Steve Keen: Marxism, Capitalism, and Economics

00:00:00.000 | The real foundation of Marx's political philosophy

00:00:03.120 | was the economic argument that there would be a tendency

00:00:05.600 | for the rate of profit to fall.

00:00:07.140 | And that tendency for the rate of profit to fall

00:00:11.040 | would lead to capitalists battening down workers harder,

00:00:15.480 | paying them less than their subsistence,

00:00:17.860 | a revolt by workers against this,

00:00:21.120 | and then you would get socialism on the other side.

00:00:23.840 | So what he called the tendency for the rate of profit to fall

00:00:28.000 | played a critical role in his explanation

00:00:30.280 | for why socialism would have to come about.

00:00:33.160 | If you look at Marx's own vision of the revolution,

00:00:35.160 | it was gonna happen in England.

00:00:36.720 | The advanced economies would be first

00:00:39.600 | to go through the revolution.

00:00:41.220 | The socialist, the primitive economies

00:00:43.340 | would have to go through a capitalist transition.

00:00:45.680 | And this is the difference

00:00:46.520 | when the Mensheviks and the Bolsheviks.

00:00:49.040 | So the Mensheviks,

00:00:50.040 | and Hyman Minsky came out of the Menshevik family,

00:00:52.600 | the Mensheviks believed you had to go

00:00:53.980 | through a capitalist phase.

00:00:55.480 | Russia had to go through a capitalist period

00:00:57.240 | before it becomes socialist.

00:00:58.880 | The Bolsheviks believed they could get there in one go.

00:01:01.640 | - The following is a conversation with Steve Keen,

00:01:06.240 | a brilliant economist that criticizes

00:01:08.120 | much of modern economics

00:01:09.680 | and proposes new theories and models

00:01:12.060 | that integrate some ideas and ditch others

00:01:14.640 | from very thinkers from Karl Marx to John Maynard Keynes

00:01:18.760 | to Hyman Minsky.

00:01:20.480 | In fact, a lot of our conversation is about Karl Marx

00:01:24.040 | and Marxian economics.

00:01:25.840 | He has been a scholar of Karl Marx's work for many years.

00:01:30.240 | So this was a fascinating exploration.

00:01:33.360 | He has written several books I recommend,

00:01:35.560 | including "The New Economics Manifesto"

00:01:38.280 | and "Debunking Economics."

00:01:41.640 | This is the Lex Friedman Podcast.

00:01:43.600 | To support it,

00:01:44.580 | please check out our sponsors in the description.

00:01:47.240 | And now, dear friends, here's Steve Keen.

00:01:50.380 | Let's start with a big question.

00:01:53.320 | What is economics?

00:01:55.800 | Or maybe what is or should be the goal of economics?

00:02:00.040 | - Well, it should be I understand

00:02:01.040 | how human civilization comes about

00:02:02.800 | and how it can be maintained.

00:02:04.240 | And that's not what it's been at all.

00:02:08.040 | So we have a discipline which has the right name

00:02:10.760 | and the wrong soul.

00:02:12.200 | - What is the soul of economics?

00:02:13.680 | - The soul of economics really is to explain

00:02:17.840 | how do we manage to build a civilization

00:02:20.320 | that elevates us so far above the energy and consumption

00:02:25.760 | and knowledge levels of the base environment of the earth?

00:02:30.760 | 'Cause if you think about,

00:02:32.120 | and this is actually a work I've learned from Tim Garrett,

00:02:35.320 | who's one of my research colleagues

00:02:37.160 | as an atmospheric physicist.

00:02:38.800 | And his idea is that we exploit

00:02:41.520 | these high-grade energy sources

00:02:44.040 | from the sun itself to coal, nuclear, et cetera, et cetera,

00:02:47.760 | which means we can maintain a level of human civilization

00:02:50.720 | well above what we'd have if we were just still running

00:02:52.640 | around with rocks and stones and spears.

00:02:55.240 | So it's that elevation above the base level of the planet,

00:02:59.920 | which is human civilization.

00:03:01.800 | And if we didn't have this energy we were exploiting,

00:03:04.560 | if we didn't use the environment to elevate ourselves

00:03:07.800 | above what's possible in the background,

00:03:10.200 | then you and I wouldn't be talking into microphones.

00:03:13.280 | We might be doing drumbeats and stuff like this,

00:03:15.400 | but we wouldn't be having the sort of conversation we have.

00:03:18.560 | So it would explain how that came about,

00:03:19.960 | that was the economics should be doing and it's not.

00:03:23.200 | - So this is the greatest thing

00:03:24.560 | that the earth has ever created

00:03:25.600 | is what you're saying in this conversation?

00:03:27.440 | - Yeah, we're the most elaborate construction on the planet.

00:03:30.920 | And that's not what we've done,

00:03:32.360 | we've denigrated the planet itself.

00:03:34.600 | We don't have respect for the fact that life itself

00:03:37.080 | is an incredible creation.

00:03:38.480 | And my ultimate, if I had to say how humanity's

00:03:42.080 | gonna survive what we're putting ourselves through,

00:03:44.440 | then we'd have to come out of it as a species

00:03:47.160 | which sees its role as preserving and respecting life.

00:03:51.400 | - I like how you took my silly, incredible statement

00:03:54.440 | and made it into a serious one about how amazing life is.

00:03:59.440 | - Life is incredible and we humans don't respect it enough,

00:04:05.160 | we trash it.

00:04:06.400 | And that's what's economics,

00:04:08.640 | I think it's played a huge role in that.

00:04:10.360 | So I actually regard my discipline,

00:04:12.320 | I would never call it a profession, let alone a science.

00:04:15.360 | My discipline has probably helped bring about

00:04:18.840 | the termination potential,

00:04:21.440 | the feasible termination of human civilization.

00:04:23.960 | - Strong words.

00:04:24.840 | Okay, let's return to the basics of economics.

00:04:28.000 | So what is the soul and the practice of economics?

00:04:32.000 | What should be the goal of it?

00:04:34.360 | Because you're speaking very poetically,

00:04:37.000 | but we'll also speak pragmatically

00:04:40.400 | about the tools of economics, the variables of economics,

00:04:43.920 | the metrics, the goals, the models.

00:04:46.760 | Practically speaking, what are the goals of economics?

00:04:50.480 | - Well, in terms of the tools we use,

00:04:52.000 | we should be using the tools that engineers use, frankly.

00:04:55.840 | And that sounds ridiculously simple

00:04:58.200 | because you would expect that economists

00:05:00.320 | are using up-to-date techniques

00:05:02.360 | that are common in other sciences

00:05:04.800 | where you're dealing with similar ideas of stocks and flows

00:05:08.880 | and interactions between the environment

00:05:11.080 | and a system and so on.

00:05:12.680 | And that's fundamentally systems engineering.

00:05:15.000 | And that's what we should be using

00:05:16.480 | as the tools of economics.

00:05:18.040 | Now, if you look at what economists actually do,

00:05:20.640 | the sophisticated stuff involves difference equations.

00:05:23.360 | And difference equations,

00:05:26.800 | if you've done enough mathematics as you have,

00:05:29.120 | you know difference equations are useful

00:05:31.640 | for individual-level processes.

00:05:33.800 | If you're talking about autonomous,

00:05:36.160 | it'll go from state T to T plus one, T plus two, and so on.

00:05:39.440 | But not when you're talking at the aggregate level.

00:05:41.280 | There you use differential equations to measure it all.

00:05:44.040 | Economists have been using difference equations.

00:05:46.520 | So there's a book, I think it's by Sargent and one other,

00:05:49.640 | called Advanced Methods in Economics Using Python,

00:05:53.080 | two-volume set.

00:05:54.640 | It's about close to 2,000 pages,

00:05:57.160 | and four of those pages are on differential equations.

00:06:00.680 | The rest is all difference equations.

00:06:02.960 | So they're using entirely the wrong mathematics

00:06:04.720 | to start with.

00:06:05.800 | - For people listening,

00:06:06.720 | what is difference equations versus differential equations?

00:06:09.320 | - Okay, a difference equation is like you can do

00:06:11.720 | in a spreadsheet.

00:06:12.560 | You'll have, this is the value for 1990,

00:06:14.840 | this is the value for 1991, '92, '93, '94.

00:06:18.200 | So you have discrete jumps in time.

00:06:21.680 | Whereas the differential equation says

00:06:23.240 | there's a process moving through time.

00:06:25.360 | And you will have a rate of change of a variable

00:06:30.040 | is a function of the state of itself and other variables

00:06:33.480 | and rates of change of those variables.

00:06:35.640 | And that is what you use

00:06:37.000 | when you're doing an aggregate model.

00:06:38.320 | So if you're modeling water, for example, or fluid dynamics,

00:06:41.840 | you have a set of differential equations

00:06:43.520 | describing the entire body of fluid moving through time.

00:06:47.400 | You don't try to model the discrete motion

00:06:49.520 | of each molecule of H2O.

00:06:52.280 | So at the aggregate level,

00:06:53.720 | you use differential equations for processes

00:06:55.800 | that occur through time.

00:06:57.320 | And that's economics, it occurs through time.

00:06:59.880 | You should be using that particular technology.

00:07:02.200 | But some economists do learn differential equations,

00:07:05.680 | but they don't learn stability analysis.

00:07:07.720 | So they simply assume equilibrium is stable

00:07:10.000 | and they work in equilibrium terms all the time.

00:07:13.000 | And that's, it is the technical level,

00:07:17.440 | it's an incredibly complicated way of modeling the world

00:07:22.160 | using entirely the wrong tools.

00:07:24.000 | - Okay, we'll talk about that

00:07:25.560 | because it's unclear what the right tools are.

00:07:29.440 | Maybe it's more clear to you, but--

00:07:31.400 | - I've got to make it clear to an audience.

00:07:33.120 | - Well, so this is a very complicated world.

00:07:36.600 | It's a complex world.

00:07:37.920 | You talk about there, some of the most complex

00:07:42.840 | systems on Earth are the human mind,

00:07:45.920 | the economy, and the biosphere.

00:07:49.480 | So we'll go, we'll go to that place.

00:07:53.920 | I'm fascinated by complex systems.

00:07:56.720 | I'm humbled by them, even at their simplest level

00:08:00.360 | of like cellular automata.

00:08:01.820 | I'm not sure what the right tools are to understand that,

00:08:05.840 | especially when part of the complex system

00:08:11.240 | is like a hierarchy of other complex systems.

00:08:13.600 | So you said the economy is a fascinating complex system,

00:08:17.280 | but it's made up of human minds.

00:08:19.920 | And those are interesting.

00:08:21.320 | Those are interesting, perhaps impossible to model,

00:08:24.800 | but we can try and we can try to figure out

00:08:27.000 | how to approximate them,

00:08:28.120 | and maybe that's the challenge of economics.

00:08:30.400 | Okay, we'll keep returning to the basics.

00:08:33.040 | Let us try to learn something from history.

00:08:36.380 | I also see as part of economics

00:08:38.640 | is us trying to figure out stuff,

00:08:40.520 | and there's a few smart folks that write books

00:08:44.600 | throughout human history,

00:08:46.120 | and sometimes they name schools of economics after them.

00:08:50.520 | So let us take a stroll through history.

00:08:54.520 | - Okay.

00:08:56.040 | - Can you describe at a high level

00:08:57.760 | what are the different schools of economics,

00:09:02.240 | perhaps ones that are interesting to you,

00:09:04.160 | perhaps ones that the difference between which

00:09:08.680 | reveal something useful or insightful for our conversation?

00:09:13.680 | So you could, classical, post-Keynesian, Austrian,

00:09:18.880 | I like the biophysical economics, and so on.

00:09:23.280 | Other heterodox economic schools that you find interesting.

00:09:26.600 | - Okay, I actually find interesting a school

00:09:29.120 | which went extinct about 250 years ago.

00:09:31.920 | That's where I'd like to start from,

00:09:33.340 | and they're called the physiocrats.

00:09:35.340 | And the name itself implies

00:09:37.920 | where their knowledge came from,

00:09:39.160 | because if you go back far enough in history,

00:09:41.600 | we didn't do autopsies.

00:09:44.320 | But when you started doing autopsies,

00:09:45.700 | they found wires, they found tubes, et cetera, et cetera.

00:09:49.360 | And they started seeing the body as a circulation system,

00:09:52.280 | and they applied the same sort of logic to the economy.

00:09:55.120 | And they came out of an agricultural economy,

00:09:57.600 | which was France,

00:09:58.800 | and they saw that the wealth came effectively from the sun.

00:10:03.040 | So they saw all wealth comes from,

00:10:04.360 | they said the soil, but what they really mean is sun.

00:10:06.880 | The soil absorbs the energy of the sun.

00:10:09.000 | One seed plants, a thousand flea seeds come back.

00:10:12.000 | There is no surplus.

00:10:13.800 | We are simply mining what we can find

00:10:15.800 | out of the natural economy.

00:10:17.440 | That's where we should have stayed

00:10:18.560 | and developed from that forward.

00:10:20.720 | We then went through the classical school of economics,

00:10:22.960 | which comes out of Adam Smith.

00:10:24.600 | And Smith, coming from Scotland,

00:10:27.960 | looked at what the physiocrats said,

00:10:30.640 | and what the physiocrats argued

00:10:32.120 | was that agriculture is the source of all wealth,

00:10:34.540 | and the manufacturing sector is sterile.

00:10:37.080 | That's literally the term they used

00:10:38.400 | to describe the manufacturing sector.

00:10:39.720 | - What does sterile mean?

00:10:40.800 | - Sterile means you don't extract value.

00:10:43.840 | You simply change the shape of value.

00:10:46.160 | - So the value comes from the soil.

00:10:49.320 | - Yeah, it comes from the soil.

00:10:50.840 | That's the free gift of nature.

00:10:52.240 | That's literally the phrase they used.

00:10:54.280 | And we then distribute the free gift of nature around,

00:10:57.240 | and we need carriages,

00:10:58.680 | which was the manufacturing term they used at the time,

00:11:01.640 | as well as wheat.

00:11:04.240 | So to make the carriages,

00:11:05.860 | we take what's been taken from the soil,

00:11:08.720 | and we convert it to a different form,

00:11:10.260 | but there is no value added in manufacturing.

00:11:12.940 | So Smith looked at that and said,

00:11:14.240 | "Well, I'm from Scotland,

00:11:15.440 | "and we've got these industries,

00:11:19.120 | "and we make stuff, and it's machinery."

00:11:21.400 | And he said, "No, it's not land

00:11:22.880 | "that gives us the source of value, it's labor."

00:11:25.280 | Now, that led to the classical school of thought,

00:11:29.120 | and that said that all value comes from labor,

00:11:32.960 | that value is objective,

00:11:35.920 | so it's the amount of effort you put in,

00:11:37.920 | that the price two things will exchange for

00:11:39.760 | reflects the relative effort

00:11:41.080 | that's involved in the manufacturing.

00:11:42.860 | So this computer takes two hours to make,

00:11:44.760 | and this bottle takes two minutes to make,

00:11:47.060 | then this is worth 60 times as much as that.

00:11:50.520 | They didn't talk about marginal cost.

00:11:53.640 | It was absolute cost, effectively.

00:11:55.520 | They didn't talk about utility as a subjective thing.

00:11:57.880 | They ridiculed subjective utility theory.

00:12:01.740 | That led to Marx,

00:12:03.380 | and Marx is probably the most brilliant mind

00:12:06.300 | in the history of economics.

00:12:07.380 | The only other competitor I'd see is Schumpeter,

00:12:09.780 | possibly Keynes, but in my terms of ranking of intellects,

00:12:12.820 | I view Marx, Schumpeter, Keynes

00:12:15.260 | in terms of the outstanding capacities to think.

00:12:18.620 | But Marx then turned that classical school,

00:12:21.180 | which was pro-capitalism and anti-feudal,

00:12:24.700 | into a critique of capitalism,

00:12:26.980 | which led to the neoclassical school

00:12:28.740 | coming along as a defense of capitalism,

00:12:31.260 | but they defended it using the ideas

00:12:33.660 | of the subjective theory of value,

00:12:35.980 | so that value does not reflect effort.

00:12:37.780 | It's the satisfaction individuals get from different objects

00:12:42.500 | that determines their value, marginal utility.

00:12:45.620 | It's the marginal cost

00:12:47.420 | that determines how much they sell for.

00:12:49.480 | Capitalism equilibrates marginal cost and marginal utility,

00:12:53.900 | and the concepts of equilibrium

00:12:56.500 | and marginal this and marginal that

00:12:58.300 | became the neoclassical school,

00:13:00.100 | and that's still the dominant school now 150 years later.

00:13:03.580 | So that's the one that everybody learns,

00:13:05.500 | and when you first learn economics,

00:13:06.980 | if you don't have the critical background

00:13:08.500 | that I managed to acquire,

00:13:10.380 | that's what you think is economics,

00:13:11.940 | the marginal utility, equilibrium-oriented analysis

00:13:16.460 | of mainstream economics,

00:13:18.020 | and for example, they ignore money.

00:13:20.380 | People think economists, you must be an expert on money

00:13:22.620 | because you're an economist.

00:13:23.700 | Well, in fact, economists learn literally

00:13:25.980 | in the first few weeks at university

00:13:27.660 | that money is irrelevant.

00:13:29.500 | They say money illusion.

00:13:31.020 | So they represent people's tastes

00:13:34.900 | using what they call indifference curves,

00:13:36.900 | and they're like isoquants on a weather map.

00:13:39.220 | If you look at an isoquant,

00:13:40.180 | it shows you all the points of the same pressure.

00:13:42.960 | So you can be here or you can be in Denver,

00:13:45.580 | and the air pressure can be the same

00:13:47.300 | if you're in the same weather unit,

00:13:48.660 | so you just draw a cell that links together.

00:13:50.780 | Well, they do the same thing with utility

00:13:52.260 | and say lots of bananas and very few coconuts

00:13:55.220 | can give you the same utility

00:13:57.380 | as lots of coconuts and very few bananas,

00:13:59.460 | and you draw basically like a hyperbola

00:14:02.660 | running down and linking the two,

00:14:04.580 | and they'll say, well, that's your utility.

00:14:06.620 | That describes your tastes,

00:14:08.300 | and then we have your income,

00:14:09.560 | and given your income,

00:14:10.820 | you can buy that many bananas completely

00:14:14.460 | or that many coconuts

00:14:15.500 | or a straight line combination of the two,

00:14:17.660 | and then if we double the price,

00:14:20.000 | nominal price of coconuts

00:14:21.420 | and double the nominal price of bananas

00:14:23.580 | and double your income,

00:14:24.780 | what happens, and the correct answer is oh, nothing, sir.

00:14:27.720 | You stay at the same point of tangency

00:14:29.920 | between what your budget is

00:14:31.880 | and which particular utility curve

00:14:34.620 | gives you the maximum satisfaction,

00:14:36.920 | so that gets ingrained into them,

00:14:38.200 | and I think anybody who worries about money

00:14:39.840 | suffers from money illusion.

00:14:42.160 | You are therefore ignorant

00:14:44.660 | of the deep insights of economics

00:14:46.160 | if you think money actually matters,

00:14:48.040 | so you have an entire theory of economics

00:14:50.400 | which presumes we exchange through data.

00:14:52.760 | I'll swap you that Microsoft Surface for,

00:14:57.080 | no, actually, I'll take two of those for one of these.

00:14:59.160 | We do this bartering type arrangement.

00:15:01.960 | In fact, that only works

00:15:03.920 | if money plays no creative role in the economy,

00:15:06.880 | and that's where you'll find, reading Schumpeter,

00:15:10.840 | the insight that's the school of thought that I come from

00:15:13.160 | that says money is essential.

00:15:15.080 | Money actually adds to demand,

00:15:16.760 | and we'll talk about that later on,

00:15:19.040 | so that's the neoclassical school

00:15:20.680 | that ends up being subjective theory of value,

00:15:25.880 | non-monetary, as though everything happens in barter,

00:15:30.680 | and focusing on equilibrium,

00:15:33.040 | as though everything happens in equilibrium,

00:15:35.160 | or if you get disturbed from equilibrium,

00:15:36.920 | you return back to it again,

00:15:38.920 | and that mindset describes capitalism.

00:15:42.720 | Its most interesting feature

00:15:44.040 | is that it reaches equilibrium.

00:15:46.000 | Now, what planet are we on to believe that?

00:15:48.440 | Because if you look at the real world,

00:15:50.120 | the real exciting world of capitalism in which we live,

00:15:55.440 | change is by far the most obvious characteristic of it.

00:15:59.320 | - There's no equilibrium.

00:16:00.720 | - There's no equilibrium.

00:16:01.840 | It's unstable, and as a mathematician,

00:16:04.440 | it's easy to, you work with stability analysis.

00:16:07.600 | You work out what the Jacobian is,

00:16:10.560 | you work out your Lyapunov exponents in a complex system.

00:16:14.160 | You're used to the idea that equilibrium is unstable,

00:16:17.080 | but economists get schooled in believing

00:16:19.280 | that everything happens in equilibrium,

00:16:21.400 | and they don't learn stability analysis,

00:16:23.280 | so all that stuff is missing,

00:16:25.140 | so onto the schools of thought,

00:16:27.040 | treating the economy as an equilibrium system,

00:16:32.080 | which was what the neoclassical school did,

00:16:34.000 | is what Keynes disturbed,

00:16:35.500 | and he really disturbed it by talking about,

00:16:39.160 | fundamentally, that uncertainty determines

00:16:41.720 | our decisions about the future,

00:16:43.500 | so when we consume, you know,

00:16:45.440 | if you like Pfizer or whatever particular drink

00:16:48.640 | you wanna have, you know the current situation,

00:16:51.880 | but to invest, you must be making guesses about the future,

00:16:55.020 | but you don't know the future, so what do you do?

00:16:57.680 | You extrapolate what you currently know,

00:17:00.320 | and as you said, this is a terrible basis

00:17:02.480 | on which to plan for the future,

00:17:05.240 | but this is the only thing you can do

00:17:07.740 | where there is no possibility of solid calculation,

00:17:10.680 | so investment is therefore subject to uncertainty,

00:17:13.960 | and therefore, you will get volatility out of investment.

00:17:17.580 | You will get fads, of course, booms and slumps

00:17:21.100 | coming out of that, 'cause people extrapolate

00:17:22.880 | for the current conditions,

00:17:24.520 | and that's the normal state of a capitalist economy,

00:17:27.280 | and Schumpeter argued that that's what gives us

00:17:29.120 | this creativity as well,

00:17:30.920 | the fact that you can perceive a potential demand,

00:17:35.000 | but first of all, you don't know

00:17:36.600 | whether that demand's going to work,

00:17:38.400 | secondly, you don't know who your competitor's going to be,

00:17:40.440 | whether somebody's going to be ahead of you or behind,

00:17:42.680 | if there's a fad, you'll overinvest, okay?

00:17:45.340 | All this stuff is the real nature of capitalism,

00:17:49.000 | and that's what we should be trying to capture,

00:17:50.400 | the dynamic, non-equilibrium, monetary violence

00:17:55.120 | and creativity of capitalism,

00:17:56.960 | that's what we should be analyzing,

00:17:58.720 | and the post-Keynesian school has gone in that orientation.

00:18:03.640 | They've been, in my opinion, inhibited

00:18:06.300 | by learning their mathematics from neoclassical economists,

00:18:09.960 | so they don't have enough

00:18:11.240 | of the technology of complex systems.

00:18:13.320 | There's only a really tiny handful of people

00:18:15.120 | working in complex systems analysis

00:18:17.280 | in post-Keynesian economics,

00:18:19.180 | but that is, to me, the most interesting area.

00:18:21.000 | - So their tools may be lacking,

00:18:22.720 | but they fundamentally accept the instability of things.

00:18:26.000 | - That's right, that's right.

00:18:26.840 | - And so that's what makes them interesting.

00:18:28.280 | So let me try to summarize what you said,

00:18:30.640 | and then you say how stupid I am.

00:18:32.520 | Okay, so then there was the physiocrats

00:18:37.000 | that thought value came from the land.

00:18:40.840 | Then there's Adam Smith, who said,

00:18:44.120 | "Nah, value comes from human labor."

00:18:49.120 | That was the classical school.

00:18:52.540 | And then neoclassical is value comes

00:18:56.540 | from bananas and coconuts, human preferences,

00:19:01.180 | like human happiness, how happy a banana makes you.

00:19:06.140 | And then the Keynesian and the post-Keynesian were like,

00:19:10.460 | yeah, well, you can't, you can never,

00:19:14.140 | the moment you try to put value to a banana and a coconut,

00:19:17.960 | you're already working in the past.

00:19:20.380 | - Yeah.

00:19:21.660 | - It's always going to be chaos and stability,

00:19:24.140 | and then you just, you're fishing in uncertain waters,

00:19:28.080 | and that's why we have to embrace that

00:19:29.460 | and come up with tools that model that well.

00:19:31.800 | And also, Joseph Schumpeter,

00:19:35.060 | what school would you put him under?

00:19:36.760 | Is he a Keynesian or is he Austrian economics?

00:19:40.900 | - He's an Austrian, and the Austrians deny.

00:19:43.060 | - Okay. - That's the intriguing.

00:19:45.300 | - He's from Austria, but he's not an Austrian economist.

00:19:50.300 | - There are elements of the Austrian school of thought

00:19:52.840 | which are worthwhile.

00:19:53.860 | - What is Austrian economics

00:19:55.460 | in this beautiful whirlwind picture that you painted?

00:19:59.140 | - Okay, Austrian economics grew out of the rebellion

00:20:02.940 | against the classical school.

00:20:04.200 | So you had three intellects who mainly led the growth

00:20:07.860 | of the neoclassical school back in the 1870s.

00:20:10.500 | It was William Jevons from England,

00:20:12.520 | Menger, who's from Austria,

00:20:15.260 | and Vollras from France.

00:20:17.340 | And Vollras tried to work out a set of equations

00:20:21.500 | to describe a multi-product economy

00:20:26.260 | where there's numerous producers and numerous consumers.

00:20:29.480 | Everybody's both a producer and a consumer,

00:20:31.780 | and you try to work out a vector of prices

00:20:34.140 | that will give you equilibrium

00:20:35.220 | in all markets instantaneously.

00:20:37.620 | And that's his equilibrium orientation.

00:20:40.340 | Jevons is also one about equilibrium,

00:20:42.100 | but he worked more at the aggregate level.

00:20:43.980 | So there's a supply curve and a demand curve,

00:20:45.940 | and that's what Marshall ultimately codified.

00:20:48.780 | Menger was pretty much saying that,

00:20:50.380 | well, yes, there might be an equilibrium,

00:20:52.420 | but you're gonna get disturbed from it all the time.

00:20:54.420 | You'll be above or below the equilibrium.

00:20:56.420 | And what came out of the Austrian school

00:20:57.900 | was an acceptance of that sort of vision

00:21:00.460 | that a market should reach equilibrium,

00:21:02.660 | but then said, well, you'll get disturbed

00:21:04.020 | away from the equilibrium.

00:21:05.580 | And that's what gives you the vitality of capitalism

00:21:09.180 | because an entrepreneur will see an arbitrage advantage

00:21:12.660 | and try to close that gap,

00:21:14.220 | and that will give you innovation over time.

00:21:16.340 | And Schumpeter went beyond that

00:21:17.980 | and saw the role of money and said that

00:21:20.060 | an entrepreneur is somebody with a great idea and no money.

00:21:23.060 | - Yeah. - Okay?

00:21:25.100 | So to become a capitalist, you've gotta get money.

00:21:28.760 | And therefore, you've gotta approach the finance sector

00:21:31.460 | to get the money, and the finance sector creates money

00:21:34.540 | and also creates a debt for the entrepreneur.

00:21:37.380 | And so you get this financial engine turning up as well,

00:21:41.620 | and you will get movements away from equilibrium

00:21:43.980 | out of that.

00:21:44.820 | You won't necessarily head back towards the equilibrium.

00:21:47.380 | So Schumpeter has a rich vision of capitalism

00:21:51.340 | in which money plays an essential role,

00:21:54.060 | in which you will be disturbed from equilibrium all the time.

00:21:58.940 | And that is really, I think, a much closer vision

00:22:02.620 | of actual capitalism than anything by,

00:22:05.320 | even the leading Austrians, Hayek, et cetera, et cetera,

00:22:11.600 | they, and certainly Ron Bardo, I find totally,

00:22:14.500 | like reading a cardboard cutout version

00:22:16.980 | of the wealth of nations, I find his worth trivial.

00:22:21.980 | But Schumpeter was rich,

00:22:25.280 | but with the same foundations as the Austrians.

00:22:27.900 | But because he talked about the importance of money,

00:22:30.140 | that took him away from the Austrian vision,

00:22:31.860 | which was very much based on a hard money idea of capitalism.

00:22:35.980 | Schumpeter said you needed the capacity

00:22:38.020 | of the financial sector to create money,

00:22:40.360 | to empower entrepreneurs.

00:22:42.620 | And that's a very important vision.

00:22:44.800 | - So Schumpeter's argument is the deviation from equilibrium,

00:22:47.580 | that's where all the fun happens,

00:22:48.960 | that's where all the magic happens.

00:22:50.220 | - That's the magic of capitalism.

00:22:51.780 | And like the Austrians,

00:22:52.700 | because they focus on the deviation from equilibrium

00:22:55.180 | are better than their classicals,

00:22:56.940 | but they still have this belief in the,

00:22:59.100 | you'll reach equilibrium ultimately,

00:23:00.620 | or you'll head back towards it.

00:23:03.060 | Whereas they don't have an explanation of capitalism

00:23:07.380 | that gives you cycles

00:23:08.360 | apart from having the wrong rate of interest.

00:23:11.100 | So there's no role for an accumulation of debt over time.

00:23:13.780 | So what Schumpeter gave us was a vision

00:23:17.000 | of the creativity of capitalism

00:23:19.340 | being driven by entrepreneurs

00:23:21.300 | who are funded by money creation by the finance sector.

00:23:24.180 | And that's fundamentally the world in which we live.

00:23:28.120 | - So there's also,

00:23:30.420 | kids these days are all into modern monetary theory.

00:23:35.420 | What's that about?

00:23:36.660 | - Okay, modern monetary theory is accounting.

00:23:39.860 | I wanna summarize it bluntly.

00:23:42.140 | It's simply saying, let's do the accounting

00:23:44.180 | because what money is,

00:23:45.740 | is a creature of double entry bookkeeping.

00:23:48.300 | - What's double entry bookkeeping?

00:23:49.700 | - Banks, this was invented back in the 1500s in Italy.

00:23:53.180 | I've forgotten the particular merchant who did it

00:23:56.140 | based on some Arabic ideas as well.

00:23:58.260 | But the thing is,

00:23:59.080 | if you wanna keep track of your financial flows,

00:24:02.220 | then you divide what you,

00:24:06.340 | all the financial claims on you,

00:24:08.220 | you divide into claims you have on somebody else,

00:24:10.380 | which are your assets,

00:24:11.740 | claims somebody else has on you,

00:24:13.100 | which are your liabilities,

00:24:14.580 | and the gap between the two is your equity.

00:24:17.100 | So you record every transaction twice on one row.

00:24:20.620 | Okay, so for example,

00:24:21.460 | if you and I do a financial transfer,

00:24:25.220 | you have a bank account, I have a bank account,

00:24:27.780 | your bank account will go down, mine goes up, okay?

00:24:30.900 | And that's, the sum of the operation is zero, okay?

00:24:34.880 | But on the other hand, if I go to a bank and borrow money,

00:24:37.280 | then my account goes up,

00:24:38.400 | they put money in my deposit account,

00:24:40.000 | the bank's assets go up, okay?

00:24:42.360 | And there's still the same sum applies,

00:24:43.920 | assets minus liabilities minus equity equals zero.

00:24:46.960 | Now that's simply saying money is an accounting,

00:24:50.480 | a creature of accounting,

00:24:51.860 | it's not a creature of a commodity.

00:24:53.920 | So if you think about how Austrians think about money,

00:24:56.520 | and how gold bugs think about money,

00:24:58.320 | and Bitcoin enthusiasts, if there are any left,

00:25:00.920 | think about money,

00:25:02.400 | what they see is money is an object, okay?

00:25:05.240 | And you and I can both have more gold,

00:25:08.640 | if we're both willing to go to this,

00:25:09.920 | you know, a mine somewhere and dig a few holes

00:25:12.860 | and get a few specks of gold out.

00:25:14.760 | So there's no competition or no interaction

00:25:18.280 | between you and me if money is gold.

00:25:20.360 | And I think money should be an object, a commodity.

00:25:23.020 | But money fundamentally is not a commodity,

00:25:25.240 | it's a claim on somebody else.

00:25:28.140 | That's money's essence.

00:25:29.560 | So when you do it,

00:25:30.400 | you must use double entry bookkeeping to do it.

00:25:32.560 | And then when you do,

00:25:33.440 | you find all the answers that come out of thinking

00:25:35.360 | as money as a commodity are wrong.

00:25:37.400 | So for example, I've got Elon on this one,

00:25:39.240 | so I wanna get this rid of Elon,

00:25:40.880 | 'cause I saw him making a comment about this

00:25:42.880 | a few weeks ago on Twitter.

00:25:44.360 | He said that it's wrong for the government,

00:25:45.960 | effectively it seems wrong for the government

00:25:47.440 | to always be in deficit.

00:25:48.680 | Okay, now when you look at it and say,

00:25:51.280 | well, how is money created?

00:25:53.380 | How does money come about

00:25:55.320 | when it's not a commodity like gold,

00:25:58.800 | which you dig up out of the ground,

00:26:00.400 | when it's actually social relations

00:26:02.000 | between people that create money?

00:26:04.080 | Well, money is the,

00:26:05.840 | they're fundamentally the liabilities of the banking sector.

00:26:10.200 | If we make a transfer between us,

00:26:14.360 | your deposit account goes down,

00:26:16.020 | my deposit account goes up.

00:26:18.400 | Those are exchanges on the liability side

00:26:20.720 | of the banking sector.

00:26:23.520 | But if we have a transaction with a bank,

00:26:26.000 | then if the bank lends us money,

00:26:27.520 | its assets loans go up, its deposits go up,

00:26:30.760 | again, that same balance.

