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

1. 0:00 – 1:51

   Introduction

   1. SKSteve Keen0:00

      The real foundation of Marx's political philosophy was the economic argument that there, there would be a tendency for the rate of profit to fall, and that tendency for the rate of profit to fall would lead to capitalists battening down on workers harder, paying them less than g- his subsistence. Uh, a revolt by workers against this, and then you would get socialism on the other side. So his, he, the, what he called the tendency for the rate of profit to fall played a critical role in his explanation for why socialism would have to come about. If you look at Marx's own vision of the revolution, it was gonna happen in England, okay? The advanced economies would be first to go through the revolution. The socialist, the, the, the primitive economies would have to go through a capitalist transition. And this is the difference when the Mensheviks and the, and the Bolsheviks. So the Mensheviks... And Hyman Minsky came out of the Menshevik family. The Mensheviks believed you had to go through a capitalist phase. Russia had to go through a capitalist period before it becomes socialist. The Bolsheviks believed they could get there in one go.

   2. LFLex Fridman1:03

      The following is a conversation with Steve Keen, a brilliant economist that criticizes much of modern economics and proposes new theories and models that integrate some ideas and ditch others from varied thinkers, from Karl Marx to John Maynard Keynes to Hyman Minsky. In fact, a lot of our conversation is about Karl Marx and Marxian economics. He has been a scholar of Karl Marx's work for many years, so this was a fascinating exploration. He has written several books I recommend, including The New Economics: A Manifesto and Debunking Economics. This is the Lex Fridman Podcast. To support it, please check out our sponsors in the description. And now dear friends, here's Steve Keen.

2. 1:51 – 8:50

   Defining economics

   1. LFLex Fridman1:51

      Let's start with a big question. What is economics? Or maybe what is or should be the goal of economics?

   2. SKSteve Keen2:00

      Well, it should be to understand how human civilization comes about and how it can be maintained. Uh, and that's not what it's been at all. Uh, so we have a, a discipline which has the right name and the wrong soul.

   3. LFLex Fridman2:12

      What is the soul of economics?

   4. SKSteve Keen2:13

      The soul of economics really is to explain how do we manage to build a civilization that elevates us so far above the energy and, and consumption and knowledge levels of the base environment of the Earth? 'Cause if you think about it, and this is actually working from, uh, work I've learned from Tim Garrett, who's one of my research colleagues, who's an atmospheric physicist. And his idea is that we have these, we exploit these high-grade energy sources, from the, the sun itself to coal, nuclear, et cetera, et cetera, which means we can maintain a level of human civilization well above what we'd have if we were just still running around with rocks and stones and spears. So it's that elevation above the base level of the planet which is human civilization. And if we didn't have this energy we were exploiting, if we didn't use the environment to elevate ourselves above what's possible in the background, then you and I wouldn't be talking into microphones, you know?

   5. LFLex Fridman3:12

      Yeah.

   6. SKSteve Keen3:13

      We might be doing drum beats and stuff like this, but we wouldn't be having the sort of conversation we have. So I would explain how that came about, that what economics should be doing, and it's not.

   7. LFLex Fridman3:23

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

   8. SKSteve Keen3:27

      Yeah, we're the most elaborate-

   9. LFLex Fridman3:29

      Yeah.

   10. SKSteve Keen3:29

       ... construction on the planet. And, like, that's not... W- what we've done, we've denigrated the planet itself. We don't have respect for the fact that life itself is an incredible creation. And I, I, my ultimate... If I had to see how humanity's gonna survive what we're putting ourselves through, then it would, we'd have to come out of it as a species which sees its role as preserving and respecting life.

   11. LFLex Fridman3:51

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

   12. SKSteve Keen4:01

       Life is incredible. And we're humans. Don't respect it enough. We trash it. And, and that's what's... Economics, I think, has played a huge role in that. So I actually regard my discipline, I would never call it a profession, let alone a science, uh, my discipline has probably helped bring about the termination, potential, the feasible termination of human civilization.

