Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Isn't all so Joe.
Speaker 1: One of the themes that we've had in our recent
Speaker 1: episodes is this idea of the pandemic changing certain perceptions
Speaker 1: of economics or certain perceptions of how the world and
Speaker 1: the economy actually works. Yeah, I mean, I think that's
Speaker 1: exactly right. Like, you know, we we just got in
Speaker 1: the US, for example, personal income and spending data, and
Speaker 1: you know, the story is that income replacement, household income
Speaker 1: replacement was actually extremely effective and successful in the US,
Speaker 1: and that's not what you expect in a recession. And
Speaker 1: it's sort of I think like people are sort of
Speaker 1: opening their mind and to like, how much of what
Speaker 1: we take for granted is just policy choices. Yeah? Absolutely so.
Speaker 1: I mean one of the big things that happened is
Speaker 1: we had the COVID shock in we finally had this
Speaker 1: exogenous shock that economics is kind of obsessed with, and
Speaker 1: things didn't necessarily pan out exactly the way that a
Speaker 1: lot of economists would have expected based on traditional principles
Speaker 1: of how things actually work. So now you know, not
Speaker 1: only have we had an unusual crisis in many respects,
Speaker 1: but now people are talking about an unusual recovery as well,
Speaker 1: and whether or not the future economy is going to
Speaker 1: look slightly different. So with that in mind, um, and
Speaker 1: I guess without further ado, we have the perfect person
Speaker 1: to talk about all of this, an iconic clastic economist,
Speaker 1: if ever there was one, and someone who thinks slightly
Speaker 1: differently to a lot of other economists out there. We're
Speaker 1: going to be speaking with Professor Steve Keane. He's a
Speaker 1: Distinguished Research Fellow at the University College London and also
Speaker 1: the world's first crowd funded economist. He has a Patreon
Speaker 1: account where he posts a lot of materials. You can
Speaker 1: check that out. Uh, Professor Keene, thanks so much for
Speaker 1: coming on. Thank you, thank you for the invitation. So
Speaker 1: I guess, um, I'm trying to think where to start,
Speaker 1: because of course your research is quite wide ranging, and
Speaker 1: if we're going to talk about the entire state of
Speaker 1: the current economy, that's a pretty big topic. But maybe
Speaker 1: just to begin with talk to us about what surprised
Speaker 1: you over the past year or what stood out to
Speaker 1: you in terms of economic developments. In some sense, I
Speaker 1: wasn't surprised because when the crosses first, I get on
Speaker 1: my Patreon blog that we should have, you know, the
Speaker 1: government should pump as much money as they canadate the
Speaker 1: economy to make it possible for people to not to
Speaker 1: have to go to work and still make their bills
Speaker 1: and not go andankrupt through the whole process. And I suppose,
Speaker 1: I suppose in one sense that it's not amazing that
Speaker 1: when a crisis strikes like this, the economic textbook gets
Speaker 1: thrown out the window where it desperately deserves to be
Speaker 1: thrown by the way, um and the people are just
Speaker 1: you know, as I know from what Hank Parlson had
Speaker 1: to say back when the financial crisis, he wasn't going
Speaker 1: to let capitalism collapse on his watch. So they throw
Speaker 1: the government money book at the system. And of course
Speaker 1: that happened back in the Great in the Great Recession
Speaker 1: as well. But we're very rapidly switched over to you
Speaker 1: the focus back on balancing the government's books and all
Speaker 1: this sort of stuff. This time around, the scale of
Speaker 1: obviously done has been two or three times as big
Speaker 1: as what happened with the trying to reduce the damage
Speaker 1: from the global financial crisis and for Actually, a lot
Speaker 1: of Americans ended up getting a pay rise out of
Speaker 1: the fact they got six hundred bucks a week from
Speaker 1: the government to meet their bills for a while. And
Speaker 1: I think what actually has started to soak into people
Speaker 1: is that, hey, maybe maybe the world of financial system
Speaker 1: doesn't work the way the textbooks told us it works.