00:26:32.080 | So you've gotta look and say,

00:26:33.640 | money therefore is fundamentally

00:26:35.400 | the liabilities of the banking sector.

00:26:37.680 | So how do you create additional liabilities?

00:26:40.440 | You must have an operation which occurs

00:26:42.600 | both on the liability side

00:26:44.120 | and the asset side of the banking sector.

00:26:46.840 | So if you and I make a new transaction,

00:26:49.000 | no money is created.

00:26:50.080 | Existing money is redistributed.

00:26:53.440 | But if you go to a bank and take out a bank loan,

00:26:56.520 | then money is created by the bank loan.

00:26:58.680 | So the liabilities of the banking sector rise,

00:27:00.800 | the assets rise, they're balanced,

00:27:02.240 | but more liabilities means,

00:27:03.560 | the banking sector means more money.

00:27:06.040 | So that's how private banks create money.

00:27:08.960 | And that's what I first started working on

00:27:11.540 | when I became an academic about 35 years ago,

00:27:14.960 | the actual dynamics of private money creation.

00:27:17.280 | But the government has the same sort of story.

00:27:19.480 | If the government runs a deficit,

00:27:21.400 | it spends more money on the individuals in the economy

00:27:26.600 | than it taxes them,

00:27:27.880 | which means their bank accounts increase.

00:27:31.360 | So a government deficit creates money

00:27:34.320 | for the private sector.

00:27:35.440 | So that's where money creation occurs from the government.

00:27:39.240 | So it puts more money into people's bank accounts

00:27:44.120 | by spending, by welfare payments

00:27:46.840 | than it takes out by taxation.

00:27:49.040 | So that's creating new money.

00:27:50.840 | And then on the other side of the bank,

00:27:53.280 | the money turns up in the reserve accounts of the banks,

00:27:56.280 | which are basically the private banks' bank accounts

00:27:58.680 | at the central bank.

00:28:00.400 | So rather than the asset of private money creation

00:28:04.700 | being loans,

00:28:06.000 | the asset of government money creation is reserves.

00:28:08.500 | Okay?

00:28:11.140 | - Right.

00:28:11.980 | Money creation.

00:28:13.320 | - Money creation.

00:28:14.160 | - Is a good thing.

00:28:15.320 | So you mentioned a bunch of stuff

00:28:16.840 | like private money creation

00:28:18.240 | with the liabilities in the banks,

00:28:19.720 | and then how the government is doing,

00:28:21.160 | the reserves, blah, blah, blah.

00:28:23.520 | At the end of the day,

00:28:24.960 | there's a bunch of printers that are printing money.

00:28:27.560 | And then you also said something interesting,

00:28:30.480 | which is social relations between humans

00:28:33.680 | is what creates money.

00:28:35.560 | I think my mind was blown several times

00:28:38.040 | over the past minute.

00:28:39.300 | So it's difficult for me to reconstruct

00:28:42.920 | the pieces of my mind back together.

00:28:44.580 | But basic question,

00:28:47.880 | is money creation a good thing or a bad thing?

00:28:50.760 | - Money creation is a good thing

00:28:53.520 | because money creation is what allows commerce to happen.

00:28:56.640 | - Isn't there a conservation of--

00:28:58.560 | - No, there isn't.

00:28:59.400 | I had arguments with physicists over this,

00:29:01.360 | and it took me a long time to answer it.

00:29:03.200 | They thought the sum total of all money is zero.

00:29:05.520 | - Yeah.

00:29:06.340 | - Okay.

00:29:07.180 | It's the sum total of all assets and liabilities is zero.

00:29:10.640 | So if you imagine your assets

00:29:13.880 | minus your liabilities is your equity,

00:29:16.620 | and your asset is somebody else's liability,

00:29:19.400 | and your liability is somebody else's asset.

00:29:21.560 | When we're talking about financial assets,

00:29:23.520 | and this is another mind blowing thing

00:29:24.920 | that I've just recently solved myself.

00:29:27.820 | So the sum total of all financial assets

00:29:30.320 | and liabilities is zero.

00:29:31.860 | - Okay, wait, wait, wait.

00:29:33.640 | I'm gonna interrupt you rudely.

00:29:35.880 | What are assets?

00:29:37.140 | What are liabilities?

00:29:38.200 | - Assets are your claims on somebody else.

00:29:41.040 | So--

00:29:41.880 | - Specific.

00:29:42.720 | Give me an example of an asset.

00:29:44.600 | - Okay, do you have a mortgage for this house?

00:29:46.680 | - No, I'm renting.

00:29:48.160 | - You're renting, there you go.

00:29:49.080 | Well, if you had a mortgage, that'd be your liability.

00:29:52.120 | - That would be my liability.

00:29:52.960 | - Okay.

00:29:53.800 | The mortgage would be the bank's asset.

00:29:56.200 | - Right.

00:29:57.040 | - Okay, if you add the two together, you get zero.

00:29:58.600 | - Okay, so that's zero.

00:30:00.000 | - That's zero.

00:30:00.840 | The money is the liability side of the banking sector.

00:30:03.920 | - Okay.

00:30:05.800 | - Okay, assets are the,

00:30:06.880 | the assets on the other side

00:30:10.020 | can be either created by the banking sector,

00:30:11.880 | which is where you get bank loans,

00:30:13.960 | or created by the government where you get reserves.

00:30:16.560 | But money is the liabilities.

00:30:18.000 | Money is, if you think about protons and anti-protons

00:30:21.160 | in that sense, money is like the anti-proton.

00:30:23.720 | It's the negative, the liability.

00:30:25.640 | - But wait, wait, wait.

00:30:27.600 | The liability is the negative.

00:30:31.280 | - Yeah.

00:30:32.120 | - But how's that money?

00:30:32.940 | I thought money is the positive.

00:30:33.780 | - What is a liability for the banking sector

00:30:35.960 | is an asset for you and me.

00:30:37.800 | - And assets includes money?

00:30:40.340 | - Yeah, yeah.

00:30:41.180 | - Okay.

00:30:42.000 | - If you have a bank, like you'd have a bank account,

00:30:44.240 | and you'd have some cash, okay?

00:30:46.200 | Okay, those are your assets.

00:30:48.280 | But the bank account is a liability to the banking sector,

00:30:52.080 | and the cash is a liability to the Federal Reserve.

00:30:54.900 | - Okay, so what's money?

00:30:57.020 | - Well, money is the promise of a third party

00:31:01.040 | that we both accept to close our transaction.

00:31:04.200 | And this is--

00:31:05.040 | - And that's a bank?

00:31:05.860 | - That's a bank.

00:31:06.700 | Yeah, this is, one of the most important works I've ever read

00:31:09.360 | is a work by a wonderful, now unfortunately deceased,

00:31:13.080 | tiny Italian economist-- - It's a tiny--

00:31:14.800 | - Called Augusto Graziani.

00:31:17.680 | - Oh, big guy. - And he's the most

00:31:18.600 | wonderful personality.

00:31:20.160 | Augusto, I've met him on a few occasions,

00:31:23.920 | is one of the few human beings

00:31:25.520 | who can speak in perfectly formed paragraphs, okay?

00:31:29.600 | Superbly eloquent.

00:31:31.120 | And what he did was write a paper called

00:31:33.160 | "The Monetary Theory of Production."

00:31:36.000 | You can find it, download it on the web.

00:31:38.120 | It's pretty much open source now.

00:31:41.560 | And what he said is,

00:31:42.400 | what distinguishes a monetary economy from a barter economy?

00:31:46.040 | So he said, "In a barter economy,

00:31:48.440 | "what we do is, I'll give you two of these

00:31:50.500 | "for one of those."

00:31:51.680 | Yeah, okay, barter.

00:31:52.880 | Just working at a relative price.

00:31:54.880 | There are two of us involved,

00:31:56.000 | and there are two commodities.

00:31:57.500 | So with money, money is a triangular transaction, okay?

00:32:02.360 | There is one commodity,

00:32:03.920 | I wanna buy that can of drink off you,

00:32:06.840 | two people, and the price that's worked out

00:32:10.320 | ends up being in a transfer from the promises to pay

00:32:13.960 | the bank that the buyer has,

00:32:15.880 | to the promises to pay the bank that the seller has.

00:32:19.160 | So if I, so what you have is a monetary transaction

00:32:22.960 | in a capitalist economy involves three agents,

00:32:26.360 | the buyer, the seller, and the bank.

00:32:28.520 | - So the bank always has to be part of it.

00:32:30.000 | - Well, the bank has to be part of it.

00:32:31.320 | When I hand you the money,

00:32:33.480 | you accept that as you've now got,

00:32:36.720 | rather than it's the bank promising to pay me something,

00:32:39.320 | it's now the bank promising to pay you something.

00:32:41.280 | And we exchange the promises of banks,

00:32:43.440 | and that's fundamentally money.

00:32:45.000 | - So money is fundamentally a threesome,

00:32:50.320 | and everybody gets fucked.

00:32:52.280 | Is that a good way to put it?

00:32:53.160 | No, I'm just kidding.

00:32:54.000 | - At least, for the guys who's actually like,

00:32:55.440 | oh, now I can use French in this conversation.

00:32:57.400 | That's good.

00:32:58.240 | - That's not French, that's a different language.

00:33:01.240 | I'll explain it to you one day.

00:33:03.520 | You Australians will never understand.

00:33:05.640 | Okay, if I can return to,

00:33:07.960 | we'll jump around if it's okay.

00:33:09.360 | - That's fine.

00:33:10.240 | - So you mentioned Karl Marx

00:33:12.520 | as one of the great intellects, economic thinkers ever.

00:33:17.520 | He might be number one.

00:33:20.980 | You study him quite a bit.

00:33:22.140 | You disagree with him quite a bit,

00:33:24.000 | but you still think he's a powerful thinker.

00:33:28.120 | - A powerful mind.

00:33:29.560 | - A powerful mind.

00:33:30.400 | So first of all, let's just explore the human.

00:33:33.000 | Why do you say so?

00:33:37.820 | What's interesting in that mind?

00:33:40.020 | In the way he saw the world,

00:33:41.260 | what are the insights that you find brilliant?

00:33:44.920 | - The Marx once described his major work

00:33:47.720 | as towards a critical examination of everything existing.

00:33:52.720 | (laughing)

00:33:54.280 | So he's a modest bastard.

00:33:56.120 | So he wanted to understand and criticize everything.

00:33:59.600 | And even, he wasn't trained directly by Hegel,

00:34:04.360 | but his teachers were Hegelian philosophers.

00:34:07.920 | And what Hegel developed was a concept called dialectics.

00:34:12.540 | And dialectics is a philosophy of change.

00:34:15.260 | And when most people hear the word dialectics,

00:34:19.580 | they come up with this unpronounceable trio of words

00:34:22.020 | called thesis, antithesis, synthesis.

00:34:25.820 | I can barely get the words out myself.

00:34:27.980 | And that actually is not Hegel at all.

00:34:29.380 | That's another German philosopher called Fichte.

00:34:31.700 | - Oh, I thought it was Kant.

00:34:33.220 | - No, Fichte.

00:34:34.200 | Well, I'm not sure.

00:34:35.040 | - I'm mixing them up.

00:34:35.860 | All Germans look the same to me.

00:34:36.700 | - Yeah, yeah, yeah, yeah, yeah.

00:34:38.060 | (laughing)

00:34:39.620 | So, but if you look,

00:34:40.540 | there's a beautiful book called "Marx and Contradiction."

00:34:42.740 | You wanna find a great explanation for Marx's philosophy.

00:34:45.940 | I've forgotten the author.

00:34:46.780 | I think it's Wilde, W-I-L-D-E, "Marx and Contradiction."

00:34:50.860 | And he points out the actual origins of Marx's philosophy.

00:34:54.380 | I didn't know that when I first read Marx.

00:34:56.100 | So I became exposed to Marx

00:34:58.940 | when I was a student at Sydney University.

00:35:01.380 | And we'd had a strike at the university

00:35:04.400 | over the teaching of philosophy.

00:35:06.360 | And what happened was the philosophy department

00:35:09.640 | had a lot of radical philosophers in it

00:35:11.240 | and a conservative chief philosopher.

00:35:13.440 | And the radicals wanted to have a course

00:35:16.920 | on what they called feminist aspects of philosophical,

00:35:19.560 | sorry, philosophical aspects of feminist thought.

00:35:22.440 | And the staff voted in favor of it.

00:35:24.240 | This is back in the days

00:35:25.080 | when university departments were democratic.

00:35:27.600 | The professor opposed it.

00:35:29.000 | He got it blocked at a high level.

00:35:30.280 | The staff leapfrogged over that.

00:35:32.160 | And then finally the vice chancellor blocked it.

00:35:34.540 | So that led to a strike over the teaching of philosophy

00:35:38.220 | at Sydney University, which at one stage,

00:35:40.180 | over half the students were on strike.

00:35:43.120 | Economics began out of that.

00:35:45.940 | - Over teaching of a philosophy of feminism.

00:35:48.580 | - Yes.

00:35:49.420 | - That's good to be.

00:35:50.260 | - That's such a different life to what we're living now.

00:35:53.120 | That's the academic milieu in which I developed

00:35:56.660 | all my ideas.

00:35:57.780 | And I had become a critic.

00:35:59.860 | I've gone from being a believer of mainstream economics

00:36:02.060 | when I was a first year student

00:36:03.800 | to disbelieving at halfway through first year.

00:36:07.020 | Okay, and I then spent a long time trying to change it,

00:36:10.020 | getting nowhere.

00:36:11.180 | And then this philosophy strike happened

00:36:12.860 | and we took it on in economics

00:36:14.540 | and we formed what's called the political economy movement

00:36:18.340 | and had a successful strike.

00:36:19.840 | We actually managed to pressure the university

00:36:23.940 | into establishing a department of political economy

00:36:26.540 | at Sydney University, as well as the department of economics.

00:36:28.980 | - What was the foundational ideas?

00:36:31.260 | Were you resistant to the whole censorship

00:36:33.020 | of why can't you have a philosophy of anything course?

00:36:38.020 | - Well, it was much more libertarian

00:36:41.300 | in the genuine sense of the word period of time

00:36:44.380 | at the end of the 60s, beginning of the 70s

00:36:47.300 | than the word libertarian has been corrupted since then.

00:36:50.580 | But it really was about free thought.

00:36:52.420 | And you went to university to learn.

00:36:54.080 | It was about education.

00:36:55.540 | I remember having a fight with my father once

00:36:57.300 | where dad was angry about the marks

00:36:59.100 | I was getting for some of my courses.

00:37:01.020 | And he said, "If you don't get a decent result,

00:37:02.540 | "you won't get a decent job."

00:37:04.260 | And I said, "I'm not here to get a job.

00:37:05.460 | "I'm here to get an education."

00:37:07.420 | - Oh, wow.

00:37:08.260 | - Okay, now the thing is, ultimately,

00:37:09.220 | it's been a pretty good job for me as well.

00:37:11.420 | This is in Sydney, by the way.

00:37:12.820 | And Sydney in summer is absolutely gorgeous.

00:37:16.060 | And what does a bunch of lefties decide to do during summer

00:37:18.980 | but read Karl Marx?

00:37:20.500 | - Yeah, on the beach or?

00:37:22.300 | - Actually, inside the room of the philosophy department

00:37:25.820 | at the University of Sydney in the main quadrangle.

00:37:28.860 | There's sandstone all around us.

00:37:30.380 | And we, a bunch of about 20 or 30 of us

00:37:32.500 | reading our way through Marx.

00:37:34.540 | - Capital, which capital?

00:37:36.220 | - Volume I Capital.

00:37:38.100 | And I remember walking off to that meeting

00:37:42.320 | with one of my friends who's a law student.

00:37:45.780 | And this was a period of a huge construction boom in Sydney.

00:37:49.900 | So the whole skyline, which we could see from the campus,

00:37:52.860 | was full of what they call kangaroo cranes,

00:37:55.000 | which were an Australian invention.

00:37:56.660 | That are cranes that can be leapfrogged over each other

00:37:59.300 | to build a skyscraper.

00:38:00.900 | - So here you are reading Karl Marx,

00:38:02.980 | looking at the mechanisms of capitalism.

00:38:05.900 | - And I looked at those mechanisms

00:38:07.260 | and I knew Marx argued that labor

00:38:08.940 | was the only source of value.

00:38:10.940 | And he said machinery doesn't add value.

00:38:12.740 | - So the cranes are worthless.

00:38:14.820 | - I'm looking at these cranes and thinking,

00:38:16.100 | I want a very good explanation by Marx

00:38:18.100 | as to why these cranes don't add value.

00:38:20.340 | So reading through the first seven chapters of Capital,

00:38:23.140 | what you found was Marx applying this dialectic.

00:38:26.080 | And like the fiction and stuff is bullshit.

00:38:27.960 | That is not how Marx thought at all.

00:38:29.680 | I was reading, trying to find the thesis, antithesis,

00:38:32.080 | synthesis, and it's not there at all

00:38:33.960 | in any of Marx's works.

00:38:35.280 | And I've read everything he's ever written on economics

00:38:38.200 | from 1844 to 1894 when his last books were published.

00:38:43.200 | There's not one word of mention of that.

00:38:45.400 | What he does talk about is foreground

00:38:46.880 | and background and tension.

00:38:49.440 | And his idea of a dialectic is that there is,

00:38:53.120 | a unity will exist in society.

00:38:57.060 | And that unity can be an individual,

00:38:58.500 | that can be a commodity, anything at all.

00:39:01.180 | The unity will be understood by that society.

00:39:04.000 | One particular aspect will be focused upon.

00:39:07.340 | So if you think about the human being in capitalism,

00:39:10.620 | the focus on the human being as an object

00:39:13.260 | is their capacity to work.

00:39:14.780 | You're a worker, okay?

00:39:17.020 | That gets put in the foreground.

00:39:18.620 | The fact that you're human and you wanna play a guitar

00:39:21.980 | and go surfing and make love

00:39:23.460 | and all the other things that humans do

00:39:25.360 | is pushed into the background.

00:39:27.240 | There's a tension between the two of those.

00:39:30.340 | And that can transform that unity over time.

00:39:33.220 | And that's a beautiful dynamic vision of change.

00:39:37.540 | So dialectics is a philosophy of change.

00:39:39.940 | - So synthesis, antithesis is what,

00:39:42.880 | does every idea have a counter argument?

00:39:45.860 | - Yeah, there's a positive and negative

00:39:47.420 | and you bring them together somehow.

00:39:48.660 | - And then Marx has this foreground, background,

00:39:51.340 | and tension. - Foreground is all

00:39:54.020 | what we think of as economics and background

00:39:55.900 | is all the lovemaking we do as humans.

00:39:57.540 | - That sort of thing.

00:39:58.380 | - And why is there a tension?

00:40:00.580 | - Well, because if you mention the unity,

00:40:03.940 | like if you take a human in any preview,

00:40:07.540 | 'cause you go back to Cro-Magnon days

00:40:09.180 | when we're living in caves and we've gotta go hunting

00:40:12.660 | and cook food and stuff like that,

00:40:14.220 | but there's no social hierarchy as we've become used to.

00:40:18.140 | So you don't get labored as a worker or a capitalist,

00:40:20.420 | you're just a human in that situation.

00:40:22.620 | Then you've got more of an integrated view of who you are.

00:40:26.300 | And I think that's one of the appeals of a tribal,

00:40:28.580 | a genuine tribal culture,

00:40:30.260 | that you get treated for the whole of who you are.

00:40:32.460 | You've certainly categorized, you're male, you're female,

00:40:35.060 | you're young, you're old, you're a hunter,

00:40:36.780 | you're a tool maker, et cetera, et cetera,

00:40:39.380 | but you're treated as more an integrated object.

00:40:41.660 | When you get put in a complex society

00:40:43.480 | like a capitalist society,

00:40:45.240 | then one side of you is emphasized

00:40:47.220 | and the others are de-emphasized.

00:40:48.900 | - So is it fair to say that the background

00:40:50.860 | is like our basic fundamental humanity

00:40:54.260 | and the foreground is the machine of capitalism?

00:40:56.820 | - Effectively, and when you look at it in terms of a human.

00:40:59.460 | But what Marx did is apply this to a commodity.

00:41:02.500 | So he said, "What is the essential unity

00:41:04.580 | "in a capitalist economy?"

00:41:06.140 | And the essential unity is a commodity.

00:41:08.540 | - The essential unit.

00:41:10.420 | - The essential unity.

00:41:11.940 | - What's unity?

00:41:12.780 | - Unity is an object in society.

00:41:15.380 | - Okay.

00:41:16.220 | - Okay, so he started from the point

00:41:17.300 | of you are trying to understand how exchange occurs.

00:41:20.180 | How do we set prices?

00:41:21.740 | And his starting vision was to say

00:41:23.540 | that a commodity is a unity in a capitalist economy.

00:41:28.540 | The part of the unity that we focus upon

00:41:33.140 | is the exchange value.

00:41:35.340 | A capitalist produces a commodity,

00:41:38.020 | not because of its qualitative characteristics,

00:41:40.900 | but because it'd be sold for a profit.

00:41:43.000 | So the foreground aspect of a commodity

00:41:44.900 | is its exchange value.

00:41:47.020 | The background aspect of it,

00:41:48.780 | it won't succeed as a commodity unless it has a use value.

00:41:51.700 | - So the background is the utility thing.

00:41:55.220 | - Yeah, see, if you made something which didn't work,

00:41:58.340 | - Okay, yeah.

00:41:59.500 | - Then it has, you might be able to sell it,

00:42:01.660 | but it has no utility.

00:42:02.980 | That can't, you can't make that into a commodity.

00:42:04.900 | A broken thing can't be sold.

00:42:06.340 | - Does that have the subjective?

00:42:07.940 | - Yeah, it has to have the subjective side.

00:42:09.900 | - So people enjoy it.

00:42:10.740 | - As well as the objective.

00:42:12.140 | So the objective is what capitalists worry about.

00:42:14.020 | I'll give you my favorite counter example of that.

00:42:16.380 | I was in, I took a bunch of Australian journalists to China

00:42:19.260 | way back in the period when the Gang of Four

00:42:22.140 | was being on trial.

00:42:23.940 | And we did a tour of the Forbidden City in Beijing.

00:42:28.260 | And at that stage, all the artifacts of the royal family,

00:42:31.660 | the emperor, were actually in the building still.

00:42:34.500 | And we walked past one of them,

00:42:35.960 | and it was this gold, solid gold bar about this long,

00:42:40.940 | shaped like a fist, turned over like this.

00:42:43.060 | And on this side, there were rubies, emeralds, diamonds.

00:42:46.420 | You'd never seen gemstones.

00:42:48.020 | I mean, gems that big.

00:42:49.780 | And one of the journalists asked me what I thought it was,

00:42:51.740 | and I said, "Oh, it's obvious.

00:42:52.620 | "Jane, it's a backscratcher, ha, ha, ha."

00:42:55.420 | I walked away, she caught up with me

00:42:56.780 | about 20 minutes later, said, "I asked one of the guides.

00:42:58.860 | "It is a backscratcher."

00:43:01.380 | So here's a backscratcher for the emperor

00:43:03.580 | made of solid gold with diamonds and rubies and emeralds

00:43:06.580 | during the scratching.

00:43:07.900 | Now that's a commodity in a feudal society.

00:43:11.860 | Cost doesn't matter.

00:43:13.300 | You want the most elaborate, beautiful thing

00:43:15.220 | 'cause you are the emperor.

00:43:16.740 | So in a feudal society, the commodity,

00:43:20.060 | what's focused upon is the utility.

00:43:22.620 | And the cost of production when you're the emperor

00:43:24.740 | is immaterial.

00:43:25.980 | Capitalism reverses that.

00:43:28.140 | So the commodity in a capitalist economy

00:43:30.240 | is a plastic $2 scratcher you can get from Kmart or Target.

00:43:35.240 | And so the use value is necessary,

00:43:39.900 | but irrelevant to forming the price.

00:43:42.740 | Now that was a completely different vision

00:43:44.780 | of exchange in capitalism

00:43:46.940 | to what I found in the neoclassical theory

00:43:48.860 | 'cause that says it's the marginal utility

00:43:51.640 | and the marginal cost of everything

00:43:54.060 | that determines the exchange ratio.

00:43:56.940 | And the crazy thing about that

00:43:58.180 | is not so much the marginal utility,

00:44:00.720 | but the argument in the neoclassical theory

00:44:03.580 | is that the price ratio, the price will,

00:44:05.680 | when there's an exchange going on,

00:44:07.960 | there's two person, two commodity exchange

00:44:10.300 | of two commodities between two people,

00:44:13.240 | they will, the price will change until such time

00:44:18.540 | as the ratio of the marginal utilities

00:44:20.940 | is equal to the ratio of the marginal costs.

00:44:23.940 | That's supposed to be the equilibrium.

00:44:25.220 | And Marx says, that's bullshit.

00:44:26.980 | That's a previous society where you exchange stuff

00:44:30.940 | that you happen to have

00:44:32.420 | for stuff somebody else happened to have

00:44:34.580 | without any real production mechanism being involved.

00:44:37.780 | And he said, that's like when you have

00:44:39.480 | two ancient tribes, two tribes meeting

00:44:41.680 | for the very first time,

00:44:43.200 | and one tribe can make something

00:44:44.600 | the other tribe can't make.

00:44:46.400 | And they will therefore,

00:44:48.200 | the price they were willing to pay

00:44:50.120 | reflect how unique this other object is

00:44:52.920 | that this one tribe can make and the other can't.

00:44:55.320 | So for example, the story of Manhattan

00:44:57.520 | being sold for 40 glass beads,

00:44:59.840 | it's actually 40 glass trading beads.

00:45:02.000 | I believe it is a true story.

00:45:03.800 | But the thing is, the Indians couldn't make glass beads.

00:45:07.560 | So they valued the glass beads

00:45:09.220 | at the Island of Manhattan,

00:45:11.100 | which is a utility-based comparison.

00:45:13.380 | What Marx said, that's the very initial contact.

00:45:16.100 | Over time, even if you don't know the technology,

00:45:18.980 | over time, you start to realize

00:45:20.820 | how much work goes involved

00:45:22.180 | to making what they're selling you

00:45:24.020 | versus what you're selling to them.

00:45:26.340 | And you start making stuff specifically for sale.

00:45:29.820 | So Elon's not losing personal utility

00:45:32.680 | each time a Model 3 goes out the door.

00:45:36.940 | He might get utility out of the fact

00:45:38.420 | that he's created that vehicle,

00:45:40.500 | that concept, and manufactures it and so on,

00:45:42.600 | but he's not losing utility

00:45:43.860 | each time a Model T Ford goes out the door

00:45:46.260 | after going back for the ancient commodity there.

00:45:50.180 | So the utility plays no role

00:45:53.260 | in setting price in Marx's model,

00:45:56.300 | whereas it's essential in the neoclassical model.

00:45:59.060 | - What's the difference between utility

00:46:00.500 | and marginal utility?

00:46:01.820 | What does the word marginal mean

00:46:04.300 | and why is it such a problem?

00:46:06.220 | - It turns marginal utility,

00:46:08.540 | well, utility itself has different meanings

00:46:11.020 | in the two schools of thought.

00:46:12.140 | If you take the classical school of thought,

00:46:14.060 | which when Marx comes from,

00:46:15.620 | utility is effectively objective.

00:46:18.060 | So the utility of a chair is that you can sit in it,

00:46:21.500 | not how comfortable it makes you feel.

00:46:23.400 | - Yeah. - Now, can I,

00:46:25.100 | if you think about the utility of the chairs,

00:46:26.380 | we're both sitting in, they're identical

00:46:28.140 | from a classical point of view, we're both sitting.

00:46:30.580 | But from a neoclassical point of view,

00:46:32.340 | it's how comfortable it makes you feel.

00:46:34.500 | And that depends upon your subjective feelings of comfort.

00:46:37.900 | You might be far more comfortable in the identical chair

00:46:40.420 | that I'm sitting in than I am.

00:46:42.020 | And therefore the comparison is difficult.

00:46:43.980 | And therefore working out a ratio

00:46:46.420 | involves you've got a decline in your,

00:46:49.100 | each time you give away a chair in exchange for an iPhone,

00:46:53.780 | you have a fall in your utility.

00:46:55.780 | And then therefore you want a higher return

00:47:00.580 | because you're losing more utility each time.

00:47:03.300 | The more chairs you give away,

00:47:04.420 | the less utility you're getting from chairs.

00:47:06.220 | So there's a decline in your utility.

00:47:08.500 | That's your marginal utility.

00:47:10.980 | So it's including your subjective valuation

00:47:13.660 | in setting the price.

00:47:15.260 | And what Marx pointed out is this is a caricature

00:47:18.500 | of actual change in a capitalist economy.

00:47:20.740 | 'Cause we have in a capitalist economy,

00:47:22.340 | huge factories sending out huge quantities

00:47:24.820 | specifically for sale.

00:47:26.620 | They've got no utility to the seller unless they're sold.

00:47:32.220 | So it's a very different vision of how price is set.

00:47:36.100 | And Marx used that to explain where profit comes from,

00:47:39.980 | but he made a mistake.

00:47:41.180 | And his argument was that talking about a worker

00:47:45.900 | as now your unity,

00:47:48.340 | this foreground, background tension thing,

00:47:50.820 | the foreground is that you hire a worker

00:47:53.100 | for their cost of production.

00:47:55.780 | And the cost of production is a subsistence wage.

00:48:00.260 | The utility to the buyer

00:48:03.100 | is the fact that they can work in a factory.

00:48:06.300 | Now it might take six hours, let's say,

00:48:08.740 | to make the means of subsistence.

00:48:10.540 | And that's the exchange value.

00:48:11.820 | And that's what the capitalist pays

00:48:13.820 | as a wage to the worker.

00:48:15.580 | But they can work in the factory for 12 hours.

00:48:18.220 | That's the utility.

00:48:19.340 | 12 minus six is six surplus of value hours.

00:48:24.700 | And that's where profit comes from.

00:48:26.780 | And that was Marx's argument.

00:48:27.940 | And I thought it was brilliant,

00:48:30.100 | but it also applied to machinery.

00:48:32.380 | - Right, okay.

00:48:33.220 | Let's lean on that.

00:48:34.380 | Hold on a second.

00:48:35.220 | No, no, deep is good.

00:48:36.380 | Just wanted to find terms.

00:48:38.380 | Don't take that statement out of context,

00:48:40.340 | the internet, please.

00:48:41.660 | Okay.

00:48:42.500 | You said buyer, seller, worker.

00:48:48.220 | In a factory, who's the seller, who's the buyer?

00:48:51.220 | Why is the worker the buyer?

00:48:55.780 | - Well, the worker's the commodity in this case.

00:48:58.820 | If you're gonna make stuff in a factory,

00:49:00.260 | you've gotta hire workers.

00:49:01.900 | - Yes.

00:49:02.740 | - And what Marx is saying,

00:49:03.580 | the buyer in that situation is a capitalist.

00:49:06.060 | So what does the buyer pay?

00:49:07.620 | He says he pays the exchange value.

00:49:09.340 | That's, back to the commodity thing,

00:49:11.540 | because that's the starting point.

00:49:13.100 | He said the essential unity

00:49:14.660 | in a capitalist economy is the commodity.

00:49:17.220 | A commodity has two characteristics,

00:49:19.100 | exchange value and use value.

00:49:21.100 | Exchange value of a commodity in a capitalist economy

00:49:24.980 | will be its cost of production.

00:49:27.060 | Use value is what you do with it, okay,

00:49:30.100 | once you've purchased it.

00:49:31.140 | - But labor is a commodity?

00:49:33.980 | - In this case, when a worker is being hired for a job, yes.

00:49:38.180 | - So the worker's labor has an exchange value

00:49:42.260 | and a use value as well?

00:49:43.580 | - Yeah.

00:49:44.420 | - Use value, use value of a worker's labor.

00:49:48.060 | Exchange value.

00:49:49.500 | Let me think about that.

00:49:52.220 | So the hours they put in--

00:49:56.740 | - Is the use value.

00:49:57.860 | - Interesting.

00:49:59.940 | So what does the worker want in this?

00:50:04.940 | What are the motivations?

00:50:06.020 | Are we not considering the worker in this context

00:50:08.820 | as a human being?

00:50:09.660 | - Well, you come, and that's actually,

00:50:11.980 | that's the next layer.

00:50:13.700 | What Marx gave was just like a layered cake,

00:50:17.020 | starting from a foundation of saying

00:50:19.180 | straight commodity exchange,

00:50:21.020 | and then saying, well, you're treating a worker

00:50:22.780 | as a commodity.

00:50:23.980 | Now, a commodity is something like this.

00:50:27.260 | Okay, that has, so far as I'm aware, no soul, okay?

00:50:30.700 | Not gonna be complaining if I turn it upside down.

00:50:32.620 | It'll fall over, but it, yeah.

00:50:34.300 | So there's no soul there.

00:50:35.740 | As a human, it's both a commodity and a non-commodity.

00:50:39.540 | And therefore, there'll be a tension in the person.

00:50:41.580 | I'm being treated as a commodity here.

00:50:43.100 | I'm being paid just enough to stay alive.

00:50:46.180 | I've got a wife and kids back at home.

00:50:48.700 | So that is another layer of thinking in Marx.

00:50:52.300 | And on that layer, he then says, well,

00:50:53.580 | workers will therefore demand more than their value.

00:50:56.900 | - So that's when you get like political.

00:50:58.740 | - You get political, and you get money coming above that,

00:51:01.020 | and so on.

00:51:01.860 | But the basic idea starts from the commodity

00:51:04.020 | is the fundamental unity in capitalism.

00:51:06.140 | The important commodity in Marx's thinking was the worker,

00:51:11.540 | because that's where he said profit came from, okay?

00:51:14.260 | And then that explains the motivation of the capitalist,

00:51:16.580 | and that ultimately leads to the labor theory of value,

00:51:19.020 | and Marx's arguments about how capitalism

00:51:22.260 | will come to an end.

00:51:23.380 | - Okay, okay, okay.