   13. LFLex Fridman4:24

       Strong words. Okay, let's return to the basics-

   14. SKSteve Keen4:26

       (laughs)

   15. LFLex Fridman4:27

       ... of economics. So what is the soul and the practice of economics? What, what should, what should be the goal of it? Because you're speaking very poetically, but we'll also speak pragmatically-

   16. SKSteve Keen4:39

       Mm-hmm.

   17. LFLex Fridman4:40

       ... about, uh, the tools of economics, the variables of economics-

   18. SKSteve Keen4:43

       Yeah.

   19. LFLex Fridman4:43

       ... the metrics, the goals, the models. Practically speaking, what are the goals of economics?

   20. SKSteve Keen4:50

       Well, in terms of the tools we use, we should be using the tools that engineers use, frankly. And that's, sounds ridiculously simple, because you would expect that economists are using up-to-date techniques that are common in other sciences, where you're d- you're dealing with similar ideas of stocks and flows and interactions between the environment and a system and so on. And that's fundamentally systems engineering, and that's what we should be using as the tools of economics. Now, if you look at what economists actually do, uh, the sophisticated stuff involves difference equations. And, like, difference equations, you know, if you, you've done enough mathematics, as you have, you know difference equations are, are useful for, like, individual level processes. If you're talking about a, a, an autonomous one, it'll go from state T to T plus one, T plus two, and so on, but not when you're talking at the aggregate level. There, you use differential equations to measure it all. Economists have been using difference equations. So there's, like, a, a book, I think it's by Sargent and one other, called Advanced Methods in Economics Using Python, two-volume set.

   21. LFLex Fridman5:54

       Mm-hmm.

   22. SKSteve Keen5:54

       It's about close to 2,000 pages, and four of those pages are on differential equations.... the rest is all difference equations. So they're using entirely the wrong mathematics to start with.

   23. LFLex Fridman6:05

       For people listening, what is difference equations versus differential equations?

   24. SKSteve Keen6:09

       Okay. A difference equation is, is l- like you can do in a spreadsheet. You'll have this is the value for 1990, this is the value for 1991, '92, '93, '94. So you have, you have discrete jumps in time. Uh, whereas the differential equation says there's a process moving through time. And you will have a, a rate of change of the, of the, of v- variable is a function of the state, uh, of itself and other variables, and rates of change of those variables. And that is what you use when you're doing an aggregate model. So if you're modeling water for example, or fluid dynamics, you have a set of differential equations describing the entire body of fluid moving through time. You don't try to model the discrete motion- motion of each molecule of H2O. So at the aggregate level, you use differential equations for processes that occur through time. And that's economics. It occurs through time. You should be using that particular technology. But, uh, uh, some economists do learn differential equations, but they don't learn stability analysis, so they simply assume equilibrium is stable and they work in equilibrium terms all the time. And that's, um... It- it- it is the- the- the technical level, it's, it's an incredibly complicated, uh, way of modeling the world using entirely the wrong tools.

   25. LFLex Fridman7:24

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

   26. SKSteve Keen7:29

       Yeah.

   27. LFLex Fridman7:29

       Maybe it's more clear to you, but...

   28. SKSteve Keen7:31

       I've got to make it clear to an audience.

   29. LFLex Fridman7:33

       Well, so this is a very complicated world. It's a complex world.

   30. SKSteve Keen7:38

       Mm.
3. 8:50 – 33:10

   Schools of economics

   1. LFLex Fridman8:50

      So let, let us take a stroll through history.

   2. SKSteve Keen8:54

      Okay.

   3. LFLex Fridman8:56

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

   4. SKSteve Keen9:13

      Okay.

   5. LFLex Fridman9:14

      So, you know, you could... Neoclassical, Post-Keynesian, Austrian. I like the biophysical economics and so on. Other heterodox economic schools that you find interesting.

   6. SKSteve Keen9:26

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

   7. LFLex Fridman9:31

      Mm-hmm.