Speaker 1: So I think that's the pleasing thing that I take
Speaker 1: out of this, that there's more consciousness of that textbook
Speaker 1: explanation as the Bank of England itself set in two
Speaker 1: thousand and fourteen is simply wrong. M Do you think
Speaker 1: this is a lesson that's actually been learned? Like, we
Speaker 1: can all observe this, we can all look at household
Speaker 1: incomes having held up despite the crisis, we can look
Speaker 1: at the sort of very robust power of you know,
Speaker 1: fiscal policy. But do you think this is a lesson
Speaker 1: that will actually be learned or do you think it's
Speaker 1: a lesson that will be dismissed? You know, Oh, that
Speaker 1: was a weird crisis because there was this exogenous shock.
Speaker 1: It was a health thing. We have to go back
Speaker 1: next time in a downturn, we have to go back
Speaker 1: to the old way. I'm already you seeing that happened
Speaker 1: in the literature, particularly amongst the UK politicians of both
Speaker 1: Labor and Tory stripes that both talking about the need
Speaker 1: to balance the books and get you know, fix up
Speaker 1: so our our future generations aren't paying for our blurreds
Speaker 1: during COVID. But I think that the scale of the
Speaker 1: was so big and the public impact so great that
Speaker 1: it's going to take longer for that conventional message to
Speaker 1: be accepted as it was in the past. And I
Speaker 1: think in some ways they're not going to get a
Speaker 1: chance to do that because as soon as was out
Speaker 1: the door and pill sent thing, God, it's not anymore
Speaker 1: said hold my beer, I'm going to set fire to Canada.
Speaker 1: And what's happening right now is making I think, making
Speaker 1: people think that a whole lot of things they took
Speaker 1: for granted do not work the way that they have
Speaker 1: been assured they do. And that includes how economists have
Speaker 1: said that climate change is no big deal. So I
Speaker 1: think COVID was a warm up saying that we have
Speaker 1: to do something to drastically change our impact on the planet.
Speaker 1: And what we did during COVID, so the government's got
Speaker 1: the capacity to finance that, it creates the money when
Speaker 1: it spends. And that's that's the lesson I hope that
Speaker 1: we can get to because we're damn or going to
Speaker 1: need that when we start working out how do we
Speaker 1: address climate change. I only want to talk about climate
Speaker 1: change in detail. But before we do that, can you
Speaker 1: maybe elaborate a little bit on the public debt versus
Speaker 1: private debt issues, so you make a massive distinction in
Speaker 1: your research between public and private debt. So yeah, it's
Speaker 1: it's It is ridiculously simple once you see from the
Speaker 1: point of view an accountant, and of course most economists
Speaker 1: don't do accounting, don't learn about money. I saw Paul
Speaker 1: Krugman has a new master class program out where the
Speaker 1: two crucial slides the economics is about people. It's not
Speaker 1: about money. Well, that's totally wrong. It is about money
Speaker 1: and how money affects people, and how people affect money.
Speaker 1: So when you when you do look at money, you've
Speaker 1: got to look in double entry bookkeeping terms, and you
Speaker 1: see what happens when a bank creates a loan, Well,
Speaker 1: it puts money in your deposit account, which is a
Speaker 1: liability for itself, and it puts an identical amount of
Speaker 1: money in its loan account. Saying you I was that money.
Speaker 1: So it's assets rise and its liabilities rise, and that's
Speaker 1: how credit money is created by banks, and a very
Speaker 1: similar mechanism of flies for the government. When the government
Speaker 1: spends more than it takes back in taxes, the spending
Speaker 1: turns up in private bank accounts. That rise increases the
Speaker 1: liability side of the banking system ledger, and the money
Speaker 1: is is stored in the reserve accounts that the is
Speaker 1: transmitted through the reserve accounts that the banks themselves have
Speaker 1: at the central bank. Well, that means the reserves rise
Speaker 1: when the government spends, it has a deficit, just like
Speaker 1: the loans rise when the private banks create. When they
Speaker 1: create loans, both of them create money, and in that
Speaker 1: sense there is no limit on the amount they can
Speaker 1: both create. The impacts they both have on the economy
Speaker 1: depend upon what are the inflationary impacts? What are the
Speaker 1: impacts of having to pay for that extra debt when
Speaker 1: you buy it as an individual, And when an individual
Speaker 1: borrows money, you can't go to the bank saying look,
Speaker 1: I printed these notes out of my basement. You're you
Speaker 1: mind if I use those to pay my interest bill.