00:51:24.540 | So first of all, what is the labor theory of value?

00:51:27.700 | And actually, before that, what is value?

00:51:30.620 | Is that, this is like me asking what's happiness.

00:51:34.340 | Is there something interesting to say

00:51:36.780 | about trying to define value?

00:51:38.620 | - You vary, and this is a huge problem in economics,

00:51:41.940 | is arguments of what does value mean?

00:51:45.020 | And the neoclassicals came down as that it's subjective.

00:51:48.340 | It's value is whatever you get out of it.

00:51:51.020 | It's your personal evaluation of something,

00:51:54.020 | your personal feelings.

00:51:55.420 | So they've got that very subjective idea of value,

00:51:58.540 | whereas the Marxists, being inheritors of the classical

00:52:02.420 | school, talk in terms of objective value.

00:52:05.300 | So the value is the number of hours it takes

00:52:08.340 | to make something, or the effort.

00:52:10.660 | The value is the effort that goes into making something

00:52:13.740 | in the classical school.

00:52:15.060 | - Well, that's just one measure of objective.

00:52:17.780 | Where do you fall?

00:52:19.540 | Where do you fall?

00:52:20.860 | - I fall on--

00:52:21.700 | - Subjective versus objective spectrum of value.

00:52:25.700 | - I think you have to have the capacity to move

00:52:28.500 | between one and the other in a structured way.

00:52:30.700 | - A key model of value.

00:52:31.740 | - Yeah, well, my base model is the objective, okay?

00:52:35.020 | But above that, as soon as you start talking,

00:52:37.100 | you said about the worker, for example,

00:52:39.020 | then you get involved in the subjectivity,

00:52:42.580 | because a worker will be angry, and justifiably so,

00:52:48.260 | about being treated as a commodity.

00:52:50.260 | Because I'm not a commodity, I'm a human being, okay?

00:52:53.140 | And that's where Marx saw political organization

00:52:56.180 | coming from.

00:52:57.020 | And that's subjective now.

00:52:59.860 | And then when you get to money itself,

00:53:01.700 | Marx actually said, "Well, what's the value of money?"

00:53:05.100 | Now, if you use an objective theory of value,

00:53:07.180 | you would say, "Well, the value of money

00:53:09.540 | "is its cost of production.

00:53:11.220 | "What's the cost of producing a dollar?

00:53:12.860 | "It's about two cents."

00:53:15.020 | So he said, "It can't be, the value of money

00:53:18.060 | "cannot be its cost of production."

00:53:20.260 | Or, "There must value,"

00:53:21.260 | I think if I remember the phrase properly,

00:53:23.260 | or "is value here, as it must mean,

00:53:25.860 | "the effectively uncertain expectations

00:53:30.060 | "or subjective valuation."

00:53:31.940 | - Uncertain expectation or subjective valuation, okay.

00:53:35.620 | But he was okay with that?

00:53:36.700 | - He was okay with that, because he could move

00:53:38.180 | between different levels.

00:53:39.460 | Because he had a structured foundation

00:53:41.420 | of this dialectical vision.

00:53:44.500 | Foreground, background tension.

00:53:46.340 | Commodity, having use value, exchange value,

00:53:49.820 | and a gap between the two.

00:53:51.660 | When you're talking about machines,

00:53:54.300 | when you're buying stuff for production.

00:53:56.100 | And then, at the next level,

00:53:57.860 | he could look at workers, worker organization,

00:54:00.300 | and say that's driven by being treated as a commodity

00:54:03.420 | when you're a non-commodity.

00:54:04.900 | - So the basic labor theory of value

00:54:09.740 | that is described to Karl Marx

00:54:11.700 | is that value at the base layer

00:54:14.420 | fundamentally comes from the labor you put into something.

00:54:19.420 | And you say, well, there's some deep truth there,

00:54:23.540 | except he misses one fundamental point,

00:54:26.060 | which is machines can also bring value to the world.

00:54:30.300 | He was saying they don't.

00:54:31.820 | The only thing that matters is human labor, not labor.

00:54:38.540 | How do you measure what's the role

00:54:41.060 | of whatever value machines bring to the world?

00:54:44.580 | - Okay, this is another intriguing history

00:54:47.860 | because Marx, when he first started,

00:54:50.460 | had what you can call an exclusivist explanation

00:54:55.380 | for why labor created value.

00:54:57.500 | And that was to say that labor is the only commodity

00:55:01.700 | with both what he called commodity and commodity power.

00:55:05.420 | So you have labor and labor power.

00:55:08.740 | Labor is the, and I get fuzzy about this,

00:55:11.740 | I haven't read it for something like 30 years,

00:55:13.860 | but labor has both commodity and commodity power.

00:55:16.940 | The commodity is you can buy labor,

00:55:19.900 | which is the means of subsistence.

00:55:21.940 | Labor power is the capacity to work inside a factory.

00:55:25.180 | There's a difference between the two.

00:55:27.220 | Therefore, that difference will give rise to surplus.

00:55:29.580 | And there's no other commodity

00:55:31.220 | that has this essence of commodity and commodity power.

00:55:34.220 | So that was his exclusivist argument.

00:55:36.380 | In the middle of the 1857,

00:55:38.980 | he was visited by a guy called Otto Brauer

00:55:42.780 | in his home in Chelsea.

00:55:44.820 | And Otto returned to Marx a copy of Hegel's,

00:55:49.820 | I think it's called "Phenomenology of Right."

00:55:51.480 | I haven't read it, but that's the book.

00:55:53.300 | And Marx was then at this stage

00:55:55.580 | reading through all the classical theorists again.

00:55:58.420 | And he was, suddenly he read Hegel again.

00:56:01.260 | And if you know Hunter S. Thompson?

00:56:02.820 | - Mm-hmm, of course.

00:56:03.700 | - Okay.

00:56:04.540 | - Who doesn't know Hunter S. Thompson?

00:56:06.340 | - Somebody who hasn't had enough drugs, obviously.

00:56:08.340 | - Yeah.

00:56:09.180 | - But Hunter S. Thompson--

00:56:10.000 | - He comes to you in a dream

00:56:10.840 | after you take your first--

00:56:12.100 | - Mescaline or whatever.

00:56:13.500 | - And of course we've all--

00:56:14.340 | - If you know your drugs well enough,

00:56:15.700 | you can tell, okay, he's stoned, okay, he's on cocaine.

00:56:18.980 | Well, Marx suddenly, his writing style

00:56:21.180 | in the middle of a book called "The Grundrisse"

00:56:23.100 | completely changed.

00:56:24.220 | - He switched from weed to cocaine.

00:56:26.060 | - He switched from Ricardo to Hegel.

00:56:28.180 | Okay, and what in Ricardo,

00:56:29.860 | he had this exclusivist argument about labor.

00:56:31.900 | And suddenly Hegel is back talking in terms of dialectics,

00:56:35.860 | not actually using a word,

00:56:37.140 | but foreground and background and tension.

00:56:40.100 | And then he, that's where this use value,

00:56:41.900 | exchange value, tension thing came from,

00:56:44.940 | is rereading Hegel 13 years after

00:56:47.580 | he stopped reading philosophy.

00:56:48.980 | 'Cause made in '44, he was reading just the economists.

00:56:53.340 | - So you're saying Karl Marx is human after all?

00:56:55.660 | - He's human.

00:56:56.500 | - He could be--

00:56:57.320 | - I would love to have a beer with Karl, for a while.

00:56:59.180 | - For Karl?

00:57:00.020 | He's Karl to you?

00:57:00.860 | (laughing)

00:57:01.700 | - He's Mr. Marx to me.

00:57:03.460 | - Hang on.

00:57:04.300 | Maybe Karl to me, I'm afraid, after all these years.

00:57:06.580 | - Yeah, yeah, you've had quite a journey together.

00:57:09.420 | So that's where, after Hegel,

00:57:11.700 | his interpretation of the dialectics comes

00:57:14.020 | in the form of foreground and background.

00:57:16.260 | - And then on page 267 of the Penguin edition

00:57:19.620 | of "The Grundrisse."

00:57:21.180 | - Literally, your memory--

00:57:22.580 | - One and a half pages, long footnote.

00:57:24.300 | It's pretty hard to forget.

00:57:25.340 | 'Cause when I did this, when I first read Marx

00:57:28.540 | way, way back when I was, how old was I, 20?

00:57:32.300 | Okay, I tried to explain my explanation

00:57:35.140 | of Marx's use value, exchange value stuff

00:57:37.840 | to my colleagues in this philosophy discussion room

00:57:40.760 | at Sydney University during a beautiful summer

00:57:43.140 | that we were inside concrete sandstone walls discussing Marx.

00:57:47.260 | And I went to say, look, the use value,

00:57:48.840 | exchange value argument can be applied to a machine.

00:57:52.380 | What's the exchange value of a machine?

00:57:53.980 | It's cost of manufacturing it.

00:57:55.460 | What's its use value?

00:57:56.700 | Its capacity to produce goods for sale.

00:57:59.740 | No relation between the two, there'll be a gap.

00:58:01.740 | A machine can be a source of profit.

00:58:04.060 | Now I said that and I got laughed at.

00:58:05.900 | I quite literally laughed at.

00:58:07.680 | So when I went back to university 13 years later

00:58:10.460 | to do my master's degree, I chose to read through

00:58:14.400 | and find in Marx where he first came across this insight.

00:58:18.540 | So I made it, my first master's thesis failed, by the way,

00:58:21.940 | and justifiably so.

00:58:24.020 | I was learning, I didn't know the level

00:58:26.140 | of academic discourse necessary.

00:58:29.860 | I had an advisor who didn't understand what I was writing.

00:58:32.860 | He got me to write for his New Keynesian audience

00:58:36.860 | and it was a mess and it got failed.

00:58:39.420 | So I got rid of him.

00:58:40.260 | - Did it get failed because, like, why do you think?

00:58:42.980 | - It wasn't a good thesis.

00:58:44.380 | I didn't know the level.

00:58:45.980 | It was written for an audience my supervisor thought

00:58:49.120 | that I should be writing for and it was a mess.

00:58:51.740 | And so I met another guy, Jeff Fishburne,

00:58:54.880 | as a lecturer at New South Wales University.

00:58:59.340 | And Jeff was open-minded.

00:59:00.740 | He was not a conventional neoclassical thinker.

00:59:04.460 | And I realized I'd throw out the half

00:59:06.380 | that Bill had got me to do, focus just on Marx.

00:59:09.700 | And so I decided to read Marx in chronological sequence

00:59:12.980 | from his very first works of economics,

00:59:15.020 | which are called the Economic and Philosophical Manuscripts

00:59:17.300 | of 1844.

00:59:18.820 | And he wrote those in a garret in Paris

00:59:21.460 | after he'd been expelled from Prussia.

00:59:23.700 | And so he decided to read the,

00:59:26.380 | having been an expert on philosophy

00:59:28.100 | and regarded as the towering intellect

00:59:30.860 | of Hegelian philosophy in Prussia,

00:59:33.980 | but driven out because he was a radical.

00:59:35.660 | He ended up running a newspaper

00:59:39.700 | or writing for a newspaper.

00:59:41.580 | And he was reporting about the eviction of peasants

00:59:44.660 | from the forests, taking away their feudal rights.

00:59:48.180 | And so this is where his passion for economics

00:59:51.380 | and humanity came from.

00:59:52.940 | And he was a poet as well.

00:59:55.140 | I mean, he wrote love poetry to Jenny von Westhalen.

00:59:58.660 | That's his first published works

01:00:00.140 | were pretty much in poetry.

01:00:01.860 | He was a rouse about, he was a wild character.

01:00:05.180 | We'd probably fight like crazy, I imagine, if we met.

01:00:07.900 | - Over the beers?

01:00:10.300 | - I'm slightly, even though I can be,

01:00:12.300 | I can get involved in an argument like nobody's business.

01:00:17.300 | - No, really?

01:00:18.220 | - No, really.

01:00:19.180 | I'm a bit more peaceful of personality.

01:00:21.580 | - Oh, you think Marx is feistier than you?

01:00:23.300 | - He was feisty, but feisty with, he could be arrogant.

01:00:27.460 | Like I've got intellectual arrogance.

01:00:29.980 | I've come to accept that.

01:00:31.580 | - But there's like a fundamental humility to you.

01:00:33.860 | You're saying Marx is like, has ego that's hard to control.

01:00:37.060 | - A bit too big ego, yeah.

01:00:38.300 | I'm guessing, I mean, I'm never gonna meet him.

01:00:40.660 | - Well, the beard says ego to me.

01:00:42.380 | - The beard is huge, yeah.

01:00:43.700 | - Okay, so this is interesting.

01:00:46.860 | You went chronologically--

01:00:48.780 | - Right through his works.

01:00:49.620 | - The development of the human being through his works.

01:00:51.820 | - Yeah, and I was trying to find the point

01:00:53.340 | at which he discovered this use value, exchange value idea.

01:00:56.420 | And it occurs in a footnote on page 267 to 268

01:01:00.860 | of the Penguin edition of the "Grundrisse,"

01:01:02.540 | which his notes he was taking,

01:01:04.660 | literally not meant for publication,

01:01:06.180 | literally sitting at a stall inside the British Museum,

01:01:09.360 | I think, reading all the classical authors

01:01:12.980 | in chronological sequence.

01:01:14.500 | And then somebody throws Hegel at him

01:01:16.580 | and suddenly he's talking in Hegelian terms.

01:01:19.580 | And he suddenly says, is not,

01:01:21.600 | 'cause it's whole value issues, what is value?

01:01:24.540 | Is it exchange value, use value,

01:01:26.100 | how do they relate to each other?

01:01:27.340 | That's what he was thinking about.

01:01:28.700 | He said, is not use value,

01:01:31.580 | which was left out of the classical school,

01:01:33.620 | a fundamental aspect of the commodity?

01:01:36.260 | Is there not a tension between the use value

01:01:38.300 | and exchange value?

01:01:39.660 | - Just so we're clear, in that context,

01:01:41.540 | use value is kind of the subjective thing,

01:01:44.000 | exchange value is the objective thing.

01:01:46.060 | And Marx found a way to integrate the two.

01:01:49.060 | - Well, he was focused on labor being the only thing

01:01:54.060 | that can generate both the use value

01:01:56.420 | and the exchange value.

01:01:57.260 | - But, no, if you look at the classical school,

01:02:00.320 | they focused on exchange value, objective.

01:02:03.540 | Look at the neoclassical,

01:02:04.900 | they focused upon use value, subjective,

01:02:07.620 | or they call it utility.

01:02:09.220 | So Marx, coming from the Ricardian tradition,

01:02:12.160 | basically dismissed the role of utility.

01:02:14.780 | And then, when he reads Hegel,

01:02:17.100 | he's suddenly starting to think in terms of unities,

01:02:20.260 | and exchange value and use value

01:02:22.260 | is the unity of the commodity.

01:02:23.740 | And he thinks, well, I can't ignore use value.

01:02:27.740 | So rather than leaving it out completely,

01:02:29.660 | which is what Ricardo and Smith does,

01:02:31.660 | I've got to somehow bring it in.

01:02:33.040 | And this Hegelian insight occurs to him.

01:02:35.540 | And it's remarkable,

01:02:37.420 | I really recommend taking a look at the book,

01:02:39.040 | even just to look at that particular page,

01:02:41.160 | because what it would have been,

01:02:42.340 | it's shown as a footnote,

01:02:43.840 | but it would have been him saying,

01:02:45.220 | oh, wow, and he's asterisk, asterisk,

01:02:47.260 | is not use value a fundamental aspect

01:02:51.540 | of the unity of a commodity?

01:02:53.380 | - So in the notes, you see the discovery of an idea

01:02:55.900 | in the human mind. - And it's beautiful.

01:02:57.020 | - The integration of an idea.

01:02:58.420 | - And he actually writes,

01:02:59.260 | does this have significance in economics, question mark.

01:03:02.100 | - And then he probably went home that night,

01:03:04.560 | and that idea changed him.

01:03:06.500 | - Yeah, it changed him completely, okay?

01:03:08.780 | And from that point on,

01:03:09.620 | his writing was completely different,

01:03:11.280 | but he still had this idea from the Ricardian days

01:03:14.120 | of saying that labor is the only source of value,

01:03:16.920 | using an exclusive argument to say

01:03:18.680 | there's something unique about labor

01:03:20.760 | that explains why it's a source of value.

01:03:22.880 | But suddenly this insight occurs to him,

01:03:24.520 | and he thinks, I can get a positive derivation.

01:03:27.040 | I can use use value and exchange value,

01:03:30.040 | and the fact they're not related to each other,

01:03:32.040 | as a dialectical tension to explain surplus value.

01:03:35.000 | And that's what he does.

01:03:36.200 | So he goes from a negative explanation

01:03:38.280 | of where value comes from to a positive explanation

01:03:41.800 | on that page of the Grundrisse.

01:03:44.400 | And he then triumphantly uses it

01:03:46.600 | to explain why labor is a source of value.

01:03:49.420 | You buy it for its exchange value,

01:03:51.320 | you use its use value, they're unrelated,

01:03:53.640 | the use value will be bigger,

01:03:55.020 | that's where profit comes from.

01:03:56.640 | Then he does exactly the same thing for machinery,

01:03:59.320 | about 30 pages on.

01:04:01.200 | He says, it also has to be contemplated,

01:04:05.400 | which was not done before.

01:04:06.680 | This is right nice to himself, by the way,

01:04:08.700 | it's written in really in a colloquial style,

01:04:11.500 | that the use value of a machine

01:04:14.100 | significantly greater than its exchange value.

01:04:16.340 | He actually left out the word is.

01:04:17.700 | It's use, this is obviously to be determined,

01:04:20.160 | it'd be a translation into English of the German, I'm sure.

01:04:23.060 | I don't know, I haven't seen the original notes,

01:04:24.780 | I'd love to see them.

01:04:25.980 | But he says, he leaves out the word is.

01:04:29.180 | It also has to be contemplated that the use value

01:04:32.780 | significantly greater than its exchange value,

01:04:35.460 | i.e. that the contribution of the machine to production

01:04:39.160 | exceeds its depreciation.

01:04:41.020 | And that was an insight which undermined

01:04:46.240 | his explanation for revolution.

01:04:48.840 | - Okay, can you say that again?

01:04:51.520 | The cost of production exceeds its depreciation?

01:04:55.960 | - Yeah.

01:04:56.800 | - Is that, okay, can you linger on that?

01:04:58.960 | - Well, what Marx argued, and you read this in "Capital,"

01:05:01.560 | and I read this in "Capital" when I first saw

01:05:04.920 | the contradiction in his own thought.

01:05:07.040 | He said that no matter how useful a machine is,

01:05:10.520 | whether it has, took 100 hours to make or cost 150 pounds,

01:05:14.800 | it cannot, under any circumstances,

01:05:17.160 | add more to production than 150 pounds.

01:05:20.420 | Which, in his old exclusivist logic, he could justify,

01:05:26.620 | and which in his post-1857 argument is bullshit.

01:05:31.380 | - Can you steel man his case?

01:05:33.180 | Can we go to the mind of Marx in thinking,

01:05:36.000 | if a machine costs 100 bucks,

01:05:39.420 | it can't be ever more, bring more value than 100 bucks.

01:05:43.200 | - But that contradicts his previous logic,

01:05:45.400 | 'cause what he said is,

01:05:46.600 | you'd have a, commodities the essential unity in capitalism.

01:05:51.800 | Capitalism focuses upon the exchange value.

01:05:54.800 | That pushes the use value into the background,

01:05:57.600 | and there's a tension between the two.

01:05:59.700 | What that means is the exchange value of a commodity

01:06:02.360 | sets its price.

01:06:04.140 | The use value is independent.

01:06:06.520 | He called them incommensurable.

01:06:07.880 | He literally would use the word incommensurability

01:06:11.040 | between exchange value and a use value,

01:06:13.200 | whereas neoclassicals make them commensurable.

01:06:15.380 | So he's saying exchange value and use value incommensurable.

01:06:19.140 | And that normally means that exchange value is objective,

01:06:22.800 | like the number of hours it takes to make something.

01:06:25.080 | Use value is subjective, how comfortable the chair is,

01:06:27.940 | the fact that you can sit in a chair.

01:06:30.160 | So that's incommensurability.

01:06:31.480 | But when you apply it in production,

01:06:33.960 | the exchange value of something is objective.

01:06:36.680 | It's how many hours it takes to make a machine,

01:06:38.800 | or how many hours it takes to make

01:06:40.680 | the means of subsistence for a worker.

01:06:42.640 | The use value is also objective.

01:06:44.760 | You're making commodities for sale.

01:06:46.620 | And the worker does six hours.

01:06:49.500 | Six hours of work will make the means of subsistence

01:06:53.940 | for the worker, but the worker will work a 12-hour day,

01:06:57.480 | and the six hours becomes a gap.

01:06:59.560 | Now, that's incommensurability between use value

01:07:02.640 | and exchange value of labor.

01:07:04.800 | But when you look at what he said about

01:07:06.360 | no matter how long it takes to make a machine,

01:07:09.120 | or how many pounds it costs, he's saying they're identical.

01:07:13.240 | And that's contradicting his own logic.

01:07:15.200 | - Well, what's the use value of a machine?

01:07:18.080 | - The fact that it can produce goods for sale,

01:07:20.780 | exactly the same as the worker.

01:07:22.320 | Now, what I've, in my modern reinterpretation of Marx,

01:07:27.080 | which brings in my work on energy,

01:07:29.460 | I see both labor and machinery as a means to harness energy

01:07:34.460 | and produce useful work.

01:07:36.480 | And they can both do that.

01:07:38.120 | In fact, they do it together.

01:07:39.320 | It's a collective enterprise.

01:07:41.220 | - Okay, so, and we'll go to that.

01:07:44.200 | So there's no fundamental difference from an exchange value

01:07:47.800 | and use value perspective between a human and a machine.

01:07:50.160 | - And therefore, they're using the same logic.

01:07:51.920 | They can both be a source of surplus,

01:07:54.000 | which is what Marx contradicted,

01:07:55.960 | because his explanation for where socialism would come from

01:07:59.860 | is that only profit comes from,

01:08:01.140 | like profit comes only from labor.

01:08:03.580 | Over time, we'll add more machinery than labor.

01:08:06.360 | That will mean a falling rate of profit,

01:08:08.060 | and therefore, a tendency towards socialism.

01:08:11.060 | And what he did in that insight in 1857

01:08:13.420 | is contradict his own idea about what would lead to socialism

01:08:18.060 | and he couldn't cope with it.

01:08:19.380 | - Okay, what's the difference between Marxian economics

01:08:25.260 | and Marxist political ideology?

01:08:30.020 | The gap between the two, the overlap, the differences, what?

01:08:33.900 | - The real foundation of Marx's political philosophy

01:08:37.580 | was the economic argument that there would be a tendency

01:08:40.040 | for the rate of profit to fall.

01:08:41.580 | And that tendency for the rate of profit to fall

01:08:45.480 | would lead to capitalists battening down on workers harder,

01:08:49.940 | paying them less than their subsistence,

01:08:53.220 | a revolt by workers against this,

01:08:55.580 | and then you would get socialism on the other side.

01:08:58.300 | So what he called the tendency for the rate of profit to fall

01:09:02.420 | played a critical role in his explanation

01:09:04.660 | for why socialism would have to come about.

01:09:07.340 | - He was saying it would have to come about

01:09:09.060 | or is it a good thing for it to come about?

01:09:11.660 | So it should come about?

01:09:12.980 | - He had a should, but he was trying to say it must.

01:09:15.580 | So if you look at Marx in the history of radical thought,

01:09:21.040 | he was preceded by what were called utopian socialists.

01:09:24.780 | Saint-Simon, even the Cadbury's company

01:09:27.580 | came out of utopian socialist.

01:09:29.620 | And they had an idea about a perfect society in the future

01:09:32.340 | where people were properly rewarded,

01:09:34.340 | were treated as human beings

01:09:35.640 | rather than cogs in a machine and all this sort of stuff.

01:09:38.380 | And they said socialism should come about

01:09:40.060 | because it treats humans better than capitalism does.

01:09:43.580 | Marx said, "I can prove that socialism must come about."

01:09:47.580 | So he preferred, he had a utopian vision

01:09:51.060 | of a future society,

01:09:52.700 | but he thought he could prove that it had to come about.

01:09:54.980 | And the proof relied critically upon

01:09:59.020 | tendency for the rate of profit to fall.

01:10:01.040 | And that relied upon labor being the only source of profit.

01:10:03.980 | - What was his utopian view?

01:10:07.740 | So this idea from each according to his ability

01:10:10.760 | to each according to his needs.

01:10:13.100 | Is that the utopian?

01:10:16.060 | - I think it's utopian in the context of our modern world.

01:10:20.260 | It says that you rather than being rewarded,

01:10:23.820 | like Jeff Bezos gets enormous fortune,

01:10:27.180 | you get what you need, not what you want necessarily.

01:10:31.780 | All needs is fulfilled.

01:10:33.620 | It was a vision of utopia

01:10:35.220 | where you could be a fisherman in the morning,

01:10:37.820 | a poet in the afternoon and a chef at night.

01:10:41.060 | Okay, this paraphrasing one of his phrases.

01:10:43.760 | So he did have a utopian vision of a future society.

01:10:46.680 | And he did think human creativity

01:10:48.440 | did much, much greater under socialism

01:10:50.760 | than it was under capitalism.

01:10:52.280 | He was wrong.

01:10:53.120 | - So let's explore in different ways where he was wrong.

01:10:57.040 | You're saying there's a fundamental flaw in the logic,

01:10:59.740 | but also if we can link,

01:11:02.720 | if we can explore a high level philosophical concepts

01:11:06.000 | of socialism to like the dreams of a utopia.

01:11:12.120 | First of all, what is socialism?

01:11:14.680 | That's another loaded term.

01:11:15.960 | - It is socialism,

01:11:17.800 | particularly in America is a very loaded term.

01:11:19.640 | And what Americans call socialist

01:11:21.160 | is a large amount of provision of services by the state,

01:11:26.160 | which is commonplace in Europe.

01:11:28.160 | It's still moderately commonplace

01:11:30.040 | in my own home country of Australia.

01:11:31.840 | And that Americans will call public education socialist.

01:11:37.840 | It's a total parody of the word.

01:11:41.880 | Strictly speaking, what socialism meant

01:11:43.720 | is the public ownership of the means of production,

01:11:46.840 | no private ownership of the means of production.

01:11:49.760 | - What is the means of production?

01:11:51.280 | - Machine factories, factories.

01:11:53.320 | - So all the goods that are produced in factories,

01:11:56.640 | no, the means of producing the goods

01:11:59.400 | is owned by a centralized entity.

01:12:01.360 | - Yeah, centrally planned.

01:12:03.120 | This is what actually was done under Gosplan

01:12:05.640 | under the Soviets.

01:12:07.520 | And even with a collective farms as well,

01:12:09.880 | you no longer owned, you all own.

01:12:11.520 | The state owned the land, you worked on the land.

01:12:14.920 | And this was supposed to be a utopia.

01:12:17.400 | - Right.

01:12:18.240 | - Now it didn't turn out to be one.

01:12:19.320 | - And we'll talk about maybe your ideas

01:12:21.160 | of why it didn't turn out to be one.

01:12:23.400 | So the fascists did the same.

01:12:25.800 | So it's this fascism also.

01:12:27.560 | - Fascism, so-called national socialism.

01:12:31.040 | It's also a kind of socialism.

01:12:32.800 | - So yeah, but there was no, it wasn't public ownership.

01:12:35.280 | There was public direction.

01:12:36.760 | So the state would tell factories what to do

01:12:39.160 | with a still private profit.

01:12:40.680 | And a large part of why the Nazis succeeded

01:12:42.560 | was the extent to which they managed to co-opt

01:12:44.960 | major manufacturers in Germany.

01:12:47.560 | So it's, you know-

01:12:49.720 | - Direction versus ownership.

01:12:51.720 | It's a dictatorial, I mean,

01:12:53.960 | that's a very particular implementation.

01:12:56.440 | So you have to consider the full details

01:12:58.400 | of the implementation,

01:12:59.360 | but it's basically dictator guided.

01:13:02.360 | - Yeah, and if you wanna take-

01:13:04.280 | - Versus owned.

01:13:05.280 | - If you wanna take a proper vision,

01:13:06.960 | then you have to say it's the ownership

01:13:08.880 | of the means of production by the state,

01:13:11.800 | versus the ownership by private.

01:13:13.960 | That rules out the Nazi period.

01:13:16.320 | They use the word that, again,

01:13:17.640 | they're bastardizing as much as Americans do

01:13:20.160 | in the opposite direction.

01:13:21.520 | - Well, what does ownership exactly mean?

01:13:26.000 | - Well, it became incredibly complicated.

01:13:31.000 | And this is actually the best work on this

01:13:34.520 | is done by a recently deceased Hungarian economist

01:13:36.760 | called Janos Kornay.

01:13:38.560 | And Kornay tried to explain why socialism failed.

01:13:41.800 | Because-

01:13:43.520 | - Why did socialism fail in your view?

01:13:45.280 | In his view, in Janos' view, in your view?

01:13:47.320 | - I think Janos is 100% correct.

01:13:49.040 | And it's a brilliant piece of work.

01:13:50.920 | So I'm gonna be really paraphrasing his view.

01:13:53.760 | And he imagined an ideal socialist society

01:13:57.320 | and there wasn't a Stalin, there weren't purges.

01:14:00.400 | And you lived up to all the ideals

01:14:02.560 | that Marx had for socialism.

01:14:04.400 | So he said, but you do it in a context of a economy

01:14:07.880 | which is incredibly primitive, Russia.

01:14:10.560 | Because if you look at Marx's own vision of the revolution,

01:14:12.800 | it was gonna happen in England.

01:14:14.360 | The advanced economies would be first

01:14:17.240 | to go through the revolution.

01:14:18.880 | The socialist, the primitive economies

01:14:21.000 | would have to go through a capitalist transition.

01:14:23.320 | And this is the difference

01:14:24.160 | when the Mensheviks and the Bolsheviks.

01:14:26.680 | So the Mensheviks, and Hyman Minsky

01:14:28.600 | came out of the Menshevik family.

01:14:30.280 | The Mensheviks believed you had to go

01:14:31.640 | through a capitalist phase.

01:14:33.160 | Russia had to go through a capitalist period

01:14:34.920 | before it becomes socialist.

01:14:36.560 | The Bolsheviks believed they could get there in one go.

01:14:40.120 | Bypass the capitalist phase,

01:14:42.160 | do the development under socialism

01:14:45.480 | rather than under capitalism.

01:14:47.120 | And this is what Yanis was actually analyzing.

01:14:49.960 | You start from a primitive, feudal economy,

01:14:54.840 | very little industrialization,

01:14:56.760 | and you wanna jump to an advanced industrial society

01:15:01.760 | from that foundation.

01:15:04.360 | So he said, what you have then for

01:15:07.480 | is a whole range of industries,

01:15:08.920 | all of which need as much resources

01:15:10.920 | as you can get for them.

01:15:12.720 | So you wanna develop agriculture, mining, industry,

01:15:17.720 | every little division of it.

01:15:19.560 | They all have legitimate demands

01:15:21.560 | on the resources of the country and the state.

01:15:24.120 | That means that all your resources are fully employed

01:15:26.920 | and are properly over-employed.

01:15:29.160 | So you have a resource constraint in that society.

01:15:32.880 | The easiest way to cope with a resource constraint

01:15:35.640 | is to produce last year's commodity,

01:15:38.200 | not to innovate, not to make change.

01:15:40.680 | So what that will give you is as you start to add,

01:15:44.000 | you invest, so you now have beginnings of a steel industry,

01:15:47.040 | beginnings of a car industry, and so on,

01:15:49.360 | you start investing, but you continue producing

01:15:51.720 | the same product you made last year.

01:15:54.400 | And I have a perfect personal example of that,

01:15:56.800 | which I'll throw in now if you like,

01:15:58.400 | 'cause we're getting pretty heavy conversation.

01:16:00.280 | One of my first major girlfriend had a brother

01:16:04.600 | who wanted to get a motorbike,

01:16:07.560 | but he couldn't afford a Honda or a Kawasaki.

01:16:11.280 | At the time, they cost about $3,000

01:16:13.480 | for a 650cc Japanese motorbike.

01:16:17.000 | He found he could buy a Cossack for $650, $1 per cc.

01:16:22.000 | So I was there when I got-- - $1 per cc, I guess.

01:16:25.560 | - This is in suburban Sylvania waters in Sydney.

01:16:30.240 | So this crate arrives with a Cossack motorbike inside it.

01:16:35.240 | So we take it apart, it's then got all these wooden palings.

01:16:37.960 | We have to pull off the wooden palings to open it up.

01:16:40.320 | Then there's oil-soaked rag over this thing,

01:16:42.560 | which is tied on a wooden base.

01:16:44.760 | We take the oil-soaked rag off,

01:16:46.600 | and we stare in all its glory in a 1942 BMW.

01:16:50.480 | - Yeah. - Okay?

01:16:51.320 | It was exactly the same as Steve McQueen in "Great Escape."

01:16:55.120 | So the Russians for 30 years

01:16:57.600 | were making the same bloody motorbike.

01:16:59.320 | It had a bicycle seat.

01:17:01.320 | - Yeah. - Okay?

01:17:02.280 | And that's how they coped.

01:17:03.920 | They just made the same damn machine every year.

01:17:06.520 | They said, "So that's the outcome.

01:17:08.960 | "You actually want the best possible world.

01:17:11.120 | "You're trying to build as fast as possible.

01:17:13.280 | "You're paying workers as high wages as you possibly can,

01:17:16.320 | "and that leads to a world where you don't innovate."

01:17:18.920 | But he said, "Capitalism, on the other hand,

01:17:22.680 | "pure capitalist economy,

01:17:24.280 | "you're trying to pay workers as little as possible.

01:17:26.800 | "You have competitive industries.

01:17:28.440 | "You're trying to take demand away from your rivals.

01:17:31.200 | "You have Kawasaki versus Honda versus BMW, et cetera,

01:17:36.200 | "et cetera.