   8. SKSteve Keen9:31

      That's where I'd like to start from. And they're called the physiocrats. And the name itself implies where their knowledge came from, because if you go back far enough in history, we didn't, we didn't do autopsies. But when you started doing autopsies, they found wires, they found tubes, et cetera, et cetera. And they started seeing the body as a circulation system, and they applied the same sort of logic to the economy. And they became out of an agricultural economy, which was France, and they saw that the wealth came effectively from the sun. So they saw all wealth comes from, they said the soil, but what they really mean is sun... The soil absorbs the energy of the sun. One seed plants 1,000 flea seeds come back. There is no surplus. Uh, we are simply mining what we can find out of the natural economy. That's where we should have stayed and, and developed from that forward. Uh, we then went through the classical school of economics which comes out of Adam Smith. And Smith, uh, coming from Scotland, looked at what the physiocrats said and what the physiocrats argued was that agriculture is the source of all wealth, and the manufacturing sector is sterile. That's literally the term they used to describe the manufacturing sector.

   9. LFLex Fridman10:39

      What does sterile mean?

   10. SKSteve Keen10:40

       Sterile means you don't ch- you don't extract value. You simply change the shape of value.

   11. LFLex Fridman10:46

       So the, the value comes from the soil.

   12. SKSteve Keen10:49

       The only thing that comes from the soil. That's the free gift of nature. That's literally the phrase they used. And we then distribute the free gifts of nature around, and we need carriages, which was the manufacturing term they used at the time, uh, as well as, uh, wheat.

   13. LFLex Fridman11:04

       Mm-hmm.

   14. SKSteve Keen11:04

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

   15. LFLex Fridman11:12

       Yeah.

   16. SKSteve Keen11:13

       So Smith looked at that and said, "Well, I'm from Scotland, okay? And we've got these-"

   17. LFLex Fridman11:17

       Easy now. (laughs)

   18. SKSteve Keen11:18

       "... industries, you know? And we make stuff on its machinery."

   19. LFLex Fridman11:21

       Sure.

   20. SKSteve Keen11:21

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

   21. LFLex Fridman11:25

       Yeah.

   22. SKSteve Keen11:26

       Now that led to the classical school of thought, and that said that all value comes from labor. Uh, that value is, uh, is objective, so it's the amount of effort you put in, that the price two things will exchange for reflects the relative effort that's involved in the manufacturing. So this computer takes two hours to make and this bottle takes two minutes to make, then there's, this is worth 60 times as much as that. Okay? They didn't talk about, um, marginal cost. It was absolute cost, effectively. They didn't talk about utility as a subjective thing. They ridiculed s- subjective utility theory.That led to Marx. And Marx is a- is a- a- probably the most brilliant mind in the history of economics. The only other competitor I'd see is Schumpeter, possibly Keynes. But then my terms of ranking of intellects would be Marx, Schumpeter, Keynes, in terms of the outstanding capacities to think. But Marx then turned that classical school, which was pro-capitalism and anti-feudal into a critique of capitalism-

   23. LFLex Fridman12:26

       Mm-hmm.

   24. SKSteve Keen12:27

       ...which led to the neoclassical school coming along as a defense of capitalism. But they defended it using the ideas of the subjective theory of value. So that value does not reflect effort, it's the u- satisfaction individuals get from different objects that determines their value. Marginal utility. It's the marginal cost that determines how much they sell for. Capitalism equilibrates marginal cost and marginal utility. And the concepts of equilibrium and marginal this and marginal that became the neoclassical school. And that's still the dominant school now 150 years later. So that's the one that everybody learns. And when you first learn economics, if you don't have the critical background that I managed to acquire, uh, that's what you think is economics.

   25. LFLex Fridman13:12

       Mm-hmm.

   26. SKSteve Keen13:12

       The marginal utility, equilibrium, uh, o- oriented analysis of mainstream economics. And for example, they ignore money. Okay? People think economists, you must be an expert on money because you're an economist. Well, in fact, economists learn literally in the first few weeks at university that money is irrelevant. They say money illusion.