Speaker 1: But in the case that the government the treasury, which
Speaker 1: creates the money by the deficit spending, is the effective
Speaker 1: owner of the central bank, and that means that it
Speaker 1: can in fact pay its interest payments. Effectivities an accounting
Speaker 1: operation between the treasury and the central bank. So the
Speaker 1: government has effectively limitless capacity to create money the limits
Speaker 1: of the impact of that on the economy rather than
Speaker 1: the physical capability of doing it, and rather than the
Speaker 1: death the government creates. And that I'm going to finish.
Speaker 1: I'm getting a very technical here as I know. No
Speaker 1: I'm into it, okay, But if you look, if you
Speaker 1: look at what are reserves, and they think about the
Speaker 1: main assets that banks have their reserves, that are the
Speaker 1: deposit accounts the private banks have at the central bank,
Speaker 1: there are the loans they've made to the private sector,
Speaker 1: and there are the bonds that they have bought, predominantly
Speaker 1: treasury bonds. Now, when the when the government runs a deficit,
Speaker 1: it puts money in the reserve accounts of the banks,
Speaker 1: increases their assets. That puts money into deposit accounts. That's
Speaker 1: where the spending comes from. The public gets extra money
Speaker 1: out of Then the treasury says we're gonna issue bonds
Speaker 1: to sell the bonds to the banks to cover the
Speaker 1: extra debt with money we've created. Well, that is an
Speaker 1: offer that the bonds, when the banks by them, are
Speaker 1: also assets, and how do they pay for them. They
Speaker 1: pay them with the reserves, So the deficit creates reserves.
Speaker 1: And then when the treasury says we're going to sell
Speaker 1: you treasury bonds for that, the treasury bonds an interest,
Speaker 1: which the reserves normally don't do. The treasury bonds can
Speaker 1: be traded, which the reserves can't, but can't be traded,
Speaker 1: so it's an offer that's too good to refuse for
Speaker 1: the banks. And that's why the banks always more than
Speaker 1: by more than the subscribe for all the issues of
Speaker 1: treasury bonds. So there's no way there's any borrowing going
Speaker 1: on from the public in that whole thing. It all
Speaker 1: happens on the asset side of the banking sector, leaving
Speaker 1: the private sector, non bank sector out of it. So
Speaker 1: there's no limit to the amount the money the government
Speaker 1: can create that way and cover by bonds, and that's
Speaker 1: why we saw something like the thirty or of GDP
Speaker 1: increasing in inverted commerce government debt. The government created the
Speaker 1: money that brought the bonds. One thing you mentioned in
Speaker 1: that the Krugman master Class. The idea has claimed that
Speaker 1: economics is the study of people, or that's about people.
Speaker 1: You say, it's about money. Can you explain that further,
Speaker 1: like this idea of like centering money as the sort
Speaker 1: of like key unit of analysis or like where we
Speaker 1: start in the journey, like understand what what is the
Speaker 1: significance of starting with money? Yeah, well, he said, let's
Speaker 1: talk about how Krugman starts without it, first of all,
Speaker 1: and why that ends up. We're using all the huge
Speaker 1: mistakes of mainstream textbooks make and of course come back
Speaker 1: to emphasize the Bank of England and the bonds Bank
Speaker 1: of Both of the textbooks are wrong. This is not
Speaker 1: a raving radical coming out and attacking you know, sensible
Speaker 1: centrist economics. This is institutions and know what they're talking
Speaker 1: about telling economists you've got it wrong. You've got to
Speaker 1: learn the accounting. So what the animos do and you
Speaker 1: can see this improvements work and you can see it
Speaker 1: in Mancu's textbook as they say, well, there's a supply
Speaker 1: of money and that's under government control and that's fixed,
Speaker 1: and then there's a demand for money and that's both
Speaker 1: as individuals demanding money and the government when it runs
Speaker 1: a deficit, all though demands money. So when they show
Speaker 1: the government running a deficit, they have a downward sloping
Speaker 1: demand curve for money. So the more money you demand,
Speaker 1: you demand the hider interest rate you have to pay.