01:17:37.240 | "The way you get demand away from your competitors

01:17:39.920 | "is by innovating.

01:17:41.640 | "So what you will get is cycles and burns and slumps,

01:17:44.160 | "but you'll innovate and change over time."

01:17:46.720 | So what you found was this huge gap

01:17:48.400 | between socialist volume production with no innovation

01:17:52.800 | and capitalism with innovation.

01:17:54.640 | So that was the fundamental failing

01:17:58.080 | that Jonas Cornay saw.

01:17:59.760 | So why did socialism not innovate?

01:18:02.800 | 'Cause if you go back to this famous historical incident

01:18:05.840 | with Khrushchev in the United Nations,

01:18:08.440 | bangs, takes off his shoe and bangs the desk,

01:18:10.520 | says, "We will bury you."

01:18:12.320 | He literally meant, "We're gonna bury you in commodities.

01:18:15.040 | "We're gonna produce more output than you are."

01:18:17.480 | And he was wrong.

01:18:18.360 | - Because fundamentally, in the long term,

01:18:22.160 | to bury somebody in commodity production,

01:18:25.280 | you have to innovate.

01:18:26.600 | - Yeah, and there's also,

01:18:28.560 | there's another remarkable Soviet engineer

01:18:32.080 | who was given the job of interpreting Marx's ideas

01:18:34.960 | of industrial sectors.

01:18:36.560 | So he had the commodity sphere, the industry sphere,

01:18:40.200 | sector one, sector two, sector three.

01:18:42.440 | Sector one, producing consumer goods.

01:18:43.960 | Sector two, producing capital goods.

01:18:45.680 | Sector three, producing luxury goods for capitalists.

01:18:48.760 | And so he had a three-sector model of the economy,

01:18:51.880 | and he was talking about the dynamics between them.

01:18:54.240 | And what Feldman did was reinterpret this

01:18:57.280 | as an engineer would reinterpret it,

01:18:58.880 | which was brilliant work.

01:19:00.880 | So what he said was,

01:19:02.280 | "You need to produce the means of production.

01:19:05.360 | "If you wanna grow quickly,

01:19:06.840 | "you focus on producing the means of production

01:19:09.020 | "rather than commodities.

01:19:10.580 | "So you don't make cars, you make car factories."

01:19:13.480 | Okay, you make a few cars,

01:19:14.880 | but most of the effort goes into expanding

01:19:16.640 | how many factories you have.

01:19:18.360 | And what he did was do a mathematical model

01:19:20.200 | where you'd start off with very low levels

01:19:21.860 | of consumer good output,

01:19:23.320 | but then you would just go exponential.

01:19:25.320 | Now, I took a look at that

01:19:27.040 | back when I was doing my master's degree,

01:19:29.840 | the training in mathematics.

01:19:31.040 | I took Feldman's equations

01:19:33.520 | and then looked at what was actually driving it was.

01:19:36.840 | He was imagining, correctly,

01:19:39.080 | a huge pool of unemployed labor.

01:19:41.480 | If you go back to the earliest stages

01:19:43.020 | of Soviet industrialization back in 1917,

01:19:45.680 | post the Second World, post the First World War,

01:19:48.320 | you had all these unemployed workers,

01:19:50.160 | you had all these peasants you could take off the land

01:19:52.120 | and put into factories.

01:19:53.480 | So you had a huge supply of workers.

01:19:56.200 | What you had to do was build the factories.

01:19:59.160 | So you're building the factories,

01:20:00.720 | but at a certain point you exhaust the supply

01:20:03.740 | of lowly employed or unemployed labor.

01:20:07.880 | And so rather than having this exponential takeoff,

01:20:11.320 | you hit a ceiling.

01:20:12.480 | And then you can only grow as fast as the population

01:20:14.720 | because you're not innovating.

01:20:16.720 | So that's what actually hit the Soviet system.

01:20:20.240 | And it's why they never buried the Western consumer goods

01:20:23.800 | and instead why Eastern consumers looked in envy

01:20:27.520 | at the goods being purchased by their Western people

01:20:30.360 | and said, "If that's exploitation, we want exploitation."

01:20:33.840 | - So, okay, this is a lot of interesting stuff to ask here,

01:20:36.440 | which is, so Marx's vision for the socialist utopia

01:20:41.440 | is you have to go through capitalism.

01:20:47.960 | And then Trubik's were true to Marx's original idea.

01:20:50.200 | - Right, so is there a case to be made

01:20:53.280 | that in the long arc of human history

01:20:55.560 | on human civilization on earth,

01:20:59.080 | that we're going to live out Marx's vision for utopia,

01:21:03.920 | which is, will we run into a wall with capitalism?

01:21:07.400 | - I think we are running into a wall with capitalism.

01:21:09.240 | In fact, I think we've already gone through the wall

01:21:10.840 | and we haven't yet realized we've smashed our skulls.

01:21:13.440 | - Okay. - Okay.

01:21:14.280 | (laughing)

01:21:16.000 | But on the other side, we're bleeding

01:21:18.680 | and everything like that,

01:21:19.960 | does Marx have any insights on what the other side of,

01:21:25.600 | what is beyond capitalism?

01:21:26.440 | - I think that beautiful phrase of,

01:21:27.920 | "From each according to his ability,

01:21:29.960 | "to each according to his needs,"

01:21:32.200 | describes what we should end up with.

01:21:36.040 | And I think that's actually, if I think about,

01:21:38.200 | you know I'm an Elon Musk fan,

01:21:40.360 | that's what I think is partially going to be

01:21:42.520 | the nature of society if we build one that functions on Mars.

01:21:46.920 | Because, and I've actually seen an interview with his,

01:21:49.600 | the Italian who's involved in designing

01:21:52.520 | what the future colony will look like.

01:21:55.040 | He was actually asked this question,

01:21:56.640 | "Can there be enormous inequality in Martian civilization?"

01:22:00.320 | The guy said, "Absolutely not."

01:22:02.080 | Because the resources, again resource constraint applies.

01:22:06.000 | You simply can't give somebody an underground bunker

01:22:09.680 | 100 times the size of somebody else's 100,

01:22:13.000 | an underground bunker.

01:22:14.760 | There's a, the scarcity of resources

01:22:17.840 | imposes a need for equality overall.

01:22:22.240 | - Is that always, that's interesting.

01:22:23.920 | I mean the scarcity of resources,

01:22:26.360 | wait, but I feel like that's the contradiction.

01:22:28.240 | I thought--

01:22:29.080 | - Are you thinking neoclassical about scarcity?

01:22:31.720 | - Yeah, I'm barely thinking at all.

01:22:33.880 | (laughing)

01:22:36.120 | So wait,

01:22:39.240 | I thought scarcity, the best way to build

01:22:42.280 | on top of scarcity is a capitalist type of machine.

01:22:44.880 | - No, this is where again,

01:22:47.000 | our vision of what scarcity is, is wrong.

01:22:50.040 | Because, and Ricardo said this,

01:22:52.920 | but it's actually better than Marx.

01:22:54.400 | 'Cause Ricardo said there are some products

01:22:57.000 | whose value is determined entirely by their scarcity.

01:23:01.320 | - Yeah.

01:23:02.240 | - Paintings, rare wines, et cetera, et cetera.

01:23:06.120 | He said, "They are things you cannot reproduce

01:23:07.920 | in a factory."

01:23:09.000 | He said, "The essence of capitalism

01:23:10.600 | is what you can make in a factory."

01:23:12.640 | And therefore, for these unique objects,

01:23:14.960 | these rare objects, Picasso painting,

01:23:18.080 | a beautiful bottle of wine, et cetera, et cetera,

01:23:22.280 | then the utility, it can't be reproduced easily.

01:23:25.760 | So its price will be determined by subjective valuation.

01:23:28.960 | He said, "What we're talking about in capitalism

01:23:30.720 | is the stuff you can make en masse."

01:23:33.000 | And that is the true focus of the capitalist economy.

01:23:37.520 | And that is not about scarcity.

01:23:38.960 | That is about, the only scarcity applies

01:23:42.120 | when you don't have the resources to make them anymore.

01:23:44.640 | Or you can't use the energy involved

01:23:46.280 | because you'll damage the biosphere too much,

01:23:48.760 | which we've already done.

01:23:50.600 | But fundamentally, the scarcity that neoclassicals

01:23:54.600 | have made us think about, and Austrians think about as well,

01:23:56.960 | is non-reproducible.

01:23:58.920 | But the essence of capitalism is the commodity,

01:24:01.000 | the backscratcher, the two-buck backscratcher.

01:24:03.000 | Anybody can, you know, the cheapest chips to make,

01:24:05.840 | and that's why you can make a profit out of them.

01:24:08.600 | Not the elaborate gold thing with diamonds and rubies

01:24:12.000 | that only the king gets.

01:24:13.360 | So we think, our vision of scarcity has been perverted

01:24:17.200 | by neoclassicals, analyzing the exception to capitalism

01:24:20.400 | and calling it capitalism.

01:24:21.840 | - Okay, fair enough.

01:24:24.840 | So, you know, let's put Mars aside,

01:24:26.920 | 'cause I think there's a lot of strange factors

01:24:29.600 | that have to do with a whole 'nother planet, civilization,

01:24:35.040 | that we don't quite understand.

01:24:37.240 | Like how economics works with different

01:24:42.240 | geographic locations, one of which have new challenges,

01:24:47.080 | which is what essentially this is.

01:24:48.200 | I don't know if you can apply the same economic theory--

01:24:50.640 | - No, I'm saying, your question, I think,

01:24:53.480 | we'll be forced into that ultimately

01:24:55.120 | by having to make a compromise with the ecology.

01:24:58.240 | And we've been ruthless about the ecology of this planet,

01:25:01.480 | and we're gonna pay the price for it.

01:25:03.520 | So if you have a planet where you can't be ruthless,

01:25:08.520 | okay, well, yeah, okay,

01:25:10.240 | you have to mine it as carefully as possible.

01:25:12.800 | Then that utopian might be imposed upon you

01:25:17.240 | for the needs for survival on that planet.

01:25:19.400 | Back here, Marx's utopia was still the one

01:25:23.600 | that ignored the ecology.

01:25:25.360 | And I think if I have a vision of a utopia in future,

01:25:30.480 | it's got bugger all to do about what humans get out of it.

01:25:34.000 | It's what humans respect.

01:25:36.240 | They have to respect life.

01:25:37.920 | So I don't see that as, I see that as a one-eyed utopia,

01:25:41.720 | a utopia for a single species,

01:25:44.040 | as if it can exist on its own, which we should know it can't.

01:25:47.640 | - Quick bathroom break?

01:25:48.640 | - Yeah, I'm gonna bathe myself.

01:25:49.480 | - That would be great.

01:25:51.200 | We took a little bit of a break, and now we're back.

01:25:54.400 | We needed to take a break 'cause my brain broke,

01:25:56.400 | and I'm piecing it back together.

01:25:58.480 | You mentioned ecology and life and the value of all of that.

01:26:02.120 | We'll return to it if we can.

01:26:04.760 | But first, we said why this kind of,

01:26:09.760 | this idea of why socialism failed.

01:26:15.760 | Can we linger on this a little bit longer?

01:26:17.920 | And how did the ideas of Karl Marx lead to Stalinism?

01:26:23.820 | So this particular implementation.

01:26:26.400 | - Yeah.

01:26:28.060 | - Is there something fundamental to these ideas

01:26:31.620 | that leads to a dictator and that leads to atrocities?

01:26:36.620 | There's something about the mechanism of the bureaucracy

01:26:39.140 | that's built that leads to a human being

01:26:44.140 | that's able to attain, integrate absolute power,

01:26:49.160 | and then start abusing that power, all that kind of stuff.

01:26:54.140 | Like some of the history of the 20th century

01:26:56.860 | is that inextricably connected to the ideas of Karl Marx?

01:27:01.380 | - I think to some extent it is,

01:27:02.660 | but I'm gonna also say that if it hadn't been

01:27:05.140 | for the Bolsheviks interpreting Marx

01:27:07.820 | and saying we can reach socialism

01:27:09.260 | without going through capitalism,

01:27:11.300 | then it might not have happened.

01:27:14.440 | So if you look at the, like the Mensheviks

01:27:17.460 | were a rival political group in Russia,

01:27:21.540 | and that's where Hyman Minsky,

01:27:23.020 | who's a huge inspiration for me--

01:27:24.780 | - So he's an economist who was maybe,

01:27:26.940 | can we take a little tangent, who was Hyman Minsky?

01:27:29.460 | - Yeah, Hyman Minsky was the person

01:27:32.180 | who developed analysis of capitalism

01:27:35.660 | based on financial instability.

01:27:37.400 | And he was actually the PhD student of Joseph Schumpeter,

01:27:42.820 | and an Austrian economist as well,

01:27:45.820 | whose name I've forgotten temporarily.

01:27:47.720 | And he asked him, his parents were both refugees from Russia,

01:27:54.700 | during the Stalinist period,

01:27:57.340 | because the Mensheviks were being wiped out in Russia,

01:28:01.360 | just like any other opponents to the Bolsheviks

01:28:05.340 | were being eliminated.

01:28:06.900 | So I think his parents met in Chicago,

01:28:09.340 | still remained socialist, still remained politically active,

01:28:13.980 | and he was educated in a family

01:28:16.820 | that was just imbued with Marx as its vision.

01:28:20.740 | He ended up fighting in the Second World War,

01:28:23.640 | on the American side,

01:28:25.920 | coming back to America and studying mathematics,

01:28:30.140 | and then also doing an economics degree,

01:28:32.780 | leading to a PhD.

01:28:34.560 | And the question he posed for himself

01:28:36.400 | is what causes Great Depressions?

01:28:38.280 | And he put it beautifully, he said,

01:28:40.980 | "Can it happen again?"

01:28:42.940 | It being the Great Depression.

01:28:44.740 | And if it can't happen,

01:28:46.380 | then what has changed between the society

01:28:49.380 | before the First, Second World War and after

01:28:52.220 | that makes a depression impossible?

01:28:54.820 | - What's the answer to those two questions?

01:28:56.300 | Can it happen again? - His answer was,

01:28:57.140 | "Yes, it can happen again."

01:29:00.260 | But what has prevented it happening

01:29:02.100 | by the time he started writing about it,

01:29:03.740 | which was the late '50s to the mid '80s, late '80s.

01:29:08.740 | We met once, but only once.

01:29:12.100 | - Over a beer? - Huh?

01:29:13.260 | - Over a beer? - No, he gave a seminar

01:29:15.300 | at New South Uni, and he bit of an obstreperous bastard.

01:29:18.700 | - What's, a stripper? - Obstreperous.

01:29:21.300 | - Wow, what is it? (laughing)

01:29:23.020 | - It means argumentative and likely to dismiss you.

01:29:26.460 | So like a good mate of mine was the guy

01:29:28.420 | I brought him out to Australia, a guy called Graham White.

01:29:30.580 | We're still, g'day, Graham.

01:29:31.940 | We're still good mates. - G'day, Graham.

01:29:33.580 | (laughing)

01:29:34.420 | I love your language and your accent.

01:29:35.740 | - It's a great, actually, there's a really good TikTok

01:29:37.860 | I saw earlier today with an Aboriginal guy

01:29:40.380 | saying he loves the Australian language

01:29:41.820 | because it's absolutely ironic.

01:29:44.260 | You ask an Australian a question,

01:29:45.860 | and he'll give you an answer,

01:29:46.740 | which is the opposite of what he means.

01:29:48.420 | You've got to work out the rest for yourself.

01:29:49.940 | - Yeah. - So he goes up

01:29:50.900 | to another Aboriginal mate and says,

01:29:53.060 | g'day, mate.

01:29:53.900 | He says, how are you today?

01:29:54.740 | Oh, not bad.

01:29:55.580 | What have you been doing recently?

01:29:56.460 | Oh, not much.

01:29:57.300 | When are we going?

01:30:00.140 | Not too far, not too soon.

01:30:02.620 | Where is it?

01:30:03.460 | Oh, not too far away.

01:30:04.300 | And it's all negatives.

01:30:05.140 | And he's a beautiful, beautiful rendition.

01:30:07.820 | - Yeah, that's the cool thing

01:30:08.980 | about the internet culture.

01:30:10.700 | - They appreciate that ironic side.

01:30:13.260 | Like for example, the best compliment you can give

01:30:15.740 | as an Aboriginal to somebody else is that's deadly.

01:30:18.940 | - That's deadly. - That's a compliment.

01:30:20.300 | That's deadly, okay?

01:30:21.700 | Another mate of mine comes to the Australian language.

01:30:24.380 | If I call you a bastard, that's a compliment.

01:30:26.340 | Yeah, depending on how I intonate the word bastard.

01:30:28.900 | - Bastard, bastard, that's deadly.

01:30:33.380 | - Yeah. - I love that.

01:30:34.620 | And there's something, unfortunately,

01:30:36.740 | there's something about the British accent

01:30:39.660 | that makes people sound

01:30:43.940 | maybe brilliant, maybe sophisticated.

01:30:46.980 | - But actually pompous.

01:30:49.620 | - Yeah, no, that's unfortunately the downside of that

01:30:54.020 | is you can sound pompous.

01:30:55.500 | There's something about the Australian accent

01:30:57.900 | that you just can't sound brilliant.

01:31:00.100 | (laughing)

01:31:03.100 | It humbles you.

01:31:04.140 | You sound like you're having a lot of fun.

01:31:06.580 | There's wit, there's all that good stuff.

01:31:09.020 | But you just can't be like,

01:31:10.980 | Karl Marx in an Australian accent

01:31:12.540 | would just not come off.

01:31:13.620 | - That is a very good point.

01:31:14.700 | - He would not be able to pull off the beard.

01:31:17.260 | I mean, I just, yeah, it's fascinating

01:31:19.660 | that the accent determines

01:31:22.100 | something about the person.

01:31:25.620 | Maybe it's the chicken and the egg too.

01:31:27.140 | It drives the way of the discourse.

01:31:29.340 | Obviously, there's a lot of brilliance.

01:31:30.620 | There's a lot of brilliance in your work.

01:31:32.220 | But it sounds like you're always having fun.

01:31:34.020 | - Yeah, and look, this,

01:31:36.340 | Poncho's got a lot of Australian mates here.

01:31:38.540 | He spent, what about, how long in Australia?

01:31:42.380 | A year and a half, and he's got all these mates

01:31:43.860 | who replace Aussie Rules Football in Austin.

01:31:46.060 | You should join them one day.

01:31:47.220 | - Oh, whoa.

01:31:48.060 | - It's actually rough.

01:31:49.060 | It's a very creative sport.

01:31:50.500 | It's much more fun.

01:31:51.500 | - It's different than rugby?

01:31:52.700 | - Oh, very.

01:31:53.540 | Rugby is hopeless.

01:31:54.580 | Rugby is two morons smashing their bodies against each other.

01:31:58.380 | - Easy now, easy now.

01:31:59.860 | - Sorry, sorry.

01:32:01.020 | - We do not mean to offend the rugby fans in the audience.

01:32:04.420 | Well, okay, so it's too simplistic.

01:32:07.380 | - It's too simplistic.

01:32:08.460 | I mean, there's skill in it.

01:32:10.260 | I've seen some really skillful rugby union

01:32:12.540 | and rugby league players in my day.

01:32:14.780 | But fundamentally, if you hit somebody hard enough,

01:32:17.340 | they go down.

01:32:18.780 | Okay, whereas in Aussie Rules,

01:32:20.580 | it's about catching the ball and then kicking the ball.

01:32:23.180 | - More skill, less power.

01:32:24.140 | - More skill, and the bodies of the athletes.

01:32:28.860 | I can actually get off and you measure

01:32:30.580 | what a sport is like by the bodies it creates.

01:32:32.980 | And you get these incredibly elegant,

01:32:35.540 | lithe muscular forms out of Aussie Rules.

01:32:38.940 | - Such beautiful words you have in your vocabulary.

01:32:41.140 | Lithe, I don't even know.

01:32:42.860 | But I'll assume you know what it means

01:32:45.940 | and maybe somebody in the audience.

01:32:47.380 | Okay, so, all right, fine.

01:32:51.100 | We should also mention that you, in your youth,

01:32:53.660 | like last year, had Olympic weightlifting

01:32:59.020 | as part of your life.

01:33:01.060 | - Long time ago.

01:33:02.620 | - And like you said, tennis.

01:33:03.860 | I also played tennis for many, many, many, many years.

01:33:06.740 | - Yeah, it's a fascinating game.

01:33:08.980 | - It's a wonderful game.

01:33:09.940 | Yeah, that's my favorite game.

01:33:11.460 | - Karl Marx and Stalin.

01:33:18.100 | - Yeah.

01:33:18.940 | - So how do we get onto Aussie football

01:33:21.260 | and Australian and the accent?

01:33:22.900 | - I'm not really sure.

01:33:23.740 | You talked about the way I said something

01:33:26.220 | about Karl Marx and with Karl Marx.

01:33:28.100 | Anyway, we got there.

01:33:29.380 | - Yeah, we got there and now we return.

01:33:31.500 | - But back to Marx, I think--

01:33:32.860 | - It's not the destination, it's the journey.

01:33:33.940 | - I think Marx, the failure of socialism

01:33:37.500 | with Janos Kornai captured beautifully.

01:33:40.220 | This idea already called demand-constrained

01:33:41.980 | versus resource-constrained economies.

01:33:44.460 | And capitalism is demand-constrained, okay?

01:33:48.460 | And this is, again, where neoclassical theory

01:33:50.260 | is completely wrong, empirically completely wrong.

01:33:53.180 | So the neoclassicals have a vision

01:33:55.300 | of capitalism being resource-constrained

01:33:57.300 | and it's about maximizing your usage of resources

01:34:00.860 | subject to constraints.

01:34:02.500 | And as Kornai said, that's really what happened

01:34:04.220 | under socialism.

01:34:05.380 | What happens under capitalism is that you have 15,

01:34:09.540 | 20 companies producing automobiles.

01:34:11.540 | They are all trying to capture as much

01:34:14.220 | of the market as they can.

01:34:15.620 | If you add up their marketing plans,

01:34:17.020 | you're gonna get 120, 130% of the actual market.

01:34:20.780 | So they're all gonna have excess capacity.

01:34:23.020 | When you build a factory, you're building it

01:34:24.840 | with a plan for it to exist for five, 10, 15 years.

01:34:27.880 | You have to have excess capacity in the factory.

01:34:30.340 | So that means that capitalism has far greater

01:34:32.920 | productive capacity than it actually uses.

01:34:35.460 | And then the way that you manage to get demand

01:34:37.820 | into your factory is to innovate

01:34:39.380 | and produce something nobody else does.

01:34:41.620 | Or you're producing in volume,

01:34:43.260 | and when somebody produces like a bung tire,

01:34:45.780 | comes out of firestone, then Goodyear is ready

01:34:48.260 | to expand its production and take advantage of that.

01:34:50.860 | So that's the actual nature of competition in capitalism.

01:34:54.300 | And that means that we get a cornucopia of goods,

01:34:57.340 | even if we're lowly workers.

01:34:59.200 | The variety of goods in capitalism is overwhelming.

01:35:02.380 | And that just doesn't happen in socialism.

01:35:05.020 | You get your 1942 Cossack as your motorbike, that's it.

01:35:08.940 | When you put your money down to buy a refrigerator,

01:35:10.940 | it'll arrive in 10 years

01:35:12.980 | because the factory is already fully constrained.

01:35:15.580 | So all these resource constraints

01:35:17.760 | mean that people aren't happy under socialism.

01:35:21.380 | And if you've got a whole bunch of people that aren't happy,

01:35:25.460 | then the best way to control them is to suppress them.

01:35:28.940 | So I think in that sense, ultimately,

01:35:30.580 | yes, it does lead to something like Stalinism.

01:35:33.980 | - So it's easier to give happy people freedom.

01:35:36.520 | - Yeah, I mean, happy people get pretty silly outside.

01:35:39.660 | I'm not particularly, the extent to which Americans

01:35:42.380 | overuse and distort the word freedom drives me balmy.

01:35:45.020 | - All of these words can be distorted,

01:35:49.100 | but they all at the core have some fundamental power

01:35:52.940 | and beauty, and then we just distort on the surface

01:35:55.940 | for the fun of it.

01:35:56.780 | - Yeah. - We used to start battles

01:35:57.740 | on Twitter and so on.

01:35:59.100 | - But what citizens of the Soviet world didn't feel

01:36:01.500 | was freedom. - Yeah.

01:36:02.740 | - Not just, first of all, it wasn't freedom

01:36:04.860 | to buy commodities.

01:36:06.380 | The commodities were supposed to be on the shops,

01:36:08.020 | weren't there.

01:36:09.620 | The volume couldn't be produced.

01:36:11.340 | And what you then got out of that as well

01:36:12.860 | was the classic Soviet joke,

01:36:15.260 | they pretend to pay us and we pretend to work.

01:36:18.020 | Okay.

01:36:18.940 | - Yeah, so you're not motivated.

01:36:20.540 | - Oh, look, I went to Cuba about eight years ago.

01:36:23.860 | - Yep. - Invited to give a talk there.

01:36:25.820 | And I was staying in a hotel, itself the hotel's a story.

01:36:29.460 | There's one day my meetings were canceled.

01:36:31.540 | So I thought I might go down to the beach.

01:36:33.620 | And in the hotel, they had a wing,

01:36:35.580 | which is the tourist office,

01:36:36.780 | and there were three women working inside the office.

01:36:39.220 | So I thought I'd just go up and ask them,

01:36:41.060 | how do I get to the beach?

01:36:42.660 | And one of them says to me, and I stood there,

01:36:45.620 | just stood in the room,

01:36:48.020 | waiting to see if they'd make eye contact with me.

01:36:50.420 | Three women, nobody else in the place.

01:36:52.500 | None of them looked at me.

01:36:54.060 | So I finally went up to one of them and said,

01:36:55.500 | I wanna go to the beach and do some surfing.

01:36:57.540 | She said, I can get a taxi outside.

01:36:59.460 | Now, fundamentally, she was saying,

01:37:01.860 | well, I'm being paid shit money here.

01:37:04.020 | I'm not gonna, I don't wanna work.

01:37:06.580 | I'm not gonna do anything apart from sit here

01:37:10.460 | and qualify for my time.

01:37:12.780 | And as much as there are reasons the Cubans have suffered

01:37:15.260 | from American embargoes and all that sort of stuff,

01:37:17.740 | you've still got that fundamental shortage economy

01:37:20.620 | that Cornel spoke about coming out of the structure

01:37:24.860 | of central ownership and central control

01:37:27.100 | of distribution and investment.

01:37:28.780 | - Breaks my heart because I think some of the effects

01:37:31.580 | of that persist throughout time.

01:37:34.900 | It become part of the culture too.

01:37:36.660 | - Yeah, yeah.

01:37:37.500 | - It's very interesting. - Negative culture.

01:37:39.420 | - Yeah. - Yeah.

01:37:40.380 | - Well, from the Western perspective.

01:37:43.020 | - Well, even from the people living through it.

01:37:44.780 | I mean, I had enough conversation with Cubans,

01:37:48.060 | meeting them on the street, hopping in a cab.

01:37:50.300 | One guy I was talking to,

01:37:53.340 | he was an industrial chemist

01:37:54.820 | and he got a bit of money being a cab driver

01:37:56.980 | because he could make money out of taking foreign tourists

01:37:59.940 | from the airport to the city.

01:38:01.540 | - By the way, this episode is brought to you

01:38:03.660 | by delicious Coca-Cola.

01:38:06.740 | (laughing)

01:38:08.540 | - That's why I didn't wanna have it on camera, but anyway.

01:38:10.620 | - No, maybe they'll actually sponsor.

01:38:12.380 | You wanna make sure you rotate the label to show,

01:38:15.420 | this is capitalism.

01:38:16.820 | What are we talking about here, even though it's red?

01:38:21.420 | Red and black, it's actually anarchist.

01:38:23.380 | (laughing)

01:38:24.340 | - I should tell you,

01:38:25.300 | I don't know if you know who Michael Malice is.

01:38:27.180 | - Michael?

01:38:28.020 | - Michael Malice, he's an anarchist and he lives next door.

01:38:30.940 | - Does he?

01:38:31.780 | Okay, now I've lost touch with anarchist philosophy.

01:38:34.980 | I actually used to read, you know,

01:38:36.660 | Kropotkin and Bakunin and so on.

01:38:38.940 | And I enjoyed their philosophy

01:38:41.220 | and then I helped organize an anarchist conference once.

01:38:44.460 | And that was the biggest antidote possible

01:38:47.180 | to being an anarchist.

01:38:48.420 | - That sounds like an entry point to a joke.

01:38:50.660 | You have to organize an anarchist party.

01:38:53.420 | - It is, I mean, we literally spent three days

01:38:57.380 | arguing over whether there should or should not

01:38:59.500 | be a chairperson for conversations.

01:39:01.740 | - Yeah.

01:39:03.300 | Well, that may be that.

01:39:04.540 | - Monty Python's "Life of Brian" was lived out live.

01:39:10.420 | - Look at the bright side of life.

01:39:15.500 | All right, so part of that explains why, for example,

01:39:18.580 | even to this day in some of those parts of the world,

01:39:21.700 | entrepreneurship does not flourish.

01:39:26.420 | There's not a spirit in the people to start businesses,

01:39:28.900 | to launch new endeavors and all those kinds of things.

01:39:31.620 | We're just taking all kinds of strange little strolls,

01:39:36.820 | but how do you explain the mechanisms of China today

01:39:41.820 | where there's quite a bit of sort of flourishing

01:39:46.820 | of businesses and so on?

01:39:48.500 | It's a very peculiar kind of entrepreneurship.

01:39:51.220 | - They got away from central control,

01:39:53.100 | but they still manage central political control,

01:39:57.140 | but diversified economic control.

01:39:59.300 | - So there's a, you could, it is possible to draw a line

01:40:02.540 | between politics and economics.

01:40:03.380 | - It is possible, and I think in some ways,

01:40:04.700 | China's more likely to survive as a society

01:40:06.660 | going into the future than Western capitalist societies are.

01:40:11.660 | - So it's like, if we do the Karl Marx,

01:40:15.780 | the foreground and the background,

01:40:18.900 | you can centralize the humanity, the subjective stuff,

01:40:23.900 | and then distribute the objective.

01:40:31.140 | - You've got to have the goods,

01:40:32.580 | and that's why the big change from Mao to Deng Xiaoping

01:40:36.440 | was the characterizing that little saying

01:40:39.060 | that I don't care whether you have a black cat

01:40:41.020 | or a white cat so long as it catches mice.

01:40:43.820 | And there was a level of pragmatism

01:40:45.600 | to the Deng Xiaoping revolution over Mao,

01:40:49.020 | and Madame Mao in particular.

01:40:50.940 | And that was manifest in the desire

01:40:53.740 | to get as much of those Western goods as possible.

01:40:56.860 | And I was actually in China in '81,

01:40:58.940 | took a group of journalists there,

01:41:00.940 | as I mentioned earlier, for a tour,

01:41:02.700 | and we ended up going to the Sichuan Free Trade Zone.

01:41:06.580 | And that gave us an idea of why China was gonna succeed,

01:41:12.140 | because they had a rule that you couldn't just come in

01:41:15.780 | and exploit the cheap wages.

01:41:17.660 | You had to also have a Chinese partner,

01:41:20.280 | and within five years, the Chinese partner

01:41:22.160 | had to own 50% of the business, which is huge.

01:41:26.380 | And it gives you an idea of the reduction in wages

01:41:29.300 | these American corporations are looking at.

01:41:31.040 | They'd shut down the factory

01:41:32.160 | in what's now the Rust Belt of America.

01:41:34.860 | They might be paying somebody there,

01:41:37.100 | that time maybe $2 an hour,

01:41:39.900 | and they come across to China,

01:41:41.320 | and they're paying two cents an hour.

01:41:43.500 | So the enormous amount of wages that they dropped,

01:41:47.820 | they were willing to forego half the profits

01:41:50.420 | and the ownership of the firm.

01:41:52.180 | So what the Chinese were doing

01:41:53.220 | wasn't just exploiting their labor force,

01:41:56.640 | it was also building a capitalist class.

01:41:59.620 | And that meant that you had this,

01:42:01.020 | that's where all the Chinese corporations have come from.

01:42:04.220 | So they were building a capitalist system

01:42:07.820 | within a socialist command political system.

01:42:11.220 | And that worked, and it's still working.

01:42:14.400 | So there was the centralization of the economic stuff,

01:42:16.740 | the Gosplan approach.

01:42:18.400 | I think that was where the Soviet failed.

01:42:21.380 | And what the Chinese realized

01:42:23.840 | after what they went through under Mao

01:42:25.700 | was you have to have that capitalist period,

01:42:28.260 | but they weren't going to abandon the communist control

01:42:30.700 | politically of the country at the same time.

01:42:32.940 | And that worked out brilliantly.

01:42:34.220 | And there's a huge amount of innovation

01:42:35.660 | taking place in China today.

01:42:37.780 | And they also will do gigantic infrastructure projects,

01:42:42.100 | breathtaking planning going into that.

01:42:44.620 | If you've, you would have seen videos

01:42:46.500 | of building a skyscraper in a day.

01:42:49.580 | The planning that has to go into that,

01:42:51.340 | the pre-preparation that's necessary is enormous.

01:42:54.220 | So there's a real respect for engineers as well

01:42:56.020 | in that society, which does not apply in the West.

01:42:58.860 | - What do you think about the, from the Western perspective,

01:43:01.700 | the destructive effects of centralized control

01:43:05.380 | of the populace, of the ideas, of the discourse,

01:43:07.600 | of the censorship and the surveillance,

01:43:09.820 | all those kinds of things?

01:43:11.100 | - It's a bit like we were talking about Russia

01:43:13.660 | to some extent beforehand

01:43:15.740 | with centralized versus decentralized corruption.

01:43:19.280 | And when you had the centralized political stuff,

01:43:25.100 | means you know you can't criticize within China,

01:43:28.440 | but so long as you don't criticize,

01:43:30.060 | you can do what you like.

01:43:31.620 | - And how destructive is that to the human spirit?