   27. LFLex Fridman13:30

       Mm-hmm.

   28. SKSteve Keen13:31

       So they s- they, they, they represent people's, uh, tastes using what they call indifference curves. And they're like isoquants on a, on a weather map. If you look at an isoquant, it shows you all the points of the same pressure. So you can be, you know, you can be he- here or you can be in Denver, and the air pressure can be the same if you're in the same weather unit. So you just draw a cell that links together. Well, they do the same thing with utility and say, lots of bananas and very few coconuts can give you the same utility as lots of coconuts and very few bananas. And you draw a, basically a, like a hyperbola running down and linking the two. And they'll say, "Well, that's your utility, that describes your tastes." And then we have your income, and there's, given your income, you can buy that many, um, bananas completely or that many coconuts or a straight line combination of the two.

   29. LFLex Fridman14:17

       Mm-hmm.

   30. SKSteve Keen14:17

       And then if we double the price, nominal price of coconuts and double the nominal price of bananas and double your income, what happens? And the correct answer is, oh, nothing, sir. You know, you stay at the same point of tangency between what your budget is and which particular utility curve gives you the maximum satisfaction. So that gets ingrained into them, and they think anybody who worries about money suffers from money illusion. You know, you, you are therefore, uh, ignorant of the deep insights of economics if you think money actually matters. So you have an entire theory of economics which presumes we exchange through barter.
4. 33:10 – 51:24

   Karl Marx

   1. LFLex Fridman33:10

      so you mentioned Karl Marx-

   2. SKSteve Keen33:12

      Mm-hmm.

   3. LFLex Fridman33:12

      ... as, um, one of the great intellects, economic thinkers ever.

   4. SKSteve Keen33:18

      Yeah, yeah.

   5. LFLex Fridman33:19

      He's num- He's, he might be number one. You study him quite a bit. You disagree with him quite a bit.

   6. SKSteve Keen33:23

      Yep.

   7. LFLex Fridman33:23

      But you still think he's a powerful thinker.

   8. SKSteve Keen33:28

      A powerful mind, yeah.

   9. LFLex Fridman33:29

      A powerful mind. So first of all, let's, let's just explore the human, um, uh ... Why do you say so? What's interesting in that mind?

   10. SKSteve Keen33:40

       Um-

   11. LFLex Fridman33:40

       In what he saw the world, what are the insights that you find brilliant?

   12. SKSteve Keen33:45

       The... Marx once described his major work as towards a critical, uh, examination of everything existing.

   13. LFLex Fridman33:52

       (laughs)

   14. SKSteve Keen33:54

       Okay? So he's a modest bastard.

   15. LFLex Fridman33:55

       Yeah.

   16. SKSteve Keen33:55

       Uh, so he, he, he wanted to understand and criticize everything.

   17. LFLex Fridman33:59

       Yeah.

   18. SKSteve Keen33:59

       And, uh, even, he, he, he wasn't trained directly by Hegel, but he was, his teachers were Hegelian philosophers. And what, uh, Hegel developed was a concept called dialectics. And dialectics is a philosophy of change. And, uh, when most people hear the word dialectics, they come up with this unpronounceable trio of words called thesis, antithesis, synthesis. I can barely get the words out myself.

   19. LFLex Fridman34:27

       Yeah.

   20. SKSteve Keen34:28

       And that actually is not Hegel at all. That's another German philosopher-

   21. LFLex Fridman34:30

       Kant?

   22. SKSteve Keen34:30

       ... called Fichte.

   23. LFLex Fridman34:31

       Oh.

   24. SKSteve Keen34:32

       Fichte.

   25. LFLex Fridman34:32

       I thought it was Kant.

   26. SKSteve Keen34:33

       No, Fichte. Well, I'm not sure. You could-

   27. LFLex Fridman34:35

       I mix them up. All Germans look the same to me.

   28. SKSteve Keen34:36

       Okay. Yeah, yeah, yeah.