Speaker 1: And the government borrowing gets added onto the demand curve,
Speaker 1: and that drives up the interest rate. And that's why
Speaker 1: they make all the arguments about driving interest government spending
Speaker 1: driving up interest rates, crowding our private spending, causing the
Speaker 1: economy to slow down. That's their analysis. And when you
Speaker 1: do the accounting and you look at it, and I've
Speaker 1: actually built a software package which is really available called
Speaker 1: Minsky available on source forge. I'd love to have people
Speaker 1: in the finance sector as well as academics and students
Speaker 1: downloaded and take a look at it. And it's designed
Speaker 1: to do interlocking double entry bookkeeping tables of the You
Speaker 1: can do it a a corporate six, A company could
Speaker 1: do it of its own books. It's designed for macroeconomics.
Speaker 1: It's there is a free tool and when you when
Speaker 1: you look at what actually happens, what you see is
Speaker 1: that rather than government borrowing adding to the demand of money,
Speaker 1: it actually adds to the supply of money. So all
Speaker 1: the arguments that Krugman and co. Make about how deficits
Speaker 1: are going to create a local expenditure and drive up
Speaker 1: interest rates, when you take what actually happens and then
Speaker 1: put it in their framework, rather than that into the
Speaker 1: demand curve and driving up interest rates, it pushes the
Speaker 1: supply curve out and drives interest rates down. So their
Speaker 1: framework is just completely the wrong framework. And so you've
Speaker 1: got to start from money. And one of the one
Speaker 1: of the essential reasons they don't like talking about money
Speaker 1: is because if you say that bank lending creates money, well,
Speaker 1: nobody borrows for the sheer pleasure of being in debt.
Speaker 1: You're borrowed to spend, so that borrowed money adds to
Speaker 1: aggregate demand. And then when you have people paying debt off,
Speaker 1: that causes a collapse and aggregate demand. So if you
Speaker 1: if you take on board that banks create money when
Speaker 1: they lend, and then see what they does the overall economy,
Speaker 1: the whole macroeconomics has to change. Now they're quite comfortable
Speaker 1: with their I SLM models and their D S G
Speaker 1: A and the A B C s and all this stuff,
Speaker 1: none of which have money, and then none of which
Speaker 1: have banks virtually now I know one or two, and
Speaker 1: they just don't want to change how they have been
Speaker 1: used to thinking, even though reality says they're wrong. Now
Speaker 1: now we have the formal bodies like the Bank of
Speaker 1: England and the BUONUS banks saying they're wrong. So it
Speaker 1: makes a huge difference to understand the accounting. So this
Speaker 1: goes back to the distinction between public versus private debt.
Speaker 1: And you know, the suggestion or the implication I think
Speaker 1: is that public debt is much less of a problem
Speaker 1: um in terms of financial stability than private debt. So
Speaker 1: I'm wondering could you maybe elaborate on that point and
Speaker 1: then put it into context for us in the current environment.
Speaker 1: So we just saw massive fiscal stimulus UM in the US,
Speaker 1: for instance, and at the same time time, I think
Speaker 1: we're starting to see I haven't looked up the number recently,
Speaker 1: but I'm pretty sure we're starting to see private sector
Speaker 1: debt go up UM. So how much of a problem
Speaker 1: is that and how much does the balance between public
Speaker 1: versus private actually matter? Yeah, I think the way to
Speaker 1: think about the private debt and public debt is like
Speaker 1: a sea saw because when you look at the mainstream,
Speaker 1: they treat them as both. Well, they ignore private debt
Speaker 1: because the attitude as well, private debt is an act
Speaker 1: between consenting adults and we shouldn't look inside the financial
Speaker 1: bedroom of the economy. Whatever they want to do is
Speaker 1: okay by us. But our government debt that's a burden
Speaker 1: on future generations. Now, in fact, when you look at it,
Speaker 1: the burden on future generations is when you know, you
Speaker 1: die with a mortgage and your kids have to take
Speaker 1: it on later. So it's private debt that gives that
Speaker 1: burden on future generations of the of the current borrowers
Speaker 1: and private debt. When you borrow money from a bank,
Speaker 1: you can't repay it and notes you invent yourself. Whereas
Speaker 1: with the government, the government, when it spends more than
Speaker 1: it gets back in taxes, can finance that by accounting
Speaker 1: operations between the treasury, which is part of the government,
Speaker 1: and the central Bank, which is part of the government.