01:43:35.080 | From the American perspective,

01:43:37.140 | that feels destructive. - I found some pretty,

01:43:39.340 | before, I've been to China quite a few times over my life,

01:43:43.500 | a lot in the last, not for about four years,

01:43:45.900 | but for the six years before that, a few visits.

01:43:48.620 | And I'd be staying in second and third and fourth tier cities

01:43:53.620 | so populations of only 4 million people,

01:43:56.140 | which is quite small on Chinese standards.

01:43:58.740 | And I had a lot of happy people that I was interacting,

01:44:02.220 | my girlfriend at the time, her social circle.

01:44:06.200 | And you can feel when people

01:44:08.300 | can't discuss a political issue.

01:44:09.760 | For example, in Thailand, you can't discuss the king.

01:44:13.040 | They still have less majest laws,

01:44:16.240 | so you can actually be jailed for discussing the king.

01:44:19.320 | And you can feel that to some extent,

01:44:21.440 | and it is a political issue in Thailand now.

01:44:24.200 | But in China, what I got back from most people,

01:44:26.920 | it was a bit like a benevolent big brother.

01:44:29.740 | But then when you get things like the lockdown,

01:44:33.480 | which has applied recently,

01:44:34.680 | then you get the failings of the Soviet system

01:44:37.960 | is still there in the Chinese system.

01:44:40.840 | In that the easiest way to avoid criticism

01:44:45.040 | as a underling carrying out instructions

01:44:47.800 | of people above you,

01:44:49.000 | is to carry those instructions out to the letter

01:44:51.600 | beyond what the people actually want you to do at the top.

01:44:56.040 | So we had a classic illustration of that

01:44:58.500 | when I took these journalists.

01:45:00.200 | There was a news report saying

01:45:02.160 | that China's output of light industry

01:45:04.840 | had grown by 17% in the previous year,

01:45:07.660 | but heavy industry had fallen by 7%.

01:45:10.160 | We just don't compute.

01:45:12.500 | So we kept on asking, why did this happen?

01:45:14.180 | Every time we asked a question, this is back in '81,

01:45:16.960 | the answer would be the initial answer,

01:45:18.400 | we followed the directive of the Central Committee

01:45:20.320 | of the Communist Party of China.

01:45:21.920 | We finally got a guy to elaborate and say what that was.

01:45:26.200 | He said, "Well, the Central Committee sent out a directive

01:45:28.320 | "to promote light industry."

01:45:30.480 | "So what did you do?"

01:45:31.600 | Quote, unquote, "We stripped heavy industry factories

01:45:34.220 | "and turned them into light industry."

01:45:36.320 | - Yeah. - Okay.

01:45:37.560 | Now that's destructive of everything, okay?

01:45:40.280 | And that's the overlay that you've still got

01:45:42.360 | sitting over the top of China.

01:45:44.300 | But a huge part of the industrialization

01:45:46.440 | was simply saying, produce whatever you can,

01:45:50.660 | make goods, market them, sell them.

01:45:53.480 | And you get that innovative component

01:45:56.520 | of humanity is respected,

01:45:58.360 | and the goods turn up and everybody's well fed,

01:46:00.820 | food in Russia is far better than food in America.

01:46:04.540 | So in terms of material satisfaction and freedom,

01:46:09.540 | so like for example, enjoy dancing.

01:46:11.960 | I mean, we went to, I think somewhere in Shanghai,

01:46:16.600 | and there's this line of people

01:46:18.520 | involving a woman who would have been close to her 90s

01:46:21.600 | and a kid who was about six or four.

01:46:24.160 | - Partying it up. - Partying it up

01:46:25.600 | in the open air and doing this Chinese collective dance.

01:46:27.960 | - So you have to be really careful about that kind of thing.

01:46:31.380 | So in terms of measuring the flourishing of a people

01:46:36.380 | by looking at their happiness,

01:46:43.080 | I have so many thoughts on this,

01:46:45.940 | but I'm imagining North Korea.

01:46:48.380 | And if you talk to people in North Korea,

01:46:51.300 | I think they would say they're happy.

01:46:55.820 | - No.

01:46:56.660 | - Well, let me try to complete this argument.

01:46:59.740 | Not an argument, but a sort of challenge to your thought,

01:47:05.760 | which especially in the bigger cities,

01:47:08.780 | because they don't know the alternative.

01:47:11.320 | So what else do you need?

01:47:14.400 | There's enough food on the table.

01:47:16.440 | We have a leader that loves us and we love him.

01:47:20.140 | We're full of, our hearts are full of love.

01:47:24.280 | Our table is full of food, they would say,

01:47:29.140 | because it's enough food.

01:47:30.980 | What else do you want from life?

01:47:34.660 | - No, I think, okay, like that's--

01:47:36.340 | - So let me sort of chat, because like--

01:47:37.860 | - That's an alternative.

01:47:38.820 | I mean, I've spent time in Romania.

01:47:41.380 | - So let me sort of complete that, sorry.

01:47:44.140 | 'Cause I'm taking the most challenging aspect.

01:47:47.100 | When there's centralized control of information,

01:47:50.940 | that you don't know the alternative,

01:47:53.380 | that you don't know how green the grass is

01:47:55.480 | on the other side.

01:47:56.900 | And so your idea of happiness might be very constrained.

01:48:00.920 | So you could also argue that is happiness,

01:48:04.300 | if you don't know.

01:48:05.140 | (laughs)

01:48:05.980 | - Ignorance is bliss.

01:48:07.340 | - Ignorance is bliss.

01:48:08.500 | And then so is happiness really the correct measure--

01:48:11.780 | - It's not. - For the flourishing?

01:48:13.740 | - It's not.

01:48:14.700 | But I mean, there's actually a classic book,

01:48:18.260 | a movie as well, called "Mal's Last Answer."

01:48:21.900 | - Okay, and that is a young man explaining his progression

01:48:26.220 | from being a dancer in the Cultural Revolution

01:48:28.800 | through to a leading dancer in American

01:48:30.540 | and ultimately Australian ballet.

01:48:32.660 | And he explicitly says at one point

01:48:36.500 | that he's told that the Chinese people

01:48:38.700 | have the highest standard of living in the world.

01:48:41.060 | And the reaction of him and his kids,

01:48:42.540 | like his fellow six-year-olds is,

01:48:44.220 | "God, it must be miserable elsewhere in the world then."

01:48:47.340 | So they knew--

01:48:48.660 | - They still know.

01:48:49.500 | - They still know.

01:48:50.320 | There's no such thing as that complete ignorance.

01:48:52.480 | But what I'm talking about is,

01:48:55.160 | and this experience is in China,

01:48:56.620 | say back in about 2016, 2014,

01:48:59.800 | there was a feeling of freedom

01:49:03.200 | within limits that you didn't wanna transgress

01:49:07.080 | because the system was working.

01:49:09.280 | So if you--

01:49:10.120 | - It's kinda like marriage.

01:49:11.200 | - Pardon?

01:49:12.040 | - It's kinda like marriage.

01:49:12.860 | - Hey, that's a good example.

01:49:14.040 | (laughs)

01:49:15.000 | - There's limits.

01:49:15.840 | - There's limits.

01:49:16.660 | - You can have fun within those limits.

01:49:17.960 | - That's right, okay.

01:49:18.800 | And people did have fun and they did feel free,

01:49:21.880 | but they didn't wanna go and get divorced.

01:49:24.040 | But that dilemma was accommodated

01:49:28.000 | because the boundaries,

01:49:29.120 | until you started hitting restrictions, were wide.

01:49:31.960 | Okay?

01:49:33.120 | And when you look at it,

01:49:34.200 | I mean, look at the,

01:49:35.480 | again, with the Chinese Communist Party,

01:49:37.920 | the administrators of that

01:49:39.640 | are often highly qualified engineers

01:49:42.440 | who can then make intelligent decisions

01:49:44.420 | about what should be done as infrastructure and so on.

01:49:47.600 | And you go to China and you've got

01:49:48.840 | an incredible high-speed rail,

01:49:50.560 | fantastic infrastructure,

01:49:54.680 | internet, telecommunications, and so on,

01:49:57.080 | rapidly evolving solar.

01:50:00.480 | There's a range of things there that are so well done

01:50:03.480 | that reflect the fact that the selection process

01:50:06.840 | that gives you your political elite

01:50:09.080 | is partially focused upon sucking up, et cetera, et cetera.

01:50:11.920 | It's still there.

01:50:13.000 | But it's also focused upon your skill levels.

01:50:16.720 | And you get people making decisions

01:50:18.720 | who damn well know what they're talking about.

01:50:20.480 | Like Australia's got a classic example.

01:50:22.760 | The internet in Australia sucks.

01:50:24.960 | The reason it sucks is that the Labor Party,

01:50:29.360 | which is our version of the Democrats,

01:50:31.680 | was in control during the global financial crisis.

01:50:34.440 | And as part of that,

01:50:35.920 | they wanted to bring in optical fiber connections

01:50:40.880 | to the house.

01:50:42.520 | So you'd have an optical fiber backbone

01:50:44.160 | and an optical fiber right to your T100 output

01:50:48.320 | from your home.

01:50:49.640 | And the Liberal Party fought that

01:50:51.880 | and said that's gonna be too expensive,

01:50:54.200 | take too long to do.

01:50:55.560 | We're going to do cable to the node

01:50:58.560 | and then have a copper network linking

01:51:00.840 | from a node on a street to all the houses in the street.

01:51:03.520 | It's gonna be cheaper and faster,

01:51:05.640 | have it more soon, blah, blah, blah.

01:51:07.160 | It was a total technical fuck up.

01:51:08.800 | And Australia now has internet

01:51:11.080 | that's about 50th or 60th fastest in the world.

01:51:13.800 | It's dreadful for the internet.

01:51:15.960 | Two political figures made the decision,

01:51:18.480 | Tony Abbott and Malcolm Turnbull,

01:51:22.040 | rivals and leaders of the conservative party

01:51:26.160 | we call Liberal over there.

01:51:27.800 | Now that was shitty decisions

01:51:30.360 | that wouldn't happen in a country like China

01:51:34.160 | because you've got actual engineers making the decisions.

01:51:36.760 | They say you can't get decent speed

01:51:38.840 | if you link optical fiber to copper.

01:51:41.440 | It's kind of, so what you get is

01:51:44.200 | even though you can't make the decisions yourself,

01:51:47.440 | a vast majority of the decisions are made intelligently

01:51:50.640 | and therefore you expect it.

01:51:52.080 | - Yeah, it's interesting but

01:51:53.480 | don't you worry about the corrupting aspects of power?

01:51:59.320 | - Oh yeah.

01:52:00.160 | - That you start, you have engineers

01:52:02.520 | making intelligent decisions,

01:52:04.680 | but at which point does the fat king

01:52:09.320 | start saying, "Oh, these engineers are annoying.

01:52:11.560 | "I have good internet.

01:52:12.680 | "I don't understand.

01:52:14.080 | "Bring me the grapes."

01:52:15.960 | - Well, that's, you get your colligular effects

01:52:18.560 | that can happen.

01:52:19.480 | I like Z from what I've seen has got elements of that.

01:52:22.200 | So friends of mine who are Caucasians can get away with it.

01:52:26.400 | They have a game that they play at conferences

01:52:28.680 | scoring how often people use Z's name in a presentation

01:52:32.360 | and giving extra points for the number of photographs

01:52:34.360 | of Z that turn up in the whole thing.

01:52:36.280 | So you've got this sort of personality cult

01:52:38.680 | coming along as well.

01:52:40.120 | But at the same time, the planning for the infrastructure

01:52:43.040 | that's being built, the social services,

01:52:45.320 | the general freedom that exists is so great.

01:52:50.080 | And like any Chinese person alive today,

01:52:52.280 | like somebody who's Chinese my age,

01:52:54.560 | would have been an adult under the early period of,

01:53:00.600 | the late period of Mao.

01:53:02.280 | And God almighty, the change, the improvement

01:53:04.200 | they've seen in their lives,

01:53:05.520 | that's what they think about.

01:53:07.120 | - So, but it's the, if you just look at the history

01:53:11.200 | of the 20th century, your intuition would say

01:53:14.120 | that some of the mechanisms we see in China now

01:53:17.160 | will get you into trouble in the long term.

01:53:19.600 | So it seems to be working really well in many ways

01:53:23.480 | in terms of improving the quality of life

01:53:26.120 | of the average citizen in China.

01:53:28.280 | But you start to get worried about how does this go wrong?

01:53:31.080 | - Well, yeah, but at the same time, maybe, I mean,

01:53:33.760 | often people will say, you know,

01:53:35.080 | what's your vision for the future?

01:53:36.720 | And what they mean is, what vision for the future

01:53:38.920 | do you have that I'm gonna like?

01:53:41.120 | - Right. - Okay.

01:53:42.080 | Now, what if you have a vision of the future

01:53:44.320 | you don't like?

01:53:45.440 | It's dreadful.

01:53:46.280 | When that's the ecological crisis

01:53:50.000 | I think we're walking blindfolded into.

01:53:51.920 | - Well, that's right, that part of the picture

01:53:55.600 | we'll have to talk about.

01:53:57.640 | How fundamental of a problem that is.

01:53:59.760 | Okay, but what does that have to do

01:54:01.720 | with the future of China?

01:54:02.560 | - Well, what it has to do is that if you wish

01:54:04.200 | to impose dramatic controls on the consumption

01:54:06.520 | of the rich, which would be necessary

01:54:08.800 | to reduce our consumption burden

01:54:11.720 | so that we can get closer to the ecological envelope

01:54:15.600 | we've destroyed already, then you're gonna make

01:54:18.640 | more likely successful doing that

01:54:19.960 | with a centralized system where people accept

01:54:22.800 | centralized political control than you were

01:54:25.520 | in a country where it's all diversified

01:54:27.280 | and you scream freedom between every point

01:54:29.720 | in a tennis match.

01:54:30.560 | And I've literally seen that when I was

01:54:32.400 | in Philadelphia some time back.

01:54:35.200 | So the ideology that accepts a collectivist attitude

01:54:39.760 | may be more successful in controlling

01:54:42.040 | our reducing human consumption levels.

01:54:45.000 | 'Cause when we talk about democracy,

01:54:46.720 | I mean, who's voting here?

01:54:49.200 | How many horses and elephants and birds get to vote?

01:54:54.200 | Okay, it's very--

01:54:56.880 | - What's a bird?

01:54:57.960 | - Yeah, you don't see them around here.

01:55:00.920 | It's a very human-centric vision we have of this planet.

01:55:04.360 | And we're gonna pay a price for that.

01:55:07.760 | - Okay, so you're saying to deal

01:55:09.280 | with global catastrophic events,

01:55:12.400 | centralized planning might be--

01:55:13.920 | - Maybe, I think will work better, period.

01:55:16.320 | I mean, again--

01:55:18.680 | - But there is some centralized stuff

01:55:21.200 | in the United States, for example.

01:55:22.400 | - Oh, your military, yeah, I know.

01:55:23.880 | - No, no, okay, all right.

01:55:26.000 | Now there's that feisty Australian.

01:55:29.640 | So besides the military, that's the ideal

01:55:33.800 | of the federal government in the United States

01:55:35.680 | is that there is some centralized infrastructure building.

01:55:40.560 | There's some big--

01:55:41.400 | - There's not enough of it, yeah.

01:55:43.120 | - But there's some.

01:55:43.960 | - There's some.

01:55:44.800 | - The question is when you deal with greater

01:55:47.040 | and greater global catastrophic events,

01:55:49.920 | like the pandemic that we're just living through,

01:55:52.080 | that the government would be able to step up

01:55:54.640 | and impose enough centralized planning

01:55:57.720 | to allow us to deal, sort of enable,

01:56:00.680 | empower the citizenry to deal

01:56:02.760 | with these catastrophic events.

01:56:04.440 | In the case of the pandemic, a lot of people argue

01:56:06.680 | that the, first of all, the world,

01:56:09.120 | but also the United States failed

01:56:11.320 | to effectively deal with the pandemic.

01:56:15.560 | On the medical side, on the social side,

01:56:17.520 | on the financial side, the supply chain, everything.

01:56:21.520 | In terms of communication, in terms of inspiring

01:56:24.520 | the populace with the power of science,

01:56:29.240 | on all fronts, they failed.

01:56:31.640 | But the ideal is that we'd be able to succeed.

01:56:34.600 | You would have to have a small, efficient,

01:56:36.720 | the ideal, the American ideal,

01:56:38.680 | is you have a small, efficient government

01:56:40.200 | that's able to take on tasks precisely like the pandemic.

01:56:43.840 | - But the thing is, maybe it shouldn't have been

01:56:45.320 | as small as it was.

01:56:46.800 | I mean, my favorite instance of that actually involves

01:56:48.800 | the UK, because the whole neoliberal approach

01:56:51.680 | is about small, efficient government, okay?

01:56:54.240 | Well, small, efficient government works

01:56:56.080 | when you face small, efficient challenges.

01:56:58.440 | When you face something systemic,

01:57:00.760 | rather than episodic, then it's gonna break down.

01:57:03.760 | And like this is, I mean, one of the things

01:57:05.360 | I greatly respect is Taleb's idea of anti-fragile.

01:57:08.920 | You want a society which is anti-fragile,

01:57:10.520 | not easily broken.

01:57:11.880 | Whereas neoliberalism has pushed us

01:57:13.440 | towards this vision of efficiency,

01:57:14.800 | but it's easily snapped.

01:57:16.360 | Like in the UK, I've forgotten the government minister

01:57:19.400 | involved, but she asked her expert committee,

01:57:23.840 | "How many," this is well before the pandemic,

01:57:26.440 | "How many masks should we have on hand

01:57:29.360 | "in case of a pandemic?"

01:57:31.040 | And the answer from the experts was about a billion.

01:57:33.560 | Okay, that's 50 masks, that's 20 masks per person, okay?

01:57:38.480 | Oh, that's too many.

01:57:39.800 | Let's just make 50 million masks.

01:57:42.240 | That's one mask per person that was gone

01:57:44.200 | in a matter of a day, okay?

01:57:46.400 | And therefore, that's why they told us,

01:57:47.680 | "Well, masks don't work."

01:57:48.800 | You know, what they meant was,

01:57:49.880 | "We don't have enough masks for our health people,

01:57:52.880 | "let alone for you and the public.

01:57:54.360 | "So we're gonna bullshit you

01:57:55.400 | "and tell you those masks don't really work."

01:57:58.040 | And then people don't wear masks,

01:57:59.760 | and then we've got enough masks,

01:58:00.840 | we rush up the production job.

01:58:02.600 | And by the time it comes along,

01:58:03.780 | people have got the skepticism about masks.

01:58:05.920 | - So who does, can you elaborate,

01:58:08.280 | who does the blame in that case go on to?

01:58:10.200 | - The blame comes down to the philosophy

01:58:11.640 | that says government should always be small.

01:58:14.380 | - No, but do you really think that bigger government

01:58:17.160 | would be the solution to the mask issue?

01:58:18.680 | - No, but what if-- - So let me push back

01:58:20.240 | sort of if it's possible that capitalism

01:58:23.200 | solves that problem.

01:58:25.440 | - Not if, there's no money

01:58:27.400 | in really long-term planning in capitalism.

01:58:29.980 | Okay, there's money in, capitalism is--

01:58:34.440 | - Isn't it possible to construct,

01:58:36.360 | isn't possible for capitalism to construct a system

01:58:40.120 | that ensures against catastrophic events?

01:58:42.680 | - Not when they're systemic.

01:58:44.040 | You can ensure against episodic events.

01:58:47.420 | If you occasionally have a really bad storm,

01:58:50.040 | but in general, the weather's not so bad

01:58:52.360 | that all the infrastructure's being destroyed,

01:58:54.400 | then you can share that around on a percentage basis.

01:58:56.880 | If you have a Gaussian distribution for your events,

01:59:00.080 | and you don't, the mean doesn't move around too much,

01:59:03.520 | and the standard deviation doesn't change all that much,

01:59:05.920 | then insurance works fine.

01:59:07.660 | But if you have an, if that's episodic,

01:59:09.600 | if you have systemic stuff

01:59:10.880 | where the climate is changing completely,

01:59:13.080 | and you're gonna wipe out your agricultural capabilities,

01:59:16.500 | you simply can't do insurance on that front.

01:59:19.760 | You can't make a profit out of catastrophe in capitalism.

01:59:23.840 | - Okay, so that example of climate change,

01:59:28.600 | let's talk about it.

01:59:29.600 | - Okay.

01:59:30.600 | - So you mentioned that the human brain,

01:59:34.040 | the economy, and the biosphere

01:59:36.740 | are three of the most complex systems we know.

01:59:39.320 | Okay, and you also criticize the economics community

01:59:45.320 | for looking at the effects of climate change

01:59:51.400 | when measured as the effect on the GDP.

01:59:55.080 | So you're saying it's a catastrophic thing,

01:59:58.520 | that the biggest challenge our society,

02:00:01.280 | our world is facing.

02:00:03.040 | Why?

02:00:03.880 | If the economists disagree with you,

02:00:05.680 | the effects on the GDP will be minor,

02:00:08.580 | so we'll deal with it when it comes.

02:00:13.600 | That's the argument against, that's the devil's advocate.

02:00:16.000 | You're saying, no, it is a thing

02:00:19.680 | that will change our world forever

02:00:22.400 | in ways that we should really, really,

02:00:24.040 | really be thinking about.

02:00:25.720 | Okay. - Okay.

02:00:26.720 | - Make the case of why you disagree with the economists.

02:00:28.400 | - The case is simple.

02:00:29.520 | Economists have made up their own numbers

02:00:31.560 | to say that it's trivial.

02:00:34.040 | - And you didn't.

02:00:35.680 | - No, I haven't even tried to make the numbers.

02:00:37.640 | I'm reading what the scientists write.

02:00:39.320 | - Okay. - Okay.

02:00:40.300 | And what the economists have done,

02:00:42.560 | and like this is William Nordhaus in particular,

02:00:44.880 | Nobel Prize winner,

02:00:46.200 | ex-president of the American Economic Association,

02:00:49.400 | literally assumed that a roof

02:00:50.640 | will protect you from climate change.

02:00:52.920 | He didn't say it in those words.

02:00:54.800 | What he said was 87% of American industry

02:00:57.680 | occurs in carefully controlled environments,

02:00:59.900 | which will not be subject to climate change.

02:01:02.320 | Now, the only things that all of manufacturing,

02:01:04.640 | all of services, he included mining as well,

02:01:08.000 | forgetting about open-cut mining,

02:01:09.640 | government activities and the finance sector,

02:01:13.560 | all they have in common is they happen beneath a roof.

02:01:16.920 | So he's basically saying climate affects the weather.

02:01:19.520 | Climate is weather, okay?

02:01:21.400 | Okay, now that is not at all what is meant by climate change.

02:01:25.880 | It's mean changing the entire pattern

02:01:28.480 | of the weather system of the planet.

02:01:32.120 | For example, the most extreme form of climate change

02:01:34.840 | would be a breakdown in the three circulation cells

02:01:38.020 | that exist in each hemisphere,

02:01:39.800 | the Hadley cell, the Ferris cell,

02:01:42.160 | I think it's called, and the polar cells,

02:01:43.680 | zero to 30, 30 to 60, 60 to 90.

02:01:46.440 | Those are the main bubbles, if you like, in the atmosphere.

02:01:50.440 | Now, if we get enough increase in the energy

02:01:54.140 | in the atmosphere, just like you turn the temperature up

02:01:57.360 | on a stove and you have nice bubbles occurring

02:01:59.880 | in a pot of soup and then turn the temperature up

02:02:02.080 | and they all break down and you've got bubbles everywhere,

02:02:04.840 | that's called the equitable climate.

02:02:06.520 | If that happens, then most of the rainfall

02:02:09.920 | is gonna occur between zero and 20 and 70 and 90,

02:02:13.280 | and the middle's gonna be dry, except for extreme storms.

02:02:16.300 | We built our societies in a period of extreme stability

02:02:23.000 | of the climate, and when you look

02:02:24.720 | at the long-term temperature records,

02:02:26.920 | it's up and down like a seesaw,

02:02:29.720 | like a sawtooth blade, between, say,

02:02:32.840 | one degree warmer than now and four degrees

02:02:34.800 | or six degrees cooler over the last million years.

02:02:38.840 | But when you look at where we evolved,

02:02:40.640 | it's just that a turning point on the peak

02:02:43.240 | of one of those ups and downs.

02:02:44.480 | So those, I've forgotten the name of the cycles,

02:02:46.640 | but the cycles caused by changes

02:02:48.480 | in the Earth's rotation around the sun.

02:02:50.520 | And so we evolved our civilization just at the top.

02:02:56.400 | So coming up from a cold period,

02:02:59.480 | and then we're gonna head down to another cold period,

02:03:02.560 | and that's when human civilization came along.

02:03:04.520 | It's about a period of about 12,000 years.

02:03:06.960 | So across that period, the temperature has changed

02:03:10.240 | by not much more than half a degree up and down.

02:03:13.120 | Now, we're blasting it well and truly out

02:03:15.240 | of those confines, and my way of interpreting

02:03:19.240 | what climate change means is the stability

02:03:22.960 | of that climate that enables to build

02:03:24.680 | sedentary civilizations and not be a nomadic species

02:03:28.600 | is being destroyed.

02:03:30.160 | - So the challenge, and by the way,

02:03:32.860 | I'm playing devil's advocate.

02:03:35.160 | - Go right ahead.

02:03:36.000 | - The question is, is there something

02:03:39.600 | fundamentally different now about human civilization

02:03:42.240 | that we're able to build technology

02:03:46.760 | that alleviates some of the destructive effects

02:03:50.840 | that we have on the climate?

02:03:52.720 | - We don't know.

02:03:53.600 | And we're gonna find out the hard way.

02:03:56.240 | - And the uncertainty, you think, would be very costly.

02:03:59.000 | - Extremely.

02:03:59.840 | - Like many of the trajectories we might take

02:04:02.400 | would be much more costly than they're profitable.

02:04:05.360 | - Yeah, and like, when we've seen some of the storms

02:04:08.840 | that are happening now in Europe,

02:04:10.240 | the ones that washed away a village in Germany

02:04:12.840 | some time ago, the firestorm that hit Canada of all places,

02:04:16.600 | I've forgotten the name of the town that was burnt down,

02:04:18.760 | but enormous temperatures in Canada.

02:04:20.920 | Again, the storms that are happening back in Australia,

02:04:24.760 | these are all manifestations of a complete shift

02:04:27.320 | in the weather patterns of the planet.

02:04:29.120 | And they can wipe out, like a village just disappears,

02:04:32.960 | just wiped out by unprecedented rains.

02:04:36.080 | And this keeps on happening.

02:04:39.120 | We are still living in a sedentary lifestyle

02:04:41.960 | when we're a nomadic species.

02:04:44.080 | So to be able to maintain that sedentary lifestyle,

02:04:47.240 | we do need to engineer the planet.

02:04:49.400 | We need to keep it within that range

02:04:51.480 | of plus one, plus half a degree Celsius,

02:04:55.800 | minus half a degree, which is really what has been lost

02:04:58.600 | for the last 10, 12,000 years.

02:05:00.400 | Instead, we're blasting it right out of that range.

02:05:03.080 | And we know some of the past climates that have existed then

02:05:07.320 | we can model what they imply

02:05:09.320 | for our food production systems, for example,

02:05:12.440 | not the only example, but obviously crucial.

02:05:15.200 | So when you look at what are called global climate models

02:05:18.800 | produced by scientists, one of the examples,

02:05:21.680 | and it was published by the OECD last year, 2021,

02:05:25.560 | in the chapter on what would happen if we lose

02:05:28.320 | what's called the Atlantic meridional overturning circulation

02:05:32.320 | or AMOC, and people would colloquially know that

02:05:34.560 | as the Gulf Stream.

02:05:35.840 | And that's what distributes heat

02:05:37.880 | around all the oceans of the planet.

02:05:39.600 | It's part of a huge chain

02:05:41.600 | called the thermohaline circulation.

02:05:43.600 | But the part that goes across from the equator

02:05:47.240 | to the North Atlantic,

02:05:48.640 | that's called the AMOC and Gulf Stream, colloquial way.

02:05:52.800 | If that disappears in the context

02:05:55.280 | of a two and a half degree Celsius increase

02:05:57.720 | in average global temperature,

02:05:59.600 | then the proportion of the Earth's surface,

02:06:02.920 | which is suitable for producing wheat,

02:06:05.360 | will fall from 20% to 7%.

02:06:08.880 | Proportion for corn, similar sort of fall.

02:06:11.960 | The proportion suitable for rice will go from 2% to 3%.

02:06:15.680 | Now that means a catastrophic,

02:06:17.240 | and that's the word used in the report,

02:06:18.680 | catastrophic collapse in food production.

02:06:20.720 | So that's what we're toying with.

02:06:23.840 | And we are one and a half, we're actually less than,

02:06:27.680 | we're about halfway there to that two degrees, 2.5.

02:06:30.920 | And economists, on the other hand,

02:06:34.600 | and this is Richard Toll, okay,

02:06:37.640 | published a paper in 2016,

02:06:39.840 | claiming using what he calls

02:06:41.440 | an integrated assessment model that economists developed,

02:06:44.960 | that losing the Gulf Stream

02:06:47.240 | would increase global GDP by 1.1%.

02:06:51.040 | Now, his model, this is what really pisses me off

02:06:53.720 | about these people, it's the worst work I've read

02:06:55.960 | in 50 years of being a critic of neoclassical economics.

02:06:59.040 | The GCMs, the one scientists produce,

02:07:03.280 | of course include precipitation as well as temperature.

02:07:06.520 | The IAMs that the economists produce,

02:07:08.560 | and this is stated yet again in a paper in 2021,

02:07:12.360 | do not include precipitation.

02:07:15.080 | They simply have temperature.

02:07:17.040 | So they assume that if temperature improves

02:07:19.920 | by moving towards a temperature

02:07:21.200 | which is better for producing aquaculture,

02:07:24.240 | okay, then so will precipitation.

02:07:26.640 | Now that's completely wrong.

02:07:27.880 | They've left out a crucial,

02:07:29.840 | imagine trying to model the climate

02:07:31.240 | while ignoring the fact that there's rainfall.

02:07:33.880 | That's what they've done.

02:07:34.940 | So their work is so bad, so dreadfully bad,

02:07:38.000 | it should never have been published.

02:07:39.200 | - So they over, all right, okay.

02:07:40.720 | - I'm gonna go for them, sorry, this is--

02:07:42.600 | - Well, no, no, 100% as they deserve it.

02:07:45.840 | So it's an oversimplification.

02:07:47.840 | But I also want you to steel man people you disagree with

02:07:51.480 | and criticize people you agree with if possible,

02:07:55.140 | to be sort of intellectually honest here.

02:07:57.240 | You do say, sort of to push back

02:07:59.440 | on the catastrophic thinking about climate change,

02:08:03.420 | that the ecology, the biosphere is a complex system.

02:08:10.160 | Economics, the economy is a complex system.

02:08:14.940 | So how can we make predictions about complex systems?

02:08:22.020 | How can we make a hope of having a semi-confident predictions

02:08:27.020 | about the complex system?

02:08:28.840 | So the scientific community is very confident

02:08:32.440 | about the complex system that is the biosphere

02:08:36.480 | and the crisis that's before us on the horizon.

02:08:40.900 | And then the economists are, as a community,

02:08:46.120 | I don't know what percentage, but--

02:08:48.480 | - Too much.

02:08:49.480 | - Too much.

02:08:50.840 | That part of the community is very confident

02:08:54.220 | looking at the economics complex system

02:08:59.220 | in saying that, no, this system we have

02:09:04.260 | of labor, money, and capital, and so on,

02:09:08.140 | we'll be able to deal with that crisis

02:09:09.860 | and any other crisis.

02:09:11.700 | And they kind of construct simplified models

02:09:14.560 | that justify their confidence.

02:09:19.220 | So how do we know who to believe?

02:09:21.380 | - For a start, if you believe the economists,

02:09:23.500 | you need your head read.

02:09:26.380 | - That's not an argument.

02:09:27.500 | - I know it's not an argument,

02:09:28.340 | it's a summary of an argument.

02:09:29.660 | And that is--

02:09:30.500 | - No, that sounds a lot like an opinion and an emotional--

02:09:32.900 | - I know, I know, 'cause I'm so angry about it.

02:09:35.060 | - Listen, I'll tell you where I stand.

02:09:37.940 | And I've begun studying the climate change much more.

02:09:43.880 | I used to be on things I don't understand,

02:09:49.180 | have not spent time on.

02:09:52.060 | I have so many colleagues that are scientists

02:09:55.300 | that I deeply respect, and I trust their opinion.

02:09:59.560 | I have seen the lesser angels of my colleagues

02:10:06.900 | on the pandemic side, on the COVID side.

02:10:12.060 | The confidence, the arrogance,

02:10:14.180 | that in part blinded, I believe,

02:10:17.540 | the jump between basic scientific research

02:10:21.260 | to public policy.

02:10:24.140 | - Yep, yep.

02:10:24.980 | - And then, so I've become a little bit more cautious

02:10:29.980 | in my trust on climate change.

02:10:32.300 | I'm still in the same place.

02:10:33.800 | And I don't mean climate change.

02:10:36.300 | On anything scientists say, I've become a little bit,

02:10:39.460 | wait a minute,

02:10:40.300 | how does the basic scientific facts of our reality

02:10:47.300 | map to what we should do as a human civilization?

02:10:50.780 | - Yeah.

02:10:51.620 | - There I wanna be a little bit careful.

02:10:52.820 | So whenever now I see arrogance and confidence,

02:10:56.340 | I become suspicious.

02:10:57.460 | - Well, I'm the same, and that's why I'm being angry

02:11:00.020 | about "The Economist," because there's incredible arrogance,

02:11:03.620 | incredible stupidity, the arrogance,

02:11:06.900 | assumptions which you look at it and think,

02:11:09.860 | how did anybody let that get published?

02:11:12.140 | - Sure.