   29. LFLex Fridman34:37

       (laughs)

   30. SKSteve Keen34:38

       Um, so but if you look at this beautiful book called Marx and Contradiction, if you want to find a great explanation for Marxist philosophy. I've forgotten the author. I think it's Wilde, W-I-L-D-E, Marx and Contradiction. And he points out the actual origins of Marx's philosophy. But I didn't know that when I first read Marx. So I became exposed to Marx, uh, when I was a student at Sydney University, and we'd had a strike at the university over the teaching of philosophy. And, uh, what happened was the philosophy department had a lot of radical philosophers in it and a conservative chief philosopher. And, uh, the, the radicals wanted to have a course in what they called feminist aspects of philosophical... sorry, Philosophical Aspects of Feminist Thought.
5. 51:24 – 1:11:10

   Labor theory of value

   1. LFLex Fridman51:24

      So first of all, what is the labor theory of value? And actually before that-

   2. SKSteve Keen51:29

      Yeah.

   3. LFLex Fridman51:29

      ... what is value? Is that, um... This is like me asking what's happiness. Uh, is there something interesting to say about trying to define value?

   4. SKSteve Keen51:38

      Very, and this is a- a- a huge problem in economics, is arguments over what does value mean. And the neoclassicals came down and said it's subjective. Its value is whatever you get out of it. What... It's your personal evaluation of something, your personal feelings. So they've got that very subjective idea of value. Whereas the Marxists, and being inheritors of the classical school, talk in terms of objective value. So the value is the number of hours it takes to make something, or the effort. The va- value is, value is the effort that goes into making something-

   5. LFLex Fridman52:13

      Yeah.

   6. SKSteve Keen52:13

      ... in the classical school.

   7. LFLex Fridman52:15

      Well, that's just like one measure of objective. W- where do you fall?

   8. SKSteve Keen52:19

      Huh?

   9. LFLex Fridman52:19

      W- where do you fall-

   10. SKSteve Keen52:20

       I fall, i- i- I fall on-

   11. LFLex Fridman52:22

       ... on the subjective versus... Subjective versus objective spectrum of value?

   12. SKSteve Keen52:25

       I think you have to, you have to have the capacity to, to, to move between one and the other in a structured way.

   13. LFLex Fridman52:30

       The cake, cake model of value?

   14. SKSteve Keen52:31

       Yeah. Well, my, my base model is the objective.

   15. LFLex Fridman52:34

       Okay.

   16. SKSteve Keen52:34

       Yeah. But above that, as soon as you start talking as you did about the worker, for example, uh, then you get involved in the subjectivity, because a worker will be angry, and justifiably so, about being treated as a commodity.

   17. LFLex Fridman52:50

       Mm-hmm.

   18. SKSteve Keen52:50

       Because I'm oth- I'm not a, I'm not a commodity, I'm a human being, okay?

   19. LFLex Fridman52:52

       Yeah.

   20. SKSteve Keen52:53

       And that's where Marx saw political organization coming from. So... And that's subjective now. And then when you get to money itself, Marx actually said, "Well, what's the pr- what's the value of money?" Now, if you use an objective theory of value, you would say, "Well, the cost of money, the value of money is its cost of production." What's the cost of producing a dollar? It's about two cents. So he said it can't be, the value of money cannot be its cost of production.

   21. LFLex Fridman53:19

       Mm-hmm.

   22. SKSteve Keen53:20

       Or the most value, I think it was... If remember the phrase properly, almost... Is value here is it must mean the... Effectively, e- uncertain expectations or subjective valuation.

   23. LFLex Fridman53:32

       Uncertain expectation or subjective valuation? Okay.

   24. SKSteve Keen53:35

       Yeah.

   25. LFLex Fridman53:35

       But he's okay with that?

   26. SKSteve Keen53:36

       He was okay with that because he could move between different levels, because he s- he had restructured the foundation of this dialectical vision, o- o- of foreground-background tension, uh, commodity having use value, exchange value, and a gap between the two.