Speaker 1: So it is in fact a way of stimulating an
Speaker 1: economy to have deficit spending taking place, as we've seen
Speaker 1: during COVID. Imagine what America would have been like if
Speaker 1: there'd been no increase in the deficit In fact, the
Speaker 1: deficit was what thirty or GDP, So without that spending,
Speaker 1: it would have been a total collapse in the private
Speaker 1: sector of the economy. And when you look at the
Speaker 1: historical record, and I've done some empirical work here, but
Speaker 1: the best work has been done by the philanthropist American
Speaker 1: philanthropist Richard Vague, who was a leading bank when his
Speaker 1: own right and is now he's a formal government position
Speaker 1: in Philadelphia. Richard did research into one and a half
Speaker 1: centuries of financial crises about a hundred and fifty countries
Speaker 1: around the world, and found over the last hundred and
Speaker 1: fifty years have been about a hundred and fifty financial crisis.
Speaker 1: Every last one of them was caused by a runaway
Speaker 1: private debt bubble, and the only way out of it
Speaker 1: was to write that private debt off. So the whole
Speaker 1: focus we health and government debt is just the wrong,
Speaker 1: is just becoming out of bad thinking. And equally, one
Speaker 1: of the things people people, and also what the level
Speaker 1: of government did is it's now DP in America after
Speaker 1: after covid or, private debt was a hundred and sixty
Speaker 1: percent of GDP. So the crazy thing is the thing
Speaker 1: they're telling you not to worry about is not only
Speaker 1: the one you should worry about, but it's substantially larger
Speaker 1: than government dead in most countries around the world. So
Speaker 1: I wanna, you know, talk a little bit more about
Speaker 1: sustainability of government spending and I think it'll actually dovetail
Speaker 1: or lead us eventually into the climate change discussion as well.
Speaker 1: But obviously, and as you noted, one of these sort
Speaker 1: of curbs or you know, where the rubber might hit
Speaker 1: the road with the government capacity to spend is inflation.
Speaker 1: And right now we have some elevated inflation, say in
Speaker 1: the US, but there's a you know, strong argument that
Speaker 1: you know, to use the economists word, that it's transitory.
Speaker 1: But how do you go about thinking more broadly Okay,
Speaker 1: forget you know the data right now, but how do
Speaker 1: you go more broadly thinking about how to conceptualize the
Speaker 1: ability to spend without generating undesirable inflation or actual like
Speaker 1: you know, how to you know, reconceptualizing fiscal capacity, Like
Speaker 1: do we have any sort of way to put numbers
Speaker 1: on this or like how do you go about thinking
Speaker 1: about where those limits are? Yeah, I mean that is
Speaker 1: something which cost because we have a modern monetary theory
Speaker 1: is a description of how current financing occurs. But what
Speaker 1: we've had is a practice with that, with that and ignored,
Speaker 1: and you had constraints on how much money government can spend.
Speaker 1: The whole effective austerity type programs I've had ever since
Speaker 1: the days of Reagan and Thatcher. Now if you say, well,
Speaker 1: we actually understand it, that would mean that the policy
Speaker 1: now becomes to get the maximum level of employment you
Speaker 1: can get. Pology of a job guarantee is part of
Speaker 1: that program. And the issue about inflation is that inflation
Speaker 1: tends to be something which comes out of competition over
Speaker 1: the over the income shares of the economy. When when
Speaker 1: as we look back, the last time there's major inflation
Speaker 1: back in the seventies, you had economy going gangbusters compared
Speaker 1: to what it's done ever since, low level of unemployment
Speaker 1: and high level of capacity utilization, and that means a
Speaker 1: strong demand on raw materials inputs. And you had in
Speaker 1: seventy three, part of course, part of the Kipper War,
Speaker 1: you had the price of all being increased from tots
Speaker 1: fifty a boarrels ten and then you had in eight
Speaker 1: another another boom where the price went from ten dollars
Speaker 1: to forty. Well, that takes money out of capitalist stands,
Speaker 1: means less investment can take place, and you have a
Speaker 1: slump in the economy. Equally, you had low unemployment, so
Speaker 1: workers demand large wage risers, and those wage risers also
Speaker 1: fed through to inflation. So you need this very very
Speaker 1: strong basis in effect in aggregate demand out of a
Speaker 1: strong bargaining position for workers to get hold of the
Speaker 1: extra bargaining power to get from lower unemployment, to get
Speaker 1: bargaining power and demand higher wages, and that's what tends