02:11:12.980 | - Okay, that's what--

02:11:13.820 | - The economic analysis of the effects of climate change

02:11:17.300 | are poor, in many cases.

02:11:19.020 | - Incredibly poor.

02:11:20.380 | - And this is like, Bjorn Lomborg styles himself

02:11:23.460 | as the skeptical environmentalist

02:11:25.340 | and criticizes the environmental models.

02:11:28.540 | He doesn't take a look.

02:11:30.100 | He doesn't criticize the work come out by economists.

02:11:32.980 | You look at it, it's so bad.

02:11:35.200 | - Is it possible to do good economics modeling

02:11:38.400 | of the effects of climate change?

02:11:40.340 | - Yeah, it is possible.

02:11:42.040 | Very difficult.

02:11:42.880 | - Or is it like one complex system's tech?

02:11:46.060 | - It's two, in that case, yeah.

02:11:48.380 | To me, what you should be looking at is saying,

02:11:51.500 | what are the scientists saying are the consequences,

02:11:53.820 | probable consequences, not guaranteed,

02:11:56.520 | but probable consequences of increasing the energy level

02:12:00.940 | of the atmosphere by the amount we're doing?

02:12:03.420 | - What can the scientists say in terms of the effects,

02:12:06.780 | 'cause it's so complicated,

02:12:07.940 | the effects of sort of shifting resources.

02:12:12.780 | So basically, what are the effects of climate change?

02:12:15.580 | How can we really model that?

02:12:16.900 | Because it's basically,

02:12:18.180 | you're looking through the fog of uncertainty.

02:12:21.180 | 'Cause there are rising sea levels.

02:12:23.240 | How can we know what effect that has?

02:12:26.580 | All we know, there'll be a lot of change.

02:12:28.540 | - Yeah, well, I think the sea level one is a poor argument,

02:12:32.380 | and I don't focus on it.

02:12:33.940 | What I mainly focus upon is the weather patterns.

02:12:38.340 | Okay, and if you look at,

02:12:39.660 | like we got the wheat belt in America

02:12:42.140 | goes through Idaho and places like that,

02:12:45.740 | and you've got an incredibly deep topsoil.

02:12:48.100 | Ukraine is another classic example.

02:12:49.820 | The depth of the topsoil in Ukraine is remarkable,

02:12:53.300 | and that's the wheat bowl of Europe.

02:12:55.860 | And that requires both the right temperature

02:12:58.340 | for growing wheat and the right rainfall for growing wheat.

02:13:01.100 | Now, when we look at the models

02:13:02.580 | that climate scientists are building of that,

02:13:06.860 | you have pretty much,

02:13:07.940 | your ultimate foundation is the Lorenz model

02:13:11.220 | of turbulent flow.

02:13:12.800 | And of course, that's the first model

02:13:15.180 | which we saw chaos theory, complexity,

02:13:18.460 | that beautiful, simple model,

02:13:19.940 | three variables, three parameters,

02:13:22.260 | an incredible complexity out of the system.

02:13:24.500 | And what that meant was you also had an exponential decay

02:13:29.740 | in the accuracy of your model over time.

02:13:32.500 | So if you're accurate to a thousand decimal places,

02:13:36.860 | then in a thousand days, you'll have no data whatsoever

02:13:41.020 | because each time you're losing

02:13:42.180 | an order of magnitude of accuracy.

02:13:44.540 | So that's the point about the inability to predict

02:13:47.100 | for the very long future.

02:13:48.700 | But what you can just say,

02:13:49.940 | well, there's a prediction horizon.

02:13:51.700 | If we're close enough to the,

02:13:53.140 | if our statistical measurement of where we are

02:13:56.300 | is close enough to where we actually are,

02:13:58.840 | and our forecast horizon is narrow enough

02:14:01.700 | to not extrapolate too far,

02:14:03.500 | then for this distance forward,

02:14:05.140 | we can make a reasonable fist

02:14:06.460 | at predicting what the weather's going to be.

02:14:08.660 | And that's the foundation of meteorological,

02:14:11.260 | the stuff we watch on TV.

02:14:13.560 | Most of the time,

02:14:14.700 | the forecasts are gonna be correct these days.

02:14:17.100 | 40, 50 years ago, most of the time the forecasts were wrong.

02:14:20.740 | So that's the background foundation to these GCMs.

02:14:24.520 | But even they've got to massively simplify the world.

02:14:26.700 | So you have this enormous sphere

02:14:29.060 | where they might divide it down to 100 kilometer

02:14:31.120 | by 100 kilometer by 10 kilometer cube,

02:14:35.220 | rectangles, whatever, oblongs.

02:14:39.380 | That's how they're modeling the transition

02:14:42.620 | of weather from one location to another.

02:14:45.720 | So they've got a chunky vision of the planet,

02:14:48.960 | which they have to, they can't model it now,

02:14:50.600 | down to the last molecule.

02:14:52.260 | So you're losing-- - Well, not yet, right?

02:14:53.620 | It's getting better and better and better and better.

02:14:55.180 | - Oh, yeah, I think that's just too much processing power.

02:14:58.400 | But you're gonna have some confine.

02:15:00.260 | You can't go, I mean, if you look at the models

02:15:02.520 | to do the weather, they used to be of that 100 kilometer,

02:15:05.320 | I think they're about 10 kilometer grids now, I don't know.

02:15:08.040 | So the processing powers let us get

02:15:09.960 | more and more precise that way.

02:15:11.560 | I do know that the models now include chemical mixing

02:15:15.100 | that occurs above cities.

02:15:16.900 | They've added that complexity to them over time.

02:15:19.020 | - So you're looking at the increasingly accurate models

02:15:21.540 | of weather patterns, the effect they have on agriculture,

02:15:24.500 | on food, and you're saying that there's a lot

02:15:28.060 | of possibilities in which that's going to be

02:15:31.220 | really destructive to society on the food production side.

02:15:34.220 | - And if you have that increase in temperature,

02:15:35.860 | they're gonna get a change in precipitation,

02:15:38.100 | and it could mean that where the rainfall

02:15:40.200 | and the sunshine are adequate for growing wheat

02:15:43.300 | is an area where there's no topsoil.

02:15:45.500 | It's like a huge part of the models,

02:15:47.340 | the models the economists use, which only use temperature,

02:15:50.500 | don't include precipitation.

02:15:52.300 | They predict that a large amount of the wheat output

02:15:54.940 | of the world is gonna occur in Siberia,

02:15:57.420 | in the frozen tundra.

02:15:59.960 | - What about, so that's a straightforward criticism

02:16:03.500 | of oversimplified models.

02:16:05.260 | What about the idea that we innovate our way out of it?

02:16:09.580 | So there's totally new, what is the,

02:16:13.180 | there's a silly, poor example at this time perhaps,

02:16:17.520 | but lab-grown meat, sort of engineered food.

02:16:22.180 | So a completely shifting source of food for civilization,

02:16:27.180 | so therefore alleviating some of the pressure on agriculture.

02:16:33.660 | - That comes down to the difference that Alan makes

02:16:35.620 | between producing a prototype and mass producing

02:16:40.220 | the prototype.

02:16:41.540 | You can develop the idea very rapidly

02:16:44.740 | to put that into production on the scale that's necessary

02:16:47.900 | to replace what we're currently doing.

02:16:49.460 | - It takes years.

02:16:50.300 | - Yeah, and we haven't got years.

02:16:51.740 | We've got, we might have decades.

02:16:53.260 | We certainly haven't got centuries.

02:16:55.020 | So in the timeframe we've got,

02:16:57.980 | I can't see that engineering going from prototype

02:17:01.500 | to production levels to replace what we're currently doing

02:17:05.600 | in the stable environment we're currently destroying.

02:17:08.420 | - What do you think about the sort of the catastrophic

02:17:10.340 | predictions that people that have thought,

02:17:13.460 | have written about climate, have made in the past

02:17:15.500 | that haven't come to fruition?

02:17:16.700 | - That's mainly unfortunately involving Paul Ehrlich

02:17:19.660 | and the population bomb, and the predictions Paul was making.

02:17:22.860 | - A few individuals, or the one individual in that case.

02:17:25.420 | - Yeah.

02:17:26.260 | - So I'm mostly playing devil's advocate in this conversation

02:17:28.900 | and enjoying doing so.

02:17:31.580 | I do think I'm in agreement with the majority

02:17:36.200 | of the scientific community.

02:17:38.280 | - But you still see that argument made.

02:17:40.720 | - I still see the argument made,

02:17:42.640 | and I also am a little bit worried about the arrogance

02:17:45.220 | and the ineffectiveness of the arrogance.

02:17:47.420 | - This is the problem, it's ineffective.

02:17:49.680 | And that's what worries me, because it's all been

02:17:53.680 | put into the sort of sea level rise, temperature changes.

02:18:00.880 | It's not put into the fragility of the system

02:18:05.520 | in which we currently live.

02:18:08.140 | And the earth will survive, and there's a wonderful

02:18:10.760 | science fiction book called "The Earth Abides"

02:18:13.140 | about a world in which humans get wiped out,

02:18:15.740 | there's only a tiny little band left,

02:18:17.120 | and then the earth reasserts itself.

02:18:19.120 | So the earth's gonna survive us.

02:18:20.780 | Will we survive what we do to the earth?

02:18:22.300 | That's the question.

02:18:23.740 | And my feeling is that we have underplayed

02:18:30.320 | the extent to which the civilizations we've built

02:18:33.360 | have depended upon a relatively stable climate.

02:18:36.220 | And there's that turning point in the maximum,

02:18:38.820 | in the global average temperature,

02:18:40.460 | that we evolved right on the top of it.

02:18:42.380 | And if we had done nothing, we could find that

02:18:45.420 | heading back down towards another ice age

02:18:47.580 | could equally destroy the possibility of sedentary life.

02:18:50.980 | For example, if we'd never developed

02:18:53.060 | fossil fuel-based industries,

02:18:55.580 | we'd never built superphosphate,

02:18:57.900 | so our population would never have reached 1 billion people.

02:19:01.660 | And we were still living like fairly sophisticated animals,

02:19:04.800 | but you know, like 17th century level of load on the planet.

02:19:08.940 | Then we would have gone down, that decline.

02:19:11.780 | And the approaching ice age would have started

02:19:14.700 | to wipe out our farming areas,

02:19:16.940 | the glaciers would have encroached,

02:19:18.740 | and we would have been driven out of

02:19:20.420 | like an agricultural sedentary civilization by that change.

02:19:23.860 | So it's just the fact that we evolved

02:19:26.900 | on this stable period

02:19:28.500 | in the overall temperature cycle of the planet,

02:19:31.020 | and that stability is something

02:19:33.420 | which just reflects the turning point

02:19:35.340 | in the regular cycle of Malicevic cycle,

02:19:38.220 | I think it's called, I've forgotten the actual name,

02:19:39.940 | but it's a cycle caused by, you know,

02:19:42.780 | change in the Earth's orbit around the sun,

02:19:44.980 | reflectivity and so on.

02:19:47.340 | That cycle, it's just that tiny top bit that we evolved in.

02:19:52.340 | So what we should have done,

02:19:54.060 | and so that's really useful for us,

02:19:55.860 | we should stay at that level.

02:19:57.780 | Now, if we hadn't done it, we'd go back down here,

02:19:59.860 | and that'd be the end of our civilization by an ice age.

02:20:02.540 | Instead, we're going up here really rapidly.

02:20:05.980 | And we're causing a change in temperature

02:20:08.620 | compared to the long-term cycle,

02:20:11.940 | 100,000 times faster.

02:20:14.580 | So-- - Yeah, I mean,

02:20:15.860 | my biggest worry is even subtle changes in climate

02:20:22.260 | might result in geopolitical pressures

02:20:26.260 | that then lead to nuclear war.

02:20:28.780 | - And that's, yeah, I mean, there's an argument

02:20:31.100 | that's actually behind, to some extent,

02:20:33.420 | not the Ukraine war so much,

02:20:35.140 | but the Arab Spring, the wars in Syria,

02:20:38.300 | which partially has led to what's happening in Ukraine.

02:20:41.300 | So-- - And our weapons

02:20:42.740 | are getting more and more powerful

02:20:44.220 | and more and more destructive,

02:20:45.380 | more and more nations are having these destructive weapons,

02:20:48.900 | and now we're entering cyberspace

02:20:52.620 | where it's even easier to be destructive--

02:20:54.500 | - And hyperbaric weapons,

02:20:55.660 | which didn't exist in the Second World War.

02:20:57.980 | So, you know, you don't need nuclear weapons

02:21:00.380 | to have catastrophic attacks on each other.

02:21:02.940 | So, yeah, it's incredibly scary

02:21:04.700 | that the war-like side of human nature

02:21:08.420 | could be extremely enhanced by climate breakdown.

02:21:13.420 | - So, in this world, on a happy note,

02:21:17.740 | (laughing)

02:21:18.660 | I don't know how we went from Marxism and Stalinism

02:21:21.860 | to ecology, but all those are beautiful, complex systems.

02:21:25.700 | What is the best form of government, would you say?

02:21:31.540 | We talked about the economics of things.

02:21:33.820 | You ran for office, so you care about politics, too.

02:21:40.340 | How can politics, what political systems can help us here?

02:21:43.700 | - I think we first of all have to appreciate

02:21:45.740 | we're one species on our planet out of millions,

02:21:49.740 | and as the intelligent species,

02:21:52.660 | we should be enabling a harmonious life

02:21:56.620 | for those other species as well.

02:21:58.340 | - Can we actually linger on that?

02:21:59.540 | What is, you mentioned that we need to acknowledge

02:22:03.260 | the value of life on Earth.

02:22:05.140 | You know, can we integrate the labor theory of value,

02:22:14.420 | can we integrate into that the value of life?

02:22:18.300 | So, there's human life, and there's life.

02:22:21.420 | - If you take that structure that I talked about

02:22:24.140 | of Marx's use-value-exchange-value dialectic,

02:22:28.180 | the foreground-background, that only exists,

02:22:30.900 | that only works because we're exploiting

02:22:32.460 | the free energy we find in the universe.

02:22:34.820 | There could be no production system without free energy,

02:22:39.000 | which is the first law of thermodynamics.

02:22:41.980 | - There is free lunch, after all,

02:22:44.100 | and it's grounded in the energy that's provided to us.

02:22:46.700 | - Well, yeah, that's the free lunch.

02:22:47.940 | That's what we're exploiting.

02:22:48.780 | - It's the only free lunch we get.

02:22:50.500 | - You know Ginzburg's summary

02:22:51.780 | of the laws of thermodynamics, don't you?

02:22:54.180 | Alan Ginzburg?

02:22:55.260 | - What's that?

02:22:56.100 | - He said the laws of thermodynamics are summarized,

02:22:58.900 | A, you can't win, okay?

02:23:01.700 | B, you can't break even.

02:23:03.900 | - Yep.

02:23:04.720 | - C, you can't leave the game.

02:23:06.020 | - Nice, yeah.

02:23:08.300 | - Beautiful summary.

02:23:09.140 | - Beautiful summary.

02:23:10.420 | - But the fact that it exists in the first place

02:23:12.380 | is the free lunch, okay?

02:23:14.020 | So we're exploiting the free lunch,

02:23:15.780 | but to be able to do it,

02:23:17.220 | we can't put waste back into that system

02:23:19.340 | so much that it undermines the free lunch,

02:23:21.620 | and that's what we've been doing.

02:23:23.460 | And once you respect the fact that we have to,

02:23:27.780 | living on the biosphere, the planet we're actually on,

02:23:31.100 | we have to enable that biosphere to survive us

02:23:35.780 | because if it doesn't survive us,

02:23:37.460 | we won't survive it disappearing,

02:23:40.100 | and there's not that realization in humanity in general.

02:23:43.260 | - And when you say the value of life,

02:23:45.980 | all the different living organisms on Earth

02:23:49.380 | are part of that biosphere.

02:23:50.740 | - Yeah.

02:23:51.580 | - So in order to maintain the biosphere,

02:23:54.780 | we have to respect, like, pragmatically speaking,

02:23:58.620 | what that means is actually respecting all of life on Earth,

02:24:01.540 | even the mosquitoes?

02:24:02.740 | - I've got some, no.

02:24:05.220 | (laughing)

02:24:06.900 | - So I personally--

02:24:07.740 | - Parasites, I mean, we are a parasite.

02:24:10.420 | When you look at it, we're the mosquitoes

02:24:12.340 | of the large organizations.

02:24:16.580 | You're a fan of the "Matrix" movies at all?

02:24:18.700 | - Sure.

02:24:19.540 | - Okay, you know the--

02:24:20.380 | - But look what I'm wearing.

02:24:21.300 | - Absolutely, I was wondering what the inspiration was.

02:24:23.740 | I was thinking--

02:24:24.580 | - It's not really inspiration.

02:24:25.500 | We are living in a simulation.

02:24:27.260 | - Okay.

02:24:28.100 | - And I have a conversation offline

02:24:29.780 | to have with you about that.

02:24:31.180 | - Okay, well--

02:24:32.020 | - You've been misbehaving,

02:24:32.840 | and we're gonna have to put you back in line.

02:24:34.180 | - So what's Agent Smith says when he's got Morpheus

02:24:38.180 | in his possession, he said,

02:24:39.380 | "I've been trying to classify your species,

02:24:41.820 | "I've decided you're a virus."

02:24:43.780 | (laughing)

02:24:44.900 | Now, there's truth to that.

02:24:46.200 | We have intruded into everything.

02:24:48.780 | We've taken over every element of the biosphere,

02:24:52.380 | and we think we can continue doing that.

02:24:55.460 | And the thing is, we're breaking that,

02:24:57.020 | we're exploiting it so much, we're breaking it down.

02:24:59.780 | And I think it's E.O. Wilson who argued for the 50% rule.

02:25:03.380 | He believed that we should reserve 50% of the planet

02:25:07.500 | for non-human species.

02:25:10.260 | In other words, we make 50% of it off limits.

02:25:13.140 | Humans cannot go there.

02:25:15.060 | And we just let that evolve as it does,

02:25:17.500 | and then we control the other 50%.

02:25:19.780 | I think he's probably giving too much to us.

02:25:22.540 | I think we should actually save like 20%, 25% max.

02:25:26.220 | And the rest of the planet, we let life go on

02:25:29.080 | and evolve as it does, without our interference,

02:25:32.900 | without our dominance.

02:25:34.420 | Now, that's neither a democratic system

02:25:38.460 | nor an authoritarian one.

02:25:40.140 | It's one which starts off with saying,

02:25:42.100 | the first thing humans have to do is respect life itself.

02:25:44.940 | Okay, so would we do that?

02:25:48.340 | We haven't done it, obviously.

02:25:52.180 | I don't think the Soviets would have done it

02:25:53.580 | if we had a generally Soviet system.

02:25:56.000 | We haven't done it under a capitalist.

02:25:58.280 | We continue intruding.

02:25:59.780 | So I think we have to go through something like a Star Trek.

02:26:03.860 | A Star Trek in a catastrophic 200 years

02:26:06.980 | to realize that ultimately,

02:26:08.180 | if we're gonna survive as a species,

02:26:09.760 | we have to respect life in general.

02:26:11.980 | And then that means parts of the planet,

02:26:15.360 | we can no longer touch.

02:26:16.800 | While we also try to maintain the planet

02:26:20.020 | at the temperature that we found it

02:26:21.640 | in what we now call the Anthropocene.

02:26:23.940 | Okay, so politically, we have to have,

02:26:28.840 | like in many ways, what native societies often have,

02:26:33.720 | a vision of the cycle of life,

02:26:35.320 | not this exponential progression we've developed

02:26:38.780 | over the last 250 years.

02:26:40.660 | And again, I'll use another movie,

02:26:43.020 | the Avatar type respect for the cycle of life.

02:26:46.140 | We need to have that as part of our innate nature.

02:26:49.460 | And then on top of that, the political system comes out.

02:26:54.060 | Now that political system has to be one

02:26:56.320 | that lets us feel like we have a say

02:26:59.100 | in the direction of society,

02:27:02.360 | while that part is sacrosanct.

02:27:04.220 | Okay, we can't touch it.

02:27:05.920 | But we also, because we are now living

02:27:08.060 | with so many challenges created by our own civilization.

02:27:11.300 | I mean, the main threat to the existence

02:27:13.500 | of human civilization is the existence

02:27:15.980 | of human civilization.

02:27:17.540 | - Is both a feature and a bug.

02:27:19.340 | - Yeah, and therefore, we need to have people

02:27:22.460 | who can understand complex systems making those decisions.

02:27:25.660 | Now that means it isn't a political system

02:27:27.380 | as much as it is an appreciation

02:27:29.940 | that the world is a complex system.

02:27:32.100 | And therefore, effects which we think are direct effects

02:27:35.980 | will actually come through in a bleak fashion.

02:27:38.300 | And we cannot, there's no simple linear progression

02:27:42.440 | from where we are to where we wanna be.

02:27:44.940 | So you have to see how everything feeds together

02:27:46.820 | in a systemic way.

02:27:47.820 | And that's why, one reason I designed the software,

02:27:49.820 | I'm wearing the t-shirt for now, Minsky,

02:27:52.100 | is to have, it's nowhere near to this scale.

02:27:55.740 | I hope it one day will be.

02:27:57.220 | But something which means we can bring together

02:27:58.860 | all that complexity, all those systems,

02:28:00.600 | and perceive them on an enormous screen

02:28:03.060 | where we have all the various interacts

02:28:04.660 | and we can see what are potential futures.

02:28:07.500 | And that then guides us.

02:28:10.500 | So it isn't a case of democracy and outside wins a vote

02:28:14.780 | and therefore we ban abortion or we don't,

02:28:18.020 | whatever else happens.

02:28:19.380 | It's seeing what the, respecting the fact

02:28:23.060 | that we're in a complex system

02:28:24.740 | and being uncertain about the consequences

02:28:27.540 | and not making the bold, expansionary ideas

02:28:34.200 | that we've been doing.

02:28:35.740 | - So like being a little bit more,

02:28:37.680 | humble.

02:28:42.620 | - Humble, humble is a good word.

02:28:44.500 | - But wouldn't you like to apply that same humility

02:28:48.660 | both to the considerations of the pros of capitalism

02:28:53.660 | and to the catastrophic view of the effects

02:29:00.100 | of climate change?

02:29:00.940 | - Yeah, and also like I think we can afford

02:29:02.860 | to be bold in space.

02:29:04.120 | And that's one reason I respect the practical vision

02:29:08.640 | of Musk and the so far impractical vision of Bezos.

02:29:12.080 | That if we're going, we look for the very far future,

02:29:15.700 | the only way we can continue expanding our knowledge

02:29:18.260 | of the universe is to move our civilization,

02:29:22.700 | the productive side of off the planet.

02:29:24.480 | - Off-site backup.

02:29:25.720 | - Yeah.

02:29:26.560 | - So can you actually linger on this?

02:29:27.960 | So let's actually talk about this.

02:29:29.840 | So first of all, you have the new book,

02:29:32.300 | humbly named The New Economics, A Manifesto.

02:29:38.560 | - The publisher chose the title.

02:29:40.040 | - Yes, no, but I'm joking,

02:29:41.980 | but maybe I will ask about why Manifesto,

02:29:46.920 | but we'll go through some of the ideas.

02:29:48.400 | In this book, we have been already.

02:29:50.100 | So some of it is embracing the fact that the economy,

02:29:55.520 | our world, our mind is a complex system.

02:29:58.920 | So this T-shirt that you're wearing.

02:30:00.920 | - Yep, take it out, yeah.

02:30:02.400 | - Is a piece of software.

02:30:04.900 | - I'll do that, if you like.

02:30:07.280 | - There you go, there you go.

02:30:08.680 | You're wearing the whole, what is this, an infomercial?

02:30:13.160 | So this is a T-shirt that says Minsky,

02:30:15.600 | after, not my Minsky, it's your Minsky.

02:30:22.200 | - Not Hyman, so no, the Hyman Minsky, not Marvin Minsky.

02:30:25.320 | - Not Marvin Minsky, right.

02:30:26.600 | So that's, so AI Minsky is Marvin,

02:30:30.200 | and then Harmon, it all rhymes.

02:30:33.640 | So stability is free open source system dynamics software

02:30:38.640 | invented by Mr. Steve Keen, coded by Russell Standish.

02:30:46.480 | It's on SourceForge.

02:30:48.720 | It's destabilizing.

02:30:52.160 | - Stability is destabilizing.

02:30:53.760 | - So that's sort of embracing the complex aspect of it.

02:30:58.120 | - Yeah, yeah.

02:30:58.960 | - So how can you model the economy?

02:31:01.480 | What are some of the interesting,

02:31:04.720 | whether detailed or high level,

02:31:06.840 | big picture ideas behind your efforts of Minsky?

02:31:10.640 | - Okay, Minsky--

02:31:12.680 | - Meaning the software, the modeling software

02:31:14.680 | that models the dynamic system that is the economy.

02:31:17.360 | - What Minsky is doing is system dynamics modeling.

02:31:19.880 | So it's, if anybody's used Stellar or Vensim

02:31:23.400 | or Simulink, then they've used exactly the same family

02:31:27.000 | of software that Minsky is part of.

02:31:28.440 | So I didn't invent that.

02:31:29.400 | That was invented by Jay Forrester,

02:31:31.400 | who's one of the great intellects,

02:31:33.080 | one of the great engineers in American history.

02:31:36.200 | And the idea of Forrester's system

02:31:39.480 | was complex interactions.

02:31:42.360 | So he was doing his work in the '50s.

02:31:44.200 | If people don't know Forrester's work,

02:31:48.120 | he actually built the models of the,

02:31:51.320 | the mathematics for the gun turrets on American warships

02:31:54.400 | in the Second World War, mechanical systems, obviously.

02:31:57.480 | So he had to work out how to give a feedback system

02:32:01.040 | that meant when the boat rolled in one direction,

02:32:03.320 | the turret did not roll the other way.

02:32:05.320 | All that stuff was his work.

02:32:06.880 | So marvelous engineering.

02:32:08.440 | And then he realized if you want to look at a,

02:32:10.640 | even like a factory, a factory is a complex system.

02:32:13.760 | And so you get cycles generated out of the interaction

02:32:16.120 | between different components of the factory

02:32:18.920 | that he was first involved in taming,

02:32:20.720 | so he built the software to model

02:32:22.200 | complex interactive systems.

02:32:23.880 | So Minsky is that.

02:32:24.840 | The thing that Minsky adds which is unique

02:32:26.440 | is the Godley table.

02:32:27.840 | And that's the double entry bookkeeping,

02:32:29.440 | so you can model the financial system.

02:32:31.160 | - Godley the economist.

02:32:32.320 | - Godley the economist, Wynne Godley, another great man.

02:32:35.680 | - So there's like this,

02:32:37.360 | so you're modeling it as like a state diagram.

02:32:40.360 | - Yeah, fundamentally.

02:32:41.200 | So it's actually, it's circuit diagrams.

02:32:43.520 | It's exactly what engineers have been using for decades,

02:32:47.000 | almost a century.

02:32:48.760 | So you're using a circuit diagram to model the economy.

02:32:52.160 | And that's the, so other factories have done it.

02:32:55.840 | What they haven't had in the circuit diagram

02:32:58.880 | is a way of handling the dynamics of the financial system.

02:33:02.800 | So what the Godley table does is bring it,

02:33:05.000 | financial flows as being,

02:33:07.360 | everything goes from somewhere and ends up somewhere.

02:33:11.320 | So you have a positive and a negative

02:33:13.120 | if you're looking on the liability side,

02:33:16.440 | a positive and a positive or negative and a negative

02:33:18.880 | if you're looking at assets and liabilities side.

02:33:21.000 | And Minsky gets the accounting right for that.

02:33:22.880 | So you can do an enormous complex model,

02:33:25.400 | looking at the economy financially

02:33:27.280 | from the point of view of a dozen different actors

02:33:29.360 | in the economy and know that the mathematics is right,

02:33:32.480 | even though what you're building

02:33:33.520 | is set of differential equations,

02:33:35.080 | which might be 50 differential equations

02:33:37.440 | with 350 terms in them.

02:33:39.960 | If you've got the Godley tables right,

02:33:41.280 | you know the mathematics is correct.

02:33:43.480 | So that's the main innovation that Minsky adds.

02:33:45.600 | - And you're operating there at the macroeconomics level.

02:33:48.760 | - Yeah, it's definitely macro, it's top down.

02:33:50.480 | It's not agent based.

02:33:52.640 | - And then this, I'm just opening on a random page

02:33:54.560 | that I think is very relevant here.

02:33:57.280 | The process, this is referring to Minsky,

02:33:59.160 | not the software, maybe the software, I don't know.

02:34:01.880 | The process can be captured

02:34:03.200 | in an extremely simple causal chain.

02:34:05.520 | Capital determines output, output determines employment,

02:34:08.160 | the rate of employment determines

02:34:09.400 | the rate of change of wages,

02:34:11.040 | output minus wages and interest payments determines profit,

02:34:14.320 | the profit rate determines the,

02:34:16.000 | there's a very nice circuit here.

02:34:17.880 | The profit rate determines the level of investment,

02:34:21.160 | which is the change in capital,

02:34:23.080 | which takes us back to the beginning of this causal chain,

02:34:25.840 | and the difference between investment and profits

02:34:29.400 | determines the change in private debt.

02:34:32.480 | And there's some nice, the Keene-Minsky model

02:34:36.080 | and the intermittent route to chaos on page 86 of your book.

02:34:40.400 | These are, do these come from the software?

02:34:42.560 | - Yeah, yeah, I mean, I first did that in Mathematica

02:34:45.840 | back in 1992, August 1992.

02:34:48.880 | - Mathematica's another amazing piece of software.

02:34:52.000 | - Yeah, and I find it,

02:34:52.960 | it's very much a programmer's approach to mathematics.

02:34:55.160 | I prefer like a program called MathCAD,

02:34:57.800 | which is what I'll be using for all my,

02:34:59.920 | when I do my mathematics on the computer,

02:35:03.200 | I write in MathCAD. - CAD, C-A-D or CAB?

02:35:05.280 | - C-A-D. - Okay.

02:35:06.640 | - It's been ruined by bad management.

02:35:09.320 | They chucked out all the good engineers

02:35:10.920 | and I'm still using a version which is 12 years old.

02:35:13.880 | - If only engineers ruled the world.

02:35:16.480 | - If only engineers, rather than this particular case,

02:35:18.680 | there was a bunch of marketers for CAD software, agreed.

02:35:22.280 | I'm definitely a fan of engineers.

02:35:23.920 | - What are the plots that we're looking at here?

02:35:25.840 | Growth rate, private debt ratio, employment versus wages,

02:35:30.040 | employment versus debt, income distribution.

02:35:32.120 | So this is across years, like different trade-offs.

02:35:36.120 | Is there something interesting to say about the plots

02:35:38.320 | and the insights from those plots that are generated?

02:35:39.920 | - Yeah, yeah. - By the software?

02:35:41.680 | - That's a particular parameter values to give that outcome.

02:35:46.080 | But what happened when I first simulated the model,

02:35:49.120 | I took a model by a guy called Richard Goodwin,

02:35:51.280 | who's one of the great neglected economists,

02:35:53.600 | American Marxist, mathematical Marxist.

02:35:56.760 | And what he did was build a model of cycles.

02:35:59.360 | And he actually wrote a paper called,

02:36:01.780 | it's only about a five-page paper,

02:36:05.240 | published in a book and a very,

02:36:07.520 | very obscure conference paper.

02:36:09.600 | And what he was doing was trying to build a model of Marx.

02:36:13.080 | Okay, so if you, he wrote it in 1967,

02:36:16.640 | and it was putting it in a mathematical form,

02:36:18.880 | a model that Marx came up with in 1867.

02:36:21.640 | So it was a centenary birthday present to Marx.

02:36:24.240 | And what Marx had argued in chapter 25, I think,

02:36:29.240 | of volume one of "Capital," section three,

02:36:33.140 | he built a verbal model of a cyclical system.

02:36:39.080 | And it's quite out of character with the rest of the book.

02:36:41.520 | So when you read volume one of "Capital,"

02:36:43.560 | people think Marx has got a commodity money,

02:36:46.920 | view of money, he doesn't at all.

02:36:48.760 | He simply did, the idea was he had like an onion.

02:36:51.720 | You start off on the middle level

02:36:52.840 | and you ignore the outer layer,

02:36:54.440 | then you bring the outer layer in and so on and so forth.

02:36:56.440 | Anyway, in this model, in volume one of "Capital,"

02:36:59.240 | he normally just assumed workers got a subsistence wage.

02:37:02.080 | That's it.

02:37:02.960 | But in this little chapter, he said that if the economy,

02:37:07.360 | if the economy is, effectively, he said,

02:37:09.560 | economy is booming, then workers will demand wage rises.

02:37:13.160 | And the wage rises will cut into the profit

02:37:16.760 | so that capitalists will not get the level of profit

02:37:19.080 | they're expecting.

02:37:20.280 | Therefore, they will invest less and the economy will slump.

02:37:23.680 | And the slump will mean workers become unemployed

02:37:26.880 | and have to accept wage cuts.

02:37:28.840 | And it was a model of a cyclical economy.

02:37:31.000 | And as it happens, Marx spent his later years

02:37:33.560 | trying to learn enough calculus

02:37:35.440 | to be able to model it himself mathematically.

02:37:37.680 | And he never managed.

02:37:38.680 | There's Marx's "Mathematical Notes on Calculus,"

02:37:40.840 | which are quite fun to read.

02:37:42.120 | And if you have a mathematical background--

02:37:43.920 | - Did he get far?

02:37:45.240 | - No, he got too caught up in the whole philosophy.

02:37:48.720 | He never really got to build the model.

02:37:50.440 | But what Goodwin realized was a predator-prey model.

02:37:54.600 | Okay, the Locter-Volterra model was the basis of the idea.

02:37:57.840 | So what the idea is, you have a prey,

02:38:00.240 | and the example that Locter actually used initially

02:38:05.080 | was grass.

02:38:07.160 | Grass is the prey.

02:38:08.560 | And then you have a predator, and the predator were cows.

02:38:12.040 | So you start off with a very few cows and lots of grass.

