is all about economic growth, and then suddenly you switch into well, actually, in order to save the planet, um and ensure that we all survive in the long run, ha ha ha um, you have to restrain economic growth. Like I don't know, and yet you kind of made

this point. But yet people, people seem comfortable sometimes, or at least in classical economics, people seem comfortable with the idea of fiscal austerity in order to preserve the budget, and yet like there seems to be a lot of difficulty with the idea of physical austerity in order to save the planet and preserve the planet, or just sort of consumption austerity. More broadly, it's like fiscal expansion consumption austerity.

I loved um, And again I thought it was a very interesting phraseology or characterization, like neo classical economics as actually like a defect of form of like anarchy. And I hadn't really thought about that before. But if you're sort of like assumption is then in this sort of like the natural state of nature is for things to come into balance, right, for things to come into balance, that two lines intersect on a chart, and there's the price that if we just let that happen, then everything

balances out. We just sort of like what neoclassical economics is rooted in these assumptions of equilibrium, But that is also like implicitly anarchist, because then the best the government can do at that point is create distortions and create you know, or maybe necessary but unfortunate distortions in what would otherwise be this perfect harmony. Is sort of this very interesting, anyway, fascinating, provocative conversation with Professor Kan. Yeah. Absolutely, um.

It reminds me a lot of that The anarchy point reminds me a lot of that quote about you know, things fall apart the center cannot hold. Okay, shall we leave it there, Let's see it there? All right. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Wisn'tal. You can follow me on Twitter at the Stalwart. Follow our guest on Twitter, Steve Keane. He's at Prof Steve Keane. Follow our producer Laura Carlson.

She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today, and check out all of our podcasts on Twitter at Bloomberg onto the handle at podcasts. Thanks for listening.