   27. LFLex Fridman53:51

       Mm-hmm.

   28. SKSteve Keen53:51

       When you're talking about, uh, machines, w- when you're buying stuff for production. And then at the next level, he could look at workers, worker organization and say that's driven by being treated as a c- a commodity when you're a non-commodity.

   29. LFLex Fridman54:04

       So the basic, uh...... labor theory of value-

   30. SKSteve Keen54:09

       Mm-hmm.
6. 1:11:10 – 1:26:12

   Socialism

   1. LFLex Fridman1:11:10

      so what, um... First of all, what is socialism? That's another loaded term. What, what-

   2. SKSteve Keen1:11:16

      It is lo- uh, socialism, particularly in America, is a very loaded term, and what Americans call socialist is, um, uh, a large amount of provision of services by the state, which is commonplace in Europe. It's still moderately commonplace in my own home country of Australia. Uh, and, uh, and that Americans, uh, will, will call, you know, public education socialist. It's a total parody of the word. Um, strictly speaking, what socialism meant is the public ownership of the means of production. No private ownership with the means of production.

   3. LFLex Fridman1:11:49

      What is the means of production? What-

   4. SKSteve Keen1:11:51

      Machine factories.

   5. LFLex Fridman1:11:52

      ... example?

   6. SKSteve Keen1:11:52

      Factories.

   7. LFLex Fridman1:11:53

      So all the goods that are produced in factories... No, the means of producing the goods-

   8. SKSteve Keen1:11:59

      Yeah.

   9. LFLex Fridman1:11:59

      ... is owned by a centralized entity.

   10. SKSteve Keen1:12:01

       Yeah. Centrally planned. This is, uh, what it... What actually was done under God's plan under the Soviets. Uh, and even with the collective, collective farms as well. You no longer owned your land. The state owns your... Owned the land. You worked on the land. And this was supposed to be a utopia.

   11. LFLex Fridman1:12:17

       Right. So that's-

   12. SKSteve Keen1:12:18

       Now, it didn't turn out to be one.

   13. LFLex Fridman1:12:19

       And we'll talk about maybe your ideas of why it didn't turn out to be one.

   14. SKSteve Keen1:12:23

       Mm-hmm.

   15. LFLex Fridman1:12:23

       Uh, so the...... the fascists did the same? So is fascism also central-

   16. SKSteve Keen1:12:28

       Fascism, so-called national socialism.

   17. LFLex Fridman1:12:31

       Is also a kind of socialism?

   18. SKSteve Keen1:12:32

       So, yeah, but I, there was no, it wasn't pub- public ownership. There was public direction. So the state would tell fa- factories what to do, but they're still private profit. And a large part of why the Nazis succeeded was the extent to which they managed to co-opt major manufacturers in Germany. Uh, so it, it, it's, you know, it's direction-

   19. LFLex Fridman1:12:50

       Direction versus ownership.

   20. SKSteve Keen1:12:51

       Yeah.

   21. LFLex Fridman1:12:52

       It's a dictatorial... I mean, that's a very particular implementation.

   22. SKSteve Keen1:12:55

       Yeah. So I th-

   23. LFLex Fridman1:12:56

       You have to, you have to consider the full details of the implementation, but it's basically dictator guided-

   24. SKSteve Keen1:13:02

       Yeah, if you wanna, if you wanna take-

   25. LFLex Fridman1:13:04

       ... versus owned.

   26. SKSteve Keen1:13:05

       If you wanna take a, a proper vision, then you have to say it's the ownership of the means of production by the state.

   27. LFLex Fridman1:13:11

       Yeah.

   28. SKSteve Keen1:13:11

       Okay? Versus the ownership by private, because that rules out the Nazi period.

   29. LFLex Fridman1:13:16

       Yeah.

   30. SKSteve Keen1:13:16

       They use the word that again, they're bastardizing as much as Americans do in the opposite direction.

Episode duration: 3:31:01