02:38:15.400 | And then because of lots of grass, the numbers of cows grow.

02:38:19.120 | And then because the cows grow,

02:38:20.440 | they start to eat the grass.

02:38:21.680 | So the grass runs out, so the cows starve,

02:38:24.040 | and you get a cycle.

02:38:25.280 | And what Locter was amazed by

02:38:26.680 | was that the cycles were persistent.

02:38:28.760 | They didn't die out.

02:38:29.920 | So Goodwin got that vision,

02:38:31.320 | and he then built a predator-prey model.

02:38:33.800 | And I, first of all, read Goodwin

02:38:35.520 | and really found it really hard to follow his writing.

02:38:38.280 | He's not a very good writer.

02:38:39.960 | But a guy called John Blatt,

02:38:41.400 | who was a professor of mathematics

02:38:42.960 | at New South Wales University,

02:38:44.840 | wrote a brilliant explanation of Goodwin's model

02:38:47.920 | in a book called "Dynamic Economic Systems."

02:38:49.880 | And I read that, it was superb.

02:38:51.800 | And he said a way he could extend this

02:38:53.320 | was to include finance.

02:38:54.760 | So I thought, okay, what I'm gonna have

02:38:57.280 | is what Goodwin presumed

02:38:59.880 | is capitalists invest all their profits.

02:39:02.600 | So you get a boom when there's a high rate of profit

02:39:07.120 | because they invest all that money,

02:39:08.520 | and then a slump when there's low profit

02:39:10.760 | because depreciation will wipe away capital

02:39:13.080 | and you'll go boom and slump.

02:39:14.720 | So I simply added in, well,

02:39:15.880 | capitalists will invest more than their profits

02:39:19.520 | during a boom,

02:39:21.000 | but less than their profits during a slump.

02:39:23.680 | And that therefore means they had to borrow money

02:39:25.320 | to finance the gap and pay interest on the debt.

02:39:28.200 | So I ended up with a model with just three system states,

02:39:30.480 | the income share, the wages distribution of income

02:39:33.560 | between workers, capitalists, and bankers,

02:39:36.280 | the level of employment, and the level of private debt.

02:39:39.440 | And those three equations are fundamentally

02:39:43.320 | like going from the Locke de Volterra model

02:39:45.680 | with just two equations,

02:39:47.040 | and therefore you get a fixed cycle,

02:39:49.240 | to the Lorenz model where you have three.

02:39:51.800 | And therefore what I got out of it was a chaotic outcome.

02:39:54.200 | So what you're seeing is a manifestation of chaos,

02:39:57.960 | complexity in those plots.

02:40:00.480 | But the fascinating,

02:40:01.680 | one of the many fascinating parts about it was that

02:40:04.960 | as the level of private debt rose,

02:40:07.200 | in my model I had capitalists

02:40:09.880 | being the only ones who borrowed,

02:40:11.920 | but the people who paid for the high level of private debt

02:40:14.160 | were the workers.

02:40:15.120 | The rising banker's share corresponded exactly

02:40:20.960 | to a falling worker's share.

02:40:23.200 | - So you can infer from that

02:40:25.000 | that the workers are the ones paying.

02:40:26.400 | - Effectively, the workers end up paying for it.

02:40:28.000 | They get a lower level of wages.

02:40:30.160 | And the basic dynamic is that capitalists,

02:40:33.840 | when you have a three social class system,

02:40:36.040 | your income goes between workers, capitalists, and bankers.

02:40:38.760 | Now in the system, the good one did,

02:40:40.040 | they're just workers and capitalists.

02:40:41.800 | So if workers' share rose, profit capital share had to fall.

02:40:45.320 | But when you have three social classes,

02:40:47.320 | then capitalists' share can remain constant

02:40:49.120 | while workers fall and bankers,

02:40:50.680 | workers falls and bankers rise.

02:40:53.520 | So that's what actually happened.

02:40:55.480 | Because capitalists, the simple way I modeled it was,

02:40:57.880 | there's a certain rate of profit

02:40:59.520 | at which capitalists invest all their profits.

02:41:02.000 | Above that, they borrow more.

02:41:03.560 | Below that, they pay off debt.

02:41:05.520 | So what would happen is when you got back to that point,

02:41:08.600 | then the level of investment would be

02:41:10.280 | a precise share of GDP.

02:41:13.160 | And therefore, you get a precise rate of economic growth.

02:41:15.920 | But if there was a higher percentage going to bankers,

02:41:19.440 | an offset by a lower share going to workers,

02:41:21.320 | it didn't affect the capitalists.

02:41:23.160 | What you get is the cycles sort of diminish for a while

02:41:25.880 | because there's,

02:41:28.120 | so the income distribution effect is important.

02:41:32.600 | So the workers pay for the increasing level of debt.

02:41:37.040 | But the other side of it was

02:41:38.240 | that the cycles would diminish for a while.

02:41:40.480 | Now, what you get is a period of diminishing cycles,

02:41:43.400 | then leading to rising cycles.

02:41:45.480 | And technically, this is known as the

02:41:47.920 | Pomer Manifold route to chaos.

02:41:52.120 | And it's one particular element of Lorenz's equations

02:41:55.760 | of fluid dynamics.

02:41:57.440 | So what they found was in examining laminar flow

02:42:01.360 | in a fluid, you have a period where the laminar flow

02:42:04.040 | got more laminar, and then suddenly it'll start

02:42:06.640 | to get less laminar and go turbulent.

02:42:09.600 | And this is what actually goes on in the model.

02:42:12.400 | So in my model of Minsky,

02:42:14.360 | so what you have is a period where there's big booms

02:42:18.280 | in cycles, and then as the debt level rises,

02:42:21.120 | the booms and slums get smaller.

02:42:23.440 | And that looks like what neoclassical economists

02:42:25.920 | call the Great Moderation.

02:42:27.920 | So when I first modeled this in 1982,

02:42:30.840 | I finished up my paper, which was published in '95,

02:42:33.400 | with what I thought was a nice rhetorical flourish,

02:42:35.840 | saying the chaotic dynamics of this paper

02:42:39.000 | should warn us against regarding a period

02:42:40.880 | of relative stability in a capitalist economy

02:42:43.440 | as anything more than a lull before the storm.

02:42:46.240 | Now, I thought it was a great speed of rhetoric.

02:42:47.760 | I didn't think it was gonna fucking happen.

02:42:50.040 | But it did, because you had this period

02:42:51.800 | from 1990 through to 2007,

02:42:55.060 | where there were diminishing cycles.

02:42:56.600 | And the neoclassicals labeled that the Great Moderation,

02:42:59.660 | and they took the credit for it.

02:43:00.880 | They thought that the economy was being managed by them

02:43:03.020 | to a lower rate of inflation,

02:43:06.080 | a lower level of unemployment, less instability over time,

02:43:09.800 | and they literally took credit for it.

02:43:11.760 | And I was watching that and thinking,

02:43:12.920 | that's like my model running, and I'm scared as shit

02:43:16.100 | that there'll be a breakdown.

02:43:17.920 | And I ended up not working in the area for a while

02:43:20.880 | because I wrote "Debunking Economics."

02:43:23.200 | And I got involved in a fight over the modeling

02:43:25.920 | of competition in neoclassical theory.

02:43:28.680 | That took me away for about four or five years.

02:43:31.200 | And then I got asked to do a court case in 2005,

02:43:35.600 | end of 2005.

02:43:37.800 | And I used Minsky as my framework for arguing

02:43:41.320 | that somebody who was involved in predatory lending

02:43:44.440 | should be able to get out of the debt they were in.

02:43:47.400 | And I explained Minsky's theory,

02:43:49.240 | and I used this throwaway line of saying,

02:43:52.280 | debt levels, private debt, have been rising exponentially.

02:43:55.800 | And then I thought, well, I can't, as an expert,

02:43:58.240 | just make a claim like that.

02:43:59.400 | I've got to check the data.

02:44:01.280 | And the debt ratio was rising exponentially.

02:44:03.760 | And I thought, holy shit, we're in for a financial crisis.

02:44:06.960 | And somebody has to warn about it.

02:44:08.360 | And at least in Australia, I was that somebody.

02:44:10.800 | - So can you, given this chaotic dynamics idea,

02:44:14.920 | can you talk about the crises

02:44:16.280 | ahead of us in the future?

02:44:17.760 | So one of the things,

02:44:19.120 | I mean, it's a fundamental question of economics,

02:44:21.720 | is economics about understanding the past

02:44:24.080 | or predicting the future?

02:44:26.080 | Because you can construct models that do poetic,

02:44:31.080 | like in '95, poetic--

02:44:35.680 | - Inclusion.

02:44:36.520 | - Yeah, and then you can watch years fly by,

02:44:40.560 | and some of the predictions in retrospect

02:44:43.520 | that you make turn out to be true.

02:44:46.240 | But all kinds of gurus throughout history

02:44:49.920 | have done that kind of thing.

02:44:52.120 | You can call yourself right

02:44:53.360 | and forget all the many times you've been wrong.

02:44:56.160 | Let's talk about the future.

02:44:57.760 | What kind of stuff?

02:44:59.360 | You mentioned about the importance of the biosphere,

02:45:02.080 | but what other crises are ahead of us

02:45:04.600 | that a chaotic dynamics view allows us to predict

02:45:09.600 | and be concerned about? - Well, what really

02:45:11.360 | I saw coming out of it, leaving aside the ecological,

02:45:14.800 | wasn't a crisis.

02:45:15.840 | It was stagnation,

02:45:17.640 | because what we got out of the crisis

02:45:20.080 | was caused by a rising level of private debt.

02:45:22.320 | Now you reach a peak level

02:45:25.120 | where the willingness to take on debt collapses.

02:45:28.640 | And so you go to a period where debt is rising all the time.

02:45:32.840 | So credit, which is the annual change in debt,

02:45:36.160 | and that's credit as part of aggregate demand

02:45:38.400 | and aggregate income.

02:45:39.880 | So credit goes from positive to negative,

02:45:42.280 | and that causes a slump.

02:45:44.640 | - So can you describe why that causes a slump?

02:45:46.960 | So credit goes to negative.

02:45:49.360 | - If you ask Paul Krugman,

02:45:50.640 | he'll tell you credit plays no role in aggregate demand.

02:45:53.440 | - Give me a second.

02:45:55.560 | Credit plays no role in aggregate demand.

02:45:58.680 | - So the vision that the neoclassicals have

02:46:00.920 | for the banking system is what they call learnable funds.

02:46:03.880 | - Is Paul Krugman, by the way,

02:46:05.440 | the knight at the front of the army

02:46:09.440 | that is the neoclassical economist?

02:46:11.640 | - Yeah, fundamentally.

02:46:12.960 | - Sure.

02:46:13.800 | - Okay.

02:46:14.640 | He's politically reasonable,

02:46:17.080 | which makes him more dangerous than those that aren't.

02:46:20.280 | - He's politically,

02:46:22.360 | yeah, there's quite a lot of people

02:46:23.560 | that would disagree with that characterization

02:46:25.480 | of Paul Krugman as he's politically reasonable.

02:46:28.240 | - You should see the people behind him.

02:46:29.240 | - The alternatives.

02:46:30.080 | (laughing)

02:46:31.520 | Fair enough.

02:46:32.360 | - Okay.

02:46:33.200 | - That's not a negative or positive statement,

02:46:34.640 | that's just he can be feisty as well.

02:46:36.560 | - Oh, he can, he can.

02:46:37.720 | But he's like the human face of neoclassical economics.

02:46:40.760 | He doesn't deserve having a human face.

02:46:42.960 | It's anti-human theory.

02:46:45.160 | But he's the human face.

02:46:46.000 | - That's what you really think.

02:46:46.840 | I got you.

02:46:47.680 | All right, well, so,

02:46:48.520 | but the credit does not have any effect

02:46:52.360 | on aggregate demand.

02:46:54.240 | - In their model.

02:46:55.080 | - And you're saying that's not the case at all.

02:46:56.920 | - It's absolutely crucial to aggregate demand.

02:46:58.960 | So what they model is, again,

02:47:00.600 | the example of you lending to me or vice versa.

02:47:03.360 | If I lend money to you, I can spend less,

02:47:06.240 | you can spend more, okay?

02:47:07.560 | So credit is the change in debt.

02:47:10.920 | So if I lend money to you,

02:47:13.600 | then there's a level of private debt rises, okay?

02:47:17.040 | So there's an increase in credit.

02:47:18.920 | But that increase in credit

02:47:20.320 | comes at an expense of my spending power.

02:47:22.720 | So you can spend what I've lent you,

02:47:24.680 | but I can't spend what I've lent you.

02:47:26.760 | So credit cancels out.

02:47:28.560 | But when you look at, that's learnable funds.

02:47:30.520 | But in the real world,

02:47:31.720 | and the Bank of England has said this is the real world

02:47:33.720 | and the textbooks are wrong, categorically in 2014.

02:47:37.840 | When the bank lends, it adds to its asset side

02:47:42.040 | and it says, "You owe us more money."

02:47:43.800 | And it adds to its liability side and says,

02:47:45.880 | "Here's the money in your bank account."

02:47:47.600 | Now you spend that money.

02:47:49.320 | So what happens when you do your sums,

02:47:51.240 | credit is part of aggregate demand and aggregate income.

02:47:55.200 | And that's something I first solved in 2019, I think.

02:47:58.760 | 2000, I only recently proved it mathematically.

02:48:02.040 | So what that means is credit

02:48:03.840 | is a component of aggregate demand

02:48:07.320 | and credit is also very volatile.

02:48:09.480 | So like consumption demand never goes negative.

02:48:11.840 | Investment demand never goes negative.

02:48:13.720 | But credit can go from positive to negative.

02:48:15.960 | And when you take a look at the long run of American history

02:48:19.480 | after the Second World War,

02:48:21.520 | there was no period until 2007 where credit was negative.

02:48:26.520 | It was a positive component of GDP, a positive number.

02:48:30.760 | Therefore, when you do it as a percentage of GDP,

02:48:33.760 | it was a positive percentage of GDP.

02:48:36.240 | It peaked at 16% of GDP in 2006, 2007.

02:48:41.240 | It fell to minus 5% in 2008, 2009.

02:48:47.400 | So you had a 20% of GDP turnaround in aggregate demand.

02:48:51.880 | Now, when you plot that against unemployment,

02:48:54.840 | the correlation of credit to unemployment

02:49:00.120 | across the period from about 1990 to 2010

02:49:05.120 | is about minus 0.9, okay?

02:49:08.800 | Enormous negative correlation.

02:49:10.480 | Now, according to the neoclassicals,

02:49:11.920 | it could be close to zero.

02:49:13.800 | Empirically, it's bleedingly obvious it's not.

02:49:16.120 | And it applies to every country in the world

02:49:18.560 | that had a financial crisis at that period.

02:49:21.440 | So it's bleedingly obvious in the data

02:49:24.680 | and they ignore it because credit's not part of their model.

02:49:27.960 | - And you're saying it's causation.

02:49:29.680 | - It's not just causation. - It's causal.

02:49:31.760 | - Today, we sit there, it's extremely high inflation.

02:49:34.480 | What does inflation,

02:49:39.160 | what role does inflation play in this picture?

02:49:41.440 | Is a little bit of inflation good?

02:49:43.440 | We talked about money creation at the beginning.

02:49:48.080 | What's a little bit of inflation good or bad?

02:49:50.560 | A lot of inflation good or bad?

02:49:52.160 | How concerned are you about--

02:49:53.640 | - A little bit is good for a simple reason.

02:49:55.960 | Like, again, it's taken me a while

02:49:57.240 | to get my head around this.

02:49:58.680 | But if you think about how people say,

02:50:00.280 | "What are the functions of money?"

02:50:01.480 | They say money, it's a unit of count,

02:50:02.960 | a count that you're measuring.

02:50:04.640 | It's a means of exchange, okay?

02:50:06.880 | And it's a store of value, okay?

02:50:09.200 | Now, yes, okay, it has those three roles,

02:50:12.360 | but the last one is contradictory to the previous two.

02:50:16.040 | Because, and this is where we see this

02:50:17.600 | with the Bitcoin phenomenon.

02:50:19.480 | If you wanna hang onto money as a store of value,

02:50:23.760 | then if prices are falling, the value of money is rising.

02:50:28.760 | And it's actually in your interests as a store of value

02:50:32.280 | to hang onto it and not spend it, okay?

02:50:35.200 | So that contradicts its role as a means of exchange.

02:50:39.200 | Now, if you have money which depreciates,

02:50:41.600 | and this was actually tried in the Austrian town of Wargill

02:50:45.040 | during the Great Depression.

02:50:48.200 | If you have money that depreciates,

02:50:50.320 | then if you don't use it, you lose it, fundamentally.

02:50:53.200 | So it has a high rate of circulation.

02:50:55.360 | So there's a monetary theorist called Silvio Gazzel,

02:50:59.720 | and he wrote this proposal that money should depreciate.

02:51:03.480 | And he was ridiculed and opposed and derided,

02:51:06.880 | but Keynes said he was a great intellect.

02:51:09.240 | And the mayor of the town of Wargill in Austria

02:51:13.440 | during the Great Depression was facing an unemployment rate

02:51:16.560 | of 25% pretty much.

02:51:18.440 | Germany had the worst experience

02:51:20.320 | in the Great Depression in the world,

02:51:22.600 | as bad as America, slightly worse than America.

02:51:25.480 | And so he thought, how can I stimulate demand here?

02:51:28.520 | So he produced a script which could only be used

02:51:30.720 | for buying goods and services in Wargill,

02:51:33.160 | and could be used to pay your local rates.

02:51:37.380 | But it was depreciated by putting a stamp on the money

02:51:39.920 | if you didn't use it.

02:51:41.400 | So what happened was people would pay their rates,

02:51:44.240 | they needed to pay the rates using this money,

02:51:46.320 | so the script, so they used the script.

02:51:48.860 | And because it depreciated, you'd use it rapidly.

02:51:52.660 | So people were using that money,

02:51:54.580 | this alternative to the Austrian shilling,

02:51:57.660 | and the economic activity in town took off,

02:52:00.060 | and unemployment fell to zero.

02:52:01.980 | And it was an absolute miracle,

02:52:03.380 | and everybody loved a Wargill experiment,

02:52:05.380 | and the Austrian Central Bank sued them

02:52:08.140 | for establishing an alternative form of money

02:52:10.180 | and shut it down.

02:52:11.700 | Unemployment went back up to 25% again,

02:52:14.180 | and Austria voted, you know, what, 99 point,

02:52:16.540 | was it 99.6% for the Nazis?

02:52:20.060 | Something crazy number like that when Hitler marched in.

02:52:23.020 | So the Wargill experiment showed

02:52:25.140 | that a depreciating currency

02:52:27.240 | led to a high rate of circulation.

02:52:29.660 | But of course, we're not talking

02:52:30.820 | Weimar Republic levels of inflation.

02:52:33.600 | So when you get that much inflation,

02:52:35.940 | and that's normally caused by,

02:52:37.860 | as the Weimar inflation was caused by,

02:52:41.520 | the reparation terms imposed on Germany,

02:52:44.500 | fundamentally by France, at the Treaty of Versailles,

02:52:47.780 | they paid a large part of that

02:52:50.020 | with just basically printing the notes.

02:52:52.060 | And you went into this crazy period of hyperinflation.

02:52:54.820 | So hyperinflation almost always occurs

02:52:56.740 | when there's a massive destruction of physical resources,

02:52:59.580 | and the monetary authority tries to pay back,

02:53:01.540 | literally, over it, and then you get hyperinflation,

02:53:03.940 | that's total social breakdown.

02:53:05.660 | So a moderate level of inflation

02:53:07.740 | inspires the means of exchange uses of money,

02:53:12.480 | but undermines the store of value usage of money.

02:53:16.320 | And that dilemma is why we have

02:53:19.820 | this antagonistic attitude towards inflation.

02:53:23.400 | - Yeah, I mean, you're describing as a tension,

02:53:26.720 | but it's nevertheless is,

02:53:30.140 | like money is a store of value and a means of exchange.

02:53:32.720 | And I don't, you know, to push back,

02:53:35.660 | it's not necessarily that there's a tension,

02:53:37.720 | it's just that depending on the dynamics

02:53:40.040 | of this beautiful economic system of ours,

02:53:43.520 | it's used as one more than the other.

02:53:45.760 | If there's inflation, you're using it more

02:53:49.440 | for the means of exchange,

02:53:52.680 | it's deflation using more for store of value,

02:53:54.900 | but that doesn't, I don't see there's a tension,

02:53:57.120 | that's just how much you use it for those different, like.

02:54:01.040 | - But it ends up saying that overall,

02:54:03.520 | for a level of effective commerce,

02:54:06.380 | a bit of inflation is a good thing,

02:54:08.320 | because that's depreciating the money slightly

02:54:10.320 | and encourage its use.

02:54:11.480 | - Yeah, but so the argument that,

02:54:13.280 | so Bitcoin folks use or gold standard folks.

02:54:17.560 | - Yeah.

02:54:18.400 | - Again, HODL is not an argument.

02:54:21.580 | That having an inflation of zero

02:54:27.240 | is actually achieving that balance.

02:54:29.160 | - Yeah.

02:54:30.800 | - So like, yeah.

02:54:31.920 | - But they're actually in favor of negative,

02:54:33.800 | or they wanted to appreciate rapidly,

02:54:35.880 | and there's a particularly negative inflation.

02:54:38.200 | The value of the money rising relative to commodities,

02:54:42.840 | that's what they want, that's the HODL philosophy.

02:54:45.340 | - Well, that's more of like an investment,

02:54:48.000 | I don't know if that,

02:54:49.120 | - Yeah.

02:54:49.960 | - That's more of investment philosophy

02:54:50.800 | than the fundamental principles

02:54:52.160 | of why they believe in cryptocurrency,

02:54:54.680 | in the enforced scarcity, it's a model.

02:54:58.080 | The concern there is that when you print money,

02:55:01.240 | the public policy is detached from the actual,

02:55:04.540 | from value.

02:55:07.380 | - Yeah, well, you get, I mean, this is where, again,

02:55:09.400 | it matters to get money creation right,

02:55:11.700 | because the government's not the only money creator,

02:55:14.400 | banks are as well, private banks.

02:55:17.020 | And if we obsess too much

02:55:20.560 | about limiting government money creation,

02:55:23.600 | what we end up getting, if there is money creation going on,

02:55:26.400 | it's private banks doing it,

02:55:28.040 | and you get an increase in private debt,

02:55:30.280 | and fundamentally, private debt and its collapse,

02:55:35.360 | a collapse of credit, when it stops growing,

02:55:37.900 | that's the fundamental cause of financial crises.

02:55:41.060 | So,

02:55:41.900 | - Yeah, but the question is,

02:55:42.940 | what's the cause for the collapse of the,

02:55:45.740 | - Well, I think this is like the Austrian thinking

02:55:49.420 | leaves out the debt deflation,

02:55:51.740 | and that's like, I think one of the most important papers

02:55:54.300 | ever written was by Irving Fisher,

02:55:56.460 | called the Debt Deflation Theory of Great Depressions.

02:55:59.460 | Fisher was somebody who accepted the neoclassical vision,

02:56:02.580 | and he wrote the pre-efficiency market hypothesis,

02:56:07.500 | efficiency market hypothesis.

02:56:09.260 | He had his own PhD called the Theory of Interest.

02:56:13.600 | And in that he argued effectively

02:56:16.100 | for a supply and demand analysis of the financial system.

02:56:20.480 | And he argued for equilibrium.

02:56:23.700 | He said, when you're working with a commodity market,

02:56:27.340 | then the sale and the transaction and the exchange occur

02:56:32.540 | at the same point in time.

02:56:34.000 | When you're working with a financial market,

02:56:36.980 | then the exchange occurs through time.

02:56:39.460 | So he said he assumed that debts are repaid,

02:56:43.220 | all debts are repaid.

02:56:45.800 | And he assumed that equilibrium through time

02:56:48.560 | was an essential part of his assumption.

02:56:50.180 | This is, and then the Great Depression comes along,

02:56:52.680 | and he has become a major shareholder in the rank Xerox,

02:56:59.420 | because he invented the Rolodex.

02:57:02.180 | He's a tinkerer.

02:57:03.500 | And so he had taken out shares on margin,

02:57:07.380 | and he was worth about 100 million in modern terms

02:57:10.940 | when the Great Depression hit.

02:57:12.400 | And 90% of that was share market valuation.

02:57:14.900 | He'd taken out margin debt, just like everybody else.

02:57:18.060 | And with margin debt, you could put down $100,000

02:57:20.900 | and buy a million dollars worth of shares.

02:57:23.000 | So he got this huge leverage into debt.

02:57:27.080 | Now, when the financial crisis hit,

02:57:28.940 | the level of margin debt in America

02:57:30.420 | had risen from half a percent of GDP in 1920

02:57:34.460 | to 13% of GDP in 1929.

02:57:38.580 | It then fell to zero again.

02:57:40.340 | That's why the stock market crash in '29

02:57:42.100 | was so devastating, that scale of margin lending.

02:57:46.380 | And everybody was being wiped out.

02:57:47.620 | They were selling Rolls Royces for 20 quid.

02:57:49.940 | You literally have photographs showing people doing that,

02:57:52.180 | because a margin call comes in,

02:57:53.980 | you've got to liquidate everything.

02:57:56.380 | So he said the danger is of a debt deflation

02:58:00.020 | is what we have to avoid.

02:58:02.060 | And that means you don't want too much private debt

02:58:05.180 | to accumulate, and you don't want falling prices,

02:58:09.080 | because the falling prices will amplify

02:58:11.700 | the impact of being insolvent to begin with.

02:58:14.580 | And that's what we saw in the Great Depression.

02:58:16.720 | It's partially what we saw in 2007,

02:58:19.660 | but we didn't have anything like the level of margin debt.

02:58:23.100 | Margin debt was reduced from 90% to 50% ratio

02:58:26.300 | after the Great Depression.

02:58:29.020 | So there were limits on how bad it was in 2007.

02:58:33.020 | But the danger is still the period of deflation

02:58:36.420 | amplifies your debts.

02:58:38.260 | Okay, and I call it Fisher's paradox.

02:58:40.580 | He didn't write those terms himself,

02:58:42.180 | but he wrote a line saying,

02:58:43.300 | "The more debtors pay, the more they owe."

02:58:46.380 | Okay, and this is because you're liquidating

02:58:49.460 | to try to meet your own debts.

02:58:52.300 | When you liquidate, the price level falls.

02:58:55.000 | You will end up having a lower level of monetary debt,

02:58:58.420 | but a higher level of debt

02:58:59.900 | when you deflate it using the price level.

02:59:02.300 | So the biggest danger in capitalism is the debt deflation,

02:59:05.780 | far more dangerous than inflation.

02:59:07.940 | - And the cause of debt deflation is?

02:59:10.980 | - Too much lending, too much bank lending,

02:59:13.060 | too much private money creation.

02:59:15.140 | And if you take a look at the 1920s,

02:59:17.540 | Calvin Coolidge explained the boom of the 1920s

02:59:21.140 | on his surplus.

02:59:22.020 | He said, "My government running a surplus of 1% of GDP,"

02:59:25.540 | pretty much from 1922 through to 1930,

02:59:28.420 | "is the foundation of our stability.

02:59:30.500 | "It should be continued."

02:59:31.940 | What he didn't look at was that over that same time period,

02:59:35.740 | on average, Americans were borrowing 5% of GDP per year

02:59:39.860 | from the private banks.

02:59:41.140 | So you had a housing bubble at the beginning of the 1920s,

02:59:44.860 | which Richard Vague covers beautifully

02:59:46.600 | in "A Brief History of Doom."

02:59:49.540 | And then you had this huge rise in margin debt as well,

02:59:53.020 | gigantic increase in margin debt.

02:59:55.540 | So all this borrowed money was being spent into the economy,

02:59:58.580 | and this is where credit becomes part of aggregate demand.

03:00:00.940 | And it's both not just for goods and services,

03:00:02.780 | it's also for shares and houses and so on.

03:00:05.700 | So a huge valuation effect.

03:00:07.900 | But then when the margin debt turned around,

03:00:11.460 | when people would not take out margin debt anymore,

03:00:14.200 | the demand for margin debt disappeared,

03:00:16.080 | and then it was what we call badly a positive feedback loop.

03:00:21.020 | It was actually an amplifying feedback loop.

03:00:23.060 | And that caused a collapse.

03:00:25.060 | - So what elements of that do you see today

03:00:28.220 | that we need to fix, and how do we fix it?

03:00:30.220 | - We have to regard the level of private debt

03:00:32.340 | as a target of economic policy,

03:00:35.000 | just as much as the rate of inflation

03:00:36.660 | or the rate of unemployment.

03:00:37.980 | - How do, what is the moderate amount of private debt

03:00:41.060 | that's good?

03:00:41.900 | - I would say something of anywhere between 30 and 70%

03:00:44.540 | of GDP.

03:00:46.220 | - What is it currently?

03:00:47.660 | - In America, it's 170%.

03:00:50.100 | - Nice.

03:00:51.660 | Of GDP.

03:00:52.500 | - Of GDP.

03:00:53.320 | - Oh, that's nice.

03:00:54.160 | - I've got, we'll have to talk about it after we talk,

03:00:55.980 | but I can show you the data in this.

03:00:57.660 | And it is just this huge increase in private debt

03:01:02.260 | that caused, first of all, caused the boom,

03:01:04.420 | but then financing the credit causes,

03:01:07.020 | ultimately causes the slump.

03:01:09.980 | And so if we remove the rate level at which debt can reach,

03:01:14.340 | and we stop speculative lending,

03:01:16.420 | and basically have a lending for both innovation,

03:01:19.660 | investment, and essential consumption items,

03:01:23.340 | we won't have the slump on the other side.

03:01:25.180 | We can get rid of financial instability.

03:01:27.500 | We can't stop financial cycles,

03:01:29.780 | but we can stop financial breakdown.

03:01:31.500 | - And so we should really be focusing on the instability

03:01:33.540 | and getting that under control.

03:01:35.300 | By the way, as you point to your laptop,

03:01:37.660 | my laptops, I have a lot of,

03:01:39.260 | how many computers do I have?

03:01:41.500 | But a lot of them, but my little Surface,

03:01:44.260 | whatever the heck this thing is,

03:01:45.660 | is getting definite size envy.

03:01:47.740 | Is your laptop, you said is 18 something inches?

03:01:50.060 | - 18.4 inches.

03:01:51.140 | - 18.4 inches.

03:01:52.580 | I don't think I've ever seen one that big,

03:01:56.780 | and I'll give the internet that one.

03:01:59.540 | All right, that's for the graphics.

03:02:01.580 | So it's a gaming laptop.

03:02:03.260 | It's basically a desktop.

03:02:05.060 | It probably weighs like 40 pounds.

03:02:07.180 | You have to--

03:02:08.540 | - Eight kilos?

03:02:10.060 | - Eight kilos.

03:02:10.900 | - So you reckon eight or?

03:02:12.140 | - Oh, wow, okay, yeah.

03:02:13.780 | Eight kilos, that's, you're pushing 40 pounds.

03:02:16.460 | - Is there a power supply for it?

03:02:17.780 | It's over there somewhere.

03:02:18.620 | The power supply weighs about twice as much as your laptop.

03:02:20.860 | - Yeah, and you have to power it on with a crank.

03:02:23.660 | - Pretty close.

03:02:24.500 | - You have to pull it.

03:02:25.420 | Is it gas powered or is it coal?

03:02:27.300 | - Oh, well, it's a nuclear power station inside.

03:02:29.900 | - Nuclear, yeah.

03:02:30.740 | - And a nuclear diamond in the back there.

03:02:33.220 | - Okay, so let me, before I forget,

03:02:37.020 | just let me ask you about,

03:02:38.980 | we've covered brilliantly the nuance disagreements you have

03:02:43.660 | and the wisdom you've drawn from Karl Marx,

03:02:46.140 | but there is also, like you mentioned in popular discourse,

03:02:50.420 | a kind of a distorted use of different terms,

03:02:55.420 | and one of them is Marxism today.

03:02:57.860 | Is there something you could just speak to

03:03:00.100 | about increased use of that word

03:03:05.100 | and is it misused?

03:03:07.180 | Does it concern you that there's a lot of actually

03:03:08.980 | young people that say they're sort of proudly Marxist?

03:03:12.300 | Are they misusing the term?

03:03:15.500 | - They are definitely misusing the term

03:03:17.140 | if they don't understand the use value, exchange value

03:03:20.980 | dialectic I went through earlier.

03:03:22.660 | - So if I could just--

03:03:24.820 | - And they don't.

03:03:25.700 | - If I could just pause, the idea of socialism

03:03:29.580 | and Marxism as used in sort of popular lingo

03:03:33.100 | is basically, a lot of people have

03:03:37.820 | a disproportionately hard life.

03:03:40.820 | Why can't we help them out?

03:03:43.740 | Why can't we be kind to our fellow man?

03:03:46.500 | That's a short embodiment of an idea

03:03:50.740 | as opposed to some super complicated,

03:03:53.700 | elaborate model of the economy and politics

03:03:57.580 | and all that kind of stuff.

03:03:58.420 | - I mean, we could do that by using the insights

03:04:00.940 | that come out of modern monetary theory,

03:04:02.740 | which I've confirmed just using my simple Minsky models,

03:04:06.060 | and that is that, to use the term,

03:04:08.180 | you use the feature, not a bug.

03:04:10.140 | A government running a deficit is a feature

03:04:12.780 | of a well-functioning mixed fiat credit economy, not a bug.

03:04:17.100 | The government should normally run a deficit

03:04:19.300 | because that's how the government creates money.

03:04:21.580 | Now, because we've had this obsession

03:04:23.020 | from mainstream economists of running a surplus,

03:04:26.100 | which is what caused the Great Depression,

03:04:28.540 | Calvin Coolidge doing it for eight years,

03:04:30.700 | because of that obsession,

03:04:32.060 | we've cut back on social services,

03:04:33.660 | we've cut back on health, we've cut back on education,

03:04:35.900 | we've cut back on infrastructure.

03:04:37.660 | Now, all that stuff predominantly affects the poor

03:04:40.460 | 'cause the rich can afford to buy it themselves.

03:04:42.540 | So if we had, Sonnenberg realized

03:04:44.900 | that the government should run a deficit,

03:04:46.580 | it's a feature, not a bug, of a fiat money system,

03:04:50.420 | and that's where Eons made one mistake recently,

03:04:52.980 | okay, but I'm not going back to first principles.

03:04:55.340 | That deficit enables you to provide enough

03:04:59.260 | of a decent standard of living

03:05:01.340 | for those who don't come out on top in the capitalist game,

03:05:05.660 | and with that, you wouldn't have the angst

03:05:07.620 | of the young people.

03:05:08.620 | Now, we still have the climate parameters

03:05:12.100 | within which we have to survive,

03:05:14.260 | but a decent level of government funding

03:05:16.180 | would mean the angst that you get

03:05:17.740 | where people say, "I wanna be a Marxist,"

03:05:19.900 | and they've got what I call a cardboard cutout version

03:05:22.060 | of Marx in their minds, that wouldn't be happening.

03:05:25.340 | So it's potential to have a good society

03:05:29.220 | where the government runs a deficit

03:05:30.660 | that finances the needs of the poor,

03:05:33.900 | where the rich get enough to indulge

03:05:36.100 | and take care of themselves,

03:05:37.500 | and you don't get this breakdown.

03:05:40.460 | If you try to cause the government running a surplus,

03:05:43.620 | then the burden of that is borne by the poor,

03:05:45.980 | middle class and poor,

03:05:47.180 | and that will lead to the angst we're now seeing.

03:05:49.620 | - Beautiful, that was a beautiful whirlwind exploration

03:05:57.100 | of all of economics and economics history.

03:05:59.660 | Let me ask you, you tweeted, I think,

03:06:01.900 | we are the opposite of ants,

03:06:05.340 | individually intelligent, collectively stupid.

03:06:09.460 | We need to develop systems thinking fast

03:06:11.900 | to counter our limitations.

03:06:14.020 | That's really interesting.

03:06:18.580 | Do you really believe we're individually intelligent

03:06:20.820 | and collectively stupid?

03:06:22.100 | - I do.

03:06:22.940 | - Can you elaborate on, I mean,

03:06:25.580 | some of that is just cheeky tweets, but--

03:06:27.420 | - It was a cheeky tweet I've had in my mind for a long time.

03:06:31.140 | It's one that actually went moderately viral,

03:06:33.580 | not enough, but moderately viral for me.

03:06:35.700 | - But nevertheless, if you could analyze it

03:06:38.820 | as if it's some deep, profound statement

03:06:40.500 | you made in a book.

03:06:41.460 | - Well, the reason is that we are,

03:06:43.820 | like, incredibly individually intelligent.

03:06:45.500 | Things like these devices we're playing with now.

03:06:47.580 | - That's the creation of individual minds.

03:06:49.660 | - Creative individual mind and a collective labor

03:06:51.740 | over centuries that led to this level of technology,

03:06:54.380 | and that has to be respected.

03:06:55.820 | It's incredible stuff.

03:06:58.140 | But at the same time, I think what humans are,

03:07:01.380 | if you want to distinguish humans

03:07:02.580 | from other species on the planet,

03:07:03.940 | we don't weave webs, okay?

03:07:06.660 | We don't make bird calls.

03:07:08.420 | What we do is we share beliefs.

03:07:10.660 | - Yeah.

03:07:11.500 | - Okay, now--

03:07:12.340 | - You don't think that's a catalyst for intelligence?

03:07:16.700 | - Yeah, it is a catalyst, but what it means is

03:07:19.500 | we can delude ourselves as much as we can inform ourselves.

03:07:22.860 | So because we share beliefs,

03:07:24.820 | we can do things in a collective way.

03:07:27.100 | And if we believe that, you know,

03:07:28.660 | we can, if we take the incantations of the witch doctors

03:07:31.380 | and we happen to have a couple of spears

03:07:33.900 | and things, we can go and attack the local,

03:07:37.340 | the tribe of lions and drive them out,

03:07:41.500 | and we become the dominant species.

03:07:43.380 | So it worked at the stage where we were in competition

03:07:47.140 | with other species on the planet.

03:07:48.780 | Now that we're the dominant species,

03:07:51.300 | then our beliefs get in the way.

03:07:53.820 | - So you agree with Einstein who said,

03:07:56.380 | there are only two things that are infinite,

03:07:59.980 | the universe and human stupidity.

03:08:01.860 | - And he wasn't sure about the universe.

03:08:03.300 | - And he wasn't sure about the, right.

03:08:05.420 | That's right, he wasn't sure about the universe.

03:08:07.820 | Yeah, so you think that the collective, I mean,

03:08:12.780 | there's an infinity to the destructive

03:08:14.820 | and the stupid, the inhumane that's possible

03:08:18.180 | when we humans get together,

03:08:19.540 | but it feels like there's more trajectories,

03:08:22.660 | there's more possibility for creation.

03:08:24.660 | - There are, and I think that's why we have to,

03:08:27.060 | I say, if we were built around the idea

03:08:29.500 | that our role as a species is to maintain

03:08:33.100 | and extend life on the planet

03:08:35.220 | and if not find it elsewhere, then seed it elsewhere,

03:08:39.740 | then that is a vision which makes us creative

03:08:42.460 | and confines the worst elements

03:08:43.860 | of our capacities to share beliefs.

03:08:46.580 | So that's what my hope is, that we'll reach that stage,

03:08:50.700 | but I think we've overshot it so badly

03:08:53.300 | that my real fear is we'll end up blaming technology

03:08:56.900 | for the type of world we find ourselves living in

03:08:59.540 | in the next 20 to 50 years.

03:09:01.420 | - So you think technology is going to be

03:09:03.220 | one of the, part of the solution?

03:09:05.420 | - Part of the solution, yeah, but it's,

03:09:07.580 | but if we go through and blame it, which is quite possible,

03:09:11.180 | but we'll blame the technology

03:09:12.420 | rather than blaming too much of the technology

03:09:14.580 | and the too much comes down to what economists have told us,

03:09:17.220 | that we can just continue consuming infinitely

03:09:19.820 | on a finite planet, and Kenneth Boulding

03:09:21.860 | said that beautifully, he said,

03:09:23.460 | "If somebody believes that you can have exponential growth

03:09:26.180 | "on a finite planet, they're either mad

03:09:28.160 | "or they're an economist."

03:09:30.900 | So you're, you made a long journey

03:09:33.540 | for which I'm deeply honored from, from--

03:09:37.620 | - Sydney?

03:09:38.740 | - This distant place.

03:09:40.420 | - Antipodes.

03:09:41.420 | - There's myth--

03:09:42.260 | - You've got to go there one day, you'd enjoy it.

03:09:43.980 | - I will, I'm afraid if I go there, I will stay forever,

03:09:47.300 | and so--

03:09:48.140 | - No, it's a bit too, there's more vitality

03:09:50.640 | back in this economy, so you'd come back.

03:09:52.940 | - Okay, maybe, you know, I'm not a fan of the economy

03:09:56.380 | or money or any of that nature calls me.

03:10:01.380 | Let me, so I'm honored that you make that trip.

03:10:04.680 | You've also said that while you're here in Austin,

03:10:06.620 | you're going to go to this American factory

03:10:11.620 | that makes cars here in Austin, and also visit Starbase.

03:10:17.180 | So let me ask you about expanding out into the universe.

03:10:22.260 | Is that something that excites you?

03:10:25.220 | - Yeah, yeah. - You mentioned about

03:10:26.060 | the economics of it, do you think,

03:10:27.660 | what do you think Marx would think about this?

03:10:31.500 | Like, economically speaking, what is this?

03:10:35.300 | Is it a good thing?

03:10:36.740 | - I think it's vital, we can have capitalism in outer space

03:10:40.820 | far more successfully than we can have it on the planet,

03:10:43.460 | because we don't face, when we dump the waste,

03:10:45.340 | it ends up in the sun, not a problem, okay?

03:10:47.560 | So it means the potential, we don't undermine

03:10:52.900 | our own productive capacity if we're doing it

03:10:54.780 | in outer space.

03:10:55.620 | - So the destructive element of waste

03:10:58.220 | has a lesser impact in outer space.

03:10:59.580 | - Far lesser, yeah.

03:11:00.420 | I mean, who cares if we throw a bit of our iron

03:11:02.420 | back into the sun again?

03:11:03.900 | It'd take a fair bit of it to turn it into a,

03:11:05.660 | what would be the next stage, it'd be a red giant.

03:11:08.740 | And we have to get away, because if there's a red giant

03:11:10.780 | at some stage, the sun will head out past the orbit of Mars,

03:11:14.000 | I think, certainly past the orbit of Earth.

03:11:16.700 | So to have the longevity of not just human life,

03:11:22.700 | but life that evolved on this planet,

03:11:25.180 | we have to be able to take it off planet, ultimately.

03:11:28.180 | So if you think in the really long term,

03:11:30.640 | then it's our responsibility, if we're gonna want

03:11:33.220 | to maintain life, is to establish life off the planet.

03:11:37.240 | - What do you think about robots and AI

03:11:41.520 | as part of the expanding out into the universe?

03:11:43.820 | - Oh yeah, we have to.

03:11:44.660 | I mean, that ends labor.

03:11:46.960 | You can't go for, your daddly jaunt can't be from here

03:11:50.360 | to the asteroid belt and back again

03:11:52.360 | for dinner with your family.

03:11:54.200 | So production would be entirely mechanized.

03:11:57.000 | There'd have to be a handful of people

03:11:58.560 | who service the machines, but--

03:12:00.080 | - So it's about production and automation.

03:12:02.240 | What about elements of consciousness

03:12:05.220 | that make humans so special?

03:12:07.640 | What about that persisting within the machine?

03:12:09.800 | - I mean, I'm still a skeptic about us ever being able

03:12:12.040 | to create a machine which is truly conscious.

03:12:14.840 | If I can throw my, it's only two cents--

03:12:16.840 | - That would really piss off Karl Marx, by the way.

03:12:19.320 | If we create machines that are conscious.

03:12:20.920 | - Exactly, this is actually part of the,

03:12:22.960 | there's two good logical arguments

03:12:24.360 | against the labor theory of value.

03:12:25.720 | One of what it becomes, machines become intelligent.

03:12:28.240 | And the other was that if the declining rate

03:12:30.320 | of profit applies in socialism,

03:12:32.660 | it'll apply as a rate of accumulation,

03:12:34.760 | sorry, in capitalism, it'll apply as a rate of socialism

03:12:37.720 | as well, a guy called Khalid made that argument.

03:12:39.840 | So his argument was just unsound.

03:12:42.400 | But yeah, intelligent machines

03:12:43.760 | would completely screw Marx up.

03:12:46.720 | - I do not like that world where machines

03:12:49.120 | have not only intelligence, but consciousness as well.

03:12:53.640 | - And I know that's one of your interests,

03:12:57.560 | one of your potential endeavors.

03:12:59.880 | And the Kurzweil idea that there's some singularity

03:13:03.440 | we're approaching as we just get

03:13:04.760 | increasing processing power.

03:13:06.480 | It's not processing power, it's imagination.

03:13:09.360 | And I think--

03:13:10.200 | - Whatever the heck that means.

03:13:12.080 | - Whatever the heck that means, yeah.

03:13:13.680 | I mean, you would have had imaginative insights.

03:13:15.880 | I mean, your papers on like in motor,

03:13:20.040 | in automating motoring,

03:13:21.520 | between the hyper-intelligent machine

03:13:23.880 | or the machine-human interface,

03:13:25.540 | where the standards can be lower for the machine

03:13:27.840 | and higher for the human.

03:13:28.840 | Okay, that's an insight you would have had at some point,

03:13:31.520 | and then you've worked it further.

03:13:33.080 | So I've had insights like that as well.

03:13:34.760 | And I have no idea where they come from.

03:13:36.400 | They just hit me in the head, and I write them down,

03:13:39.360 | and they solve the problems

03:13:40.920 | that I didn't even know my mind was working on.

03:13:43.600 | So how can we get a machine to do that?

03:13:46.680 | And I do not know the answer,

03:13:50.060 | but one thing I think is the potential,

03:13:51.960 | is I think we have to create AI that has feelings,

03:13:55.960 | AI that wants to survive.

03:13:58.320 | Because if you think how our intelligence evolved,

03:14:02.200 | it's on this planet in a struggle

03:14:04.080 | between predator and prey.

03:14:05.760 | And intelligence became a survival technique.

03:14:08.080 | - I find the ideas of Ernest Becker

03:14:09.840 | with denial of death really powerful,

03:14:11.960 | which is that humans will not only have emotions

03:14:16.960 | and are trying to survive,

03:14:20.440 | they're able to ponder out in the distant future

03:14:25.440 | their mortality.

03:14:27.880 | - Yes.

03:14:28.720 | - And that is a driving force for even greater creation

03:14:32.520 | that animals are able to do, more primitive animals.

03:14:38.720 | And so there is some element where I agree with you.

03:14:42.320 | I think for AI systems to have something like consciousness,

03:14:46.600 | they have to fear their mortality.

03:14:49.120 | - Exactly.

03:14:50.200 | And I think that's, if you do it then,

03:14:52.440 | you can't produce an AI whose behavior you can control.

03:14:57.440 | - I mean, when you have kids.

03:15:00.400 | - Yeah, you're doing it.

03:15:01.240 | - You can't control their behavior.

03:15:02.800 | (laughing)

03:15:04.640 | That's the trade-off.

03:15:06.280 | - You give life to an anarchist.

03:15:07.920 | I got one of my favorite instances in my family life

03:15:10.840 | is one of my, I like all my nieces and nephews,

03:15:15.520 | but one's got a real quirk to her.

03:15:17.320 | And I was standing over her cot

03:15:19.720 | when she was literally like about six months old

03:15:22.400 | and she was gurgling away to herself.

03:15:24.560 | And her father waved his fingers,

03:15:27.040 | said, "Stop making that noise."

03:15:28.840 | And this little six-month-old kid goes, "Zoo, zoo, zoo, zoo."

03:15:32.080 | And I said, "Boy, you're gonna have issues

03:15:33.840 | "with that one, mate."

03:15:34.800 | - Yeah, an anarchist was born.

03:15:37.240 | - Yeah, and so you can't control this life

03:15:39.440 | you give birth to, and that's, I think, the threat of AI.

03:15:42.080 | - Terrifying and exciting.

03:15:43.800 | - It is, and I think we should take that risk at some stage.

03:15:47.480 | But I think to do it with what actually let

03:15:50.200 | artificial intelligence involve in this environment

03:15:53.680 | in which it fears its own death.

03:15:55.880 | - Yeah, yeah.

03:15:58.080 | I think there's a lot of beauty there,

03:15:59.720 | but there's also--

03:16:01.240 | - A lot of fear.

03:16:02.400 | - A lot of destruction that's possible,

03:16:04.080 | so you have to be extremely careful.

03:16:05.800 | That's kind of the cutting edge

03:16:07.920 | at which we often operate as a humanity.

03:16:10.600 | Let me ask you for advice.

03:16:14.240 | Can you give advice to young people

03:16:16.520 | in high school and college?

03:16:18.280 | Maybe they're interested in economics.

03:16:22.120 | Maybe they have other career ideas.

03:16:24.800 | What advice would you give them about a career

03:16:27.400 | they can have that they can be proud of

03:16:29.280 | or a life they can be proud of?

03:16:31.520 | - Mainly in a career, I say don't do an economics degree.

03:16:34.200 | (laughing)

03:16:35.520 | I say if--

03:16:36.760 | - There's a little book--

03:16:38.960 | - Econ Comics.

03:16:40.080 | - Econ Comics, Taking the Con Out of Economics.

03:16:44.840 | So they should start with that

03:16:47.600 | and then say screw it to an economics degree.

03:16:50.760 | - Yeah, because what you learn is an obsolete technology.

03:16:54.280 | Learning economics at a university

03:16:56.160 | is like learning to make astronomy.

03:16:58.120 | Okay, the centric equilibrium,

03:17:04.120 | epicycles being added to make your models fit the data.

03:17:06.840 | - So it's not that economics

03:17:08.320 | is not a discipline worth deeply studying.

03:17:10.960 | It's that the university education around economics--

03:17:13.280 | - Is so bad.

03:17:14.120 | - Is bad.

03:17:14.960 | - So I'd say learn system dynamics.

03:17:17.040 | Do a course in system dynamics

03:17:18.560 | which you can apply in any field

03:17:20.480 | and then apply what you learn out of system dynamics

03:17:23.680 | to the issues of economics if that's what interests you.

03:17:26.360 | - So get a sort of base engineering education.

03:17:30.120 | - A base engineering education.

03:17:32.400 | That is far better than doing an economics degree.

03:17:35.040 | In terms of life,

03:17:36.360 | my life is pretty chaotic in many, many ways.

03:17:40.120 | My friends and family will tell me that at every opportunity

03:17:43.280 | but the thing is, I once had a,

03:17:45.720 | this will tell you an example

03:17:46.720 | of a really funny incident that occurred to me

03:17:49.400 | 'cause I led the student revolt at Sydney University

03:17:51.360 | as I mentioned, I was 20 years old.

03:17:53.240 | And then in my, I think about 28 or so,

03:17:56.240 | I went to a restaurant one night

03:17:57.520 | and I found a bunch of guys, all guys,

03:18:00.680 | who'd done accounting at the university

03:18:02.320 | but had also been part of the student revolt.

03:18:04.720 | So they hadn't seen me for about a decade

03:18:06.520 | and they said, "What have you been doing, Steve?"

03:18:07.960 | And I talked about what I'd done.

03:18:09.040 | So I'd been a school teacher for a while.

03:18:11.080 | I then worked in overseas aid.

03:18:13.480 | I was doing computer programming at the time

03:18:15.840 | and I'd forgotten what else I was doing at that point.

03:18:18.240 | So I explained it to all of them

03:18:19.800 | and they were at a Bucs night,

03:18:20.720 | one of them having a wedding coming up the next week.

03:18:23.160 | And one of them said, "I wish I'd done that."

03:18:27.000 | And there was silence around the table.

03:18:29.040 | There was obviously silent agreement.

03:18:31.320 | And I looked at them and said,

03:18:32.360 | "Hang on, guys, look at the downside of my life.

03:18:35.600 | "Like you're getting married.

03:18:38.080 | "I don't have a girlfriend right now.

03:18:40.760 | "You've all got secure jobs.

03:18:42.940 | "I'm unemployed, okay?

03:18:44.780 | "I don't, you own a house.

03:18:45.960 | "I haven't even got a car.

03:18:47.560 | "Look at the downside of my life."

03:18:49.320 | And the bloke who was the kingpin of that group,

03:18:51.120 | they're a very innovative bunch of guys

03:18:52.960 | in the student revolt.

03:18:54.200 | So he said, "Steve, we would still all rather have done

03:18:58.980 | "what you have done."

03:19:01.140 | And they did accounting because it was safe.

03:19:03.760 | You could always get a job.

03:19:04.600 | They were bored shitless.

03:19:06.800 | - Did you have a sense that the chaos

03:19:10.080 | you're always jumping into was dangerous

03:19:14.120 | or was it just the pull of it that--

03:19:16.920 | - I simply couldn't not do it.

03:19:18.920 | It was part of me that I couldn't swallow

03:19:20.920 | this economic stuff.

03:19:22.020 | Once I was exposed to why it was so wrong,

03:19:24.960 | then I was on a crusade to make it right.

03:19:28.520 | And that's been part of my nature all through my life.

03:19:31.520 | I don't know why.

03:19:32.700 | So it wasn't that I made a choice to do it,

03:19:35.160 | it's that I couldn't be true to myself without doing it.

03:19:38.520 | And I find a lot of people get caught in a life

03:19:40.760 | where they're doing it because it works

03:19:42.400 | for some financial or other reason,

03:19:44.260 | but they're not being true to themselves.

03:19:46.200 | And as messy as my life is,

03:19:47.920 | as much shit I've got myself caught up in,

03:19:50.000 | and there's a lot of that in my personal

03:19:51.440 | and financial life right now,

03:19:52.760 | which is a pain in the ass,

03:19:54.220 | I would rather have had that nature than not.

03:19:58.660 | - You would rather take the pain in the ass than not.

03:20:01.220 | - Yep, yep.

03:20:02.640 | - Let me ask a dark question.

03:20:04.300 | What's the darkest place you've ever gone to in your mind?

03:20:09.740 | So in all that rollercoaster of life,

03:20:12.420 | have there been periods where it's been really--

03:20:15.220 | - I think I've had to cope with depression

03:20:17.100 | in the last five years,

03:20:19.540 | since I started reading Neoclassical Economist

03:20:22.580 | on climate change.

03:20:23.980 | - Sorry to laugh.

03:20:24.820 | - Gotta come back to that one.

03:20:25.660 | - That's where my wife's gonna come into this story.

03:20:27.980 | So I was reading Richard Toll,

03:20:30.700 | a paper from 2009 called "The Economics of Climate Change,"

03:20:34.620 | Journal of Economic Perspectives, I think.

03:20:37.060 | And I read this section where he says

03:20:38.940 | that one of the ways they tried to calibrate

03:20:43.220 | what climate change was due is they assumed

03:20:46.060 | that the relationship between GDP and temperature

03:20:48.620 | over space would apply over time as well.

03:20:51.880 | - Yes.

03:20:54.140 | - And I read that and thought that is so fucking stupid.

03:20:58.260 | 'Cause all it's saying is that

03:20:59.300 | if there's a 10 degree temperature difference

03:21:00.980 | between New York and Florida

03:21:02.740 | and a 20% difference in income,

03:21:04.700 | then a 10 degree increase in temperature

03:21:06.220 | will cause GDP to fall by 20%.

03:21:08.340 | It is so insanely stupid.

03:21:10.260 | So when I read that line, I just did this.

03:21:14.660 | I just, you know, I was in shock at how stupid it was.

03:21:18.260 | My wife, who's Thai and brings in treats for me all day,

03:21:22.580 | walks into the room and she speaks in a staccato English

03:21:26.300 | and says to me, "Why are you like this?"

03:21:29.300 | And I said, "I'm just doing this work on climate change."

03:21:31.700 | And she interrupts me and says,

03:21:32.600 | "Oh, why you do that stuff?

03:21:34.780 | "Nobody's interested in climate change.

03:21:36.620 | "You can't do anything to change it.

03:21:37.940 | "If we die, we die."

03:21:39.280 | And that's perfect Buddhist grounding, you know?

03:21:44.300 | And I thought, well, I can't argue with her again.

03:21:47.380 | So that sort of stopped me on the depression,

03:21:51.220 | but that's the darkest point when I looked at it

03:21:53.420 | and I thought that this arrogance, this stupidity,

03:21:56.140 | this humbug in the economists meant

03:22:00.900 | that we were potentially jeopardizing the lives

03:22:03.260 | of billions of people,

03:22:04.420 | and Christ knows how many other life forms.

03:22:08.020 | And having that knowledge

03:22:10.020 | is the most depressing experience of my life.

03:22:12.620 | - That ideas, simple models combined with arrogance

03:22:19.620 | can lead to the potential destruction

03:22:23.100 | of human civilization.

03:22:23.940 | That was a very heavy,

03:22:25.700 | and then your wife came in with--

03:22:28.740 | - And broke me out of it.

03:22:29.900 | - Nature wins in the end.

03:22:33.140 | - Yeah, and that's--

03:22:33.980 | - And sort of accept the flow of life.

03:22:35.780 | - You should really enjoy that book, "The Earth of Odds,"

03:22:38.580 | because it's got that same beautiful sense to it.

03:22:40.920 | Life will survive whatever we do.

03:22:42.860 | I mean, they talk about the people,

03:22:45.180 | I was actually talking with a good mate of mine,

03:22:46.660 | an ex-geologist, and he's now a professor of economics,

03:22:49.540 | and he said as a geologist,

03:22:50.820 | he really hated people talking about the Anthropocene Epoch.

03:22:54.820 | And I said, "Well, it shouldn't be the Anthropocene Epoch,

03:22:57.980 | "it'll be the Anthropocene Event,

03:23:00.580 | "because an epoch is millions of years,

03:23:02.460 | "and it'd be a huge period of life on the planet,

03:23:06.660 | "and we might be snuffed out

03:23:08.800 | "in 10,000 years of human civilization."

03:23:12.260 | And that's not much slower

03:23:14.980 | than the meteors wiping out the dinosaurs.

03:23:16.780 | The dinosaurs lasted for a long time after that event.

03:23:19.380 | So we're like, we'd just be a layer

03:23:22.220 | in the surface of the planet

03:23:24.500 | with plastics and strange metals like that at some point.

03:23:29.020 | So we're just, but life will abide, life will survive us.

03:23:32.380 | But there's so much life we're gonna take down with us

03:23:35.100 | in this whole period,

03:23:37.180 | and there's so many of our own lives we're gonna terminate

03:23:40.820 | for no good reason.

03:23:41.860 | - I'm looking at this Richard Tull character,

03:23:46.220 | I'll definitely have to look at some of his papers.

03:23:48.060 | It does look like, boy, is he oversimplifying

03:23:51.820 | and do a lot of people-- - Oh my God.

03:23:53.620 | Check his one on the Anthro,

03:23:55.020 | how good it'll be to lose Amok.

03:23:57.340 | - That said, I'm going to approach

03:24:00.700 | all of these topics with humility,

03:24:02.860 | and I would like to have some conversations

03:24:04.900 | if people can recommend.

03:24:06.160 | My default position is always with the scientists,

03:24:09.940 | but even above that, my default position

03:24:12.260 | is with those who are humble versus those who are arrogant.

03:24:16.860 | - This idea that because you're a quote unquote expert,

03:24:19.940 | you deserve to have arrogance is a silly idea to me.

03:24:23.180 | Again, going to the broader view of life on Earth,

03:24:27.500 | nature, nature's the only one that gets to be arrogant,

03:24:31.140 | and it chooses not to. (laughing)

03:24:35.220 | So let me ask you about love.

03:24:38.060 | What role does love play in this whole thing?

03:24:41.620 | Did Karl Marx have a model for that?

03:24:43.660 | - Oh, Marx was madly in love with Geneva on West Island.

03:24:46.820 | And wrote love poetry to her

03:24:48.580 | long before he wrote "Das Kapital."

03:24:50.820 | And he was infatuated with her.

03:24:52.540 | He ended up also impregnating his housekeeper.

03:24:56.940 | So there's the son of Karl Marx,

03:24:59.020 | who was the son of the housekeeper, not the Jenny.

03:25:02.700 | There are numerous daughters.

03:25:04.100 | - So he had a complicated view of love.

03:25:09.180 | - Oh yeah.

03:25:10.580 | - There's a dialectic on love there.

03:25:12.500 | - He had an idealistic view with Jenny,

03:25:15.940 | and he was rejected because he wasn't, not by Jenny.

03:25:19.860 | She was madly in love with him as well.

03:25:21.940 | So it was a real passionate love affair from the very outset.

03:25:25.340 | But then, of course, you have children, lots of them die.

03:25:28.540 | There's a huge amount of tragedy in his life as well.

03:25:31.140 | He and Jenny were forced out of Chelsea

03:25:34.980 | by a cholera epidemic.

03:25:37.140 | My vision for London back in the 1850s and '60s

03:25:40.020 | was Calcutta in the 1970s.

03:25:43.500 | That's really what life was like.

03:25:45.100 | So there's a lot of hardship in his life as well.

03:25:47.660 | And he was always poor.

03:25:49.240 | So only Ingalls kept him alive financially.

03:25:54.700 | He applied for one job outside of,

03:25:57.080 | he never got an academic job.

03:26:01.620 | He was pushed out of Prussia as a newspaper author.

03:26:04.340 | But he also, he applied for a job as a clerk

03:26:08.420 | in the British railway system,

03:26:09.980 | was turned down 'cause they couldn't read his handwriting.

03:26:12.740 | So I think I'm a bit similar there.

03:26:17.380 | So yeah, there's a lot of love and passion.

03:26:20.980 | - But in general, what do you think is the role of love

03:26:23.340 | in the human condition?

03:26:24.380 | - It's vital.

03:26:25.220 | I mean, that feeling of passionate desire

03:26:31.220 | and respect for somebody else.

03:26:33.460 | And there's perverted forms of love as well,

03:26:35.220 | so I'll leave that out.

03:26:36.420 | But somebody having a really, a deep bond

03:26:40.260 | which goes beyond just sexual attraction.

03:26:44.180 | I like I've had that four or five times in my life

03:26:46.420 | with different women at different times.

03:26:48.420 | And I've stuffed up the most important one very early on.

03:26:51.220 | And that feeling is incredible.

03:26:55.460 | And you couldn't have life worth living without that.

03:27:00.460 | So it's an essential part of who we are.

03:27:03.980 | But what we have to do is to transfer it

03:27:05.940 | not just to the rest of our species,

03:27:08.240 | but to all the species.

03:27:09.980 | And that's, I think, what's vital.

03:27:12.900 | And how do we maintain that over generations?

03:27:16.820 | And I think that idea that we can actually hang on

03:27:20.820 | to that general sense of respect and not lose it again.

03:27:23.140 | 'Cause the amount of life we've terminated on this planet,

03:27:26.040 | the warlike side of humanity,

03:27:29.500 | that is too much of a defining feature of our species.

03:27:32.860 | That's the opposite of love, it's hate.

03:27:35.100 | But it's pleasure and inflicting pain on others.

03:27:37.140 | When you see people killing others

03:27:38.900 | in a warlike environment, they're enjoying themselves.

03:27:41.560 | It's rarely, sometimes it's self-defense.

03:27:44.660 | But when you have spoken to people

03:27:47.420 | who've been involved in combat

03:27:49.100 | and been involved in riots and said,

03:27:51.420 | when you see somebody rioting, bashing people up,

03:27:53.460 | they're enjoying themselves.

03:27:54.820 | It's not anger, they're feeling, it's pleasure.

03:27:56.740 | - There's a dark aspect to human nature.

03:27:58.420 | - Very dark.

03:27:59.380 | - But there's also the capacity to rise above that.

03:28:04.380 | - And I think, like I put us on a spectrum

03:28:06.420 | between chimpanzees at one extreme

03:28:08.020 | and bonobos at the other.

03:28:09.700 | We're too close to the chimpanzees.

03:28:11.580 | - And bonobos are just having fun, having lots of sex.

03:28:15.020 | - Every time they do anything,

03:28:16.220 | they fuck first and do the work later

03:28:17.780 | and then fuck afterwards to celebrate.

03:28:19.740 | - Fuck first, ask questions later.

03:28:21.540 | It's like that "Scent of a Woman,"

03:28:23.900 | one of my favorite films,

03:28:25.620 | where Al Pacino gives advice to a cat.

03:28:28.620 | He says, "When in doubt, fuck."

03:28:30.420 | (laughing)

03:28:32.900 | It's good life advice for a cat, especially.

03:28:36.060 | - We mentioned that death seems to be maybe fundamental

03:28:39.820 | to creating a conscious AI.

03:28:42.100 | Do you think about your own death?

03:28:45.060 | Are you afraid of it?

03:28:48.660 | - I'm afraid of going through it.

03:28:51.620 | - Not the other side?

03:28:55.340 | You're not afraid of being on the other side?

03:28:56.980 | - I don't think there is another side.

03:28:58.420 | I mean, I'm agnostic.

03:29:00.580 | I'm atheist when pressed and agnostic.

03:29:02.740 | The one thing that I think I can understand

03:29:04.860 | why religion exists is that the whole thing

03:29:07.540 | that something exists is itself a dilemma.

03:29:10.060 | You have to take on faith that reality exists,

03:29:13.620 | whether it's a simulation or actual reality, it exists.

03:29:17.660 | And that itself can't be explained in any scientific manner.

03:29:20.780 | I mean, you can talk about anti-protons and protons

03:29:23.700 | and the sum being zero and so on,

03:29:25.340 | but why did it even happen in the first place?

03:29:27.660 | So there's part you simply have to take on faith.

03:29:30.100 | - So there was darkness before.

03:29:34.700 | - We don't know.

03:29:35.540 | - And there's darkness after.

03:29:36.780 | - Yeah, and I don't know if we're gonna be alive

03:29:38.420 | on the other side of that darkness.

03:29:39.580 | I think individually, no.

03:29:41.220 | But the way you can live on

03:29:42.420 | is by what you do to human consciousness.

03:29:44.980 | - How do you hope people remember you?

03:29:47.380 | - As someone who managed to integrate economics

03:29:54.260 | with an appreciation for life.

03:29:56.020 | - Well, I have to say, as a bit of a callback,

03:30:03.020 | you're one deadly bastard.

03:30:05.220 | (laughing)

03:30:06.620 | It's a huge honor that you would come down and talk to me.

03:30:08.980 | You're a brilliant person, you're a hilarious person.

03:30:11.620 | The humility shines through, the brilliance shines through.

03:30:13.940 | Thank you so much for spending this time.

03:30:14.780 | - Well, thank you, Alex.

03:30:16.020 | You do the same for humanity.

03:30:17.580 | I mean, when I saw that email from you,

03:30:19.580 | my eyes popped out on my head, okay?

03:30:21.900 | - Well, you should hold your judgment.

03:30:23.540 | I gotta show you the sex dungeon I have.

03:30:25.580 | (laughing)

03:30:26.420 | You'll completely change--

03:30:27.240 | - I'm waiting for an invitation.

03:30:28.900 | I'll send my wife over.

03:30:30.300 | - Awesome, can't wait, all right.

03:30:31.900 | - Okay, mate.

03:30:33.500 | - Thanks for listening to this conversation with Steve Keen.

03:30:36.260 | To support this podcast,

03:30:37.500 | please check out our sponsors in the description.

03:30:40.220 | And now, let me leave you with some words from Karl Marx.

03:30:44.260 | To be radical is to grasp things at their root.

03:30:48.460 | Thank you for listening, and hope to see you next time.

03:30:53.020 | (upbeat music)

03:30:55.600 | (upbeat music)

03:30:58.180 | [BLANK_AUDIO]

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

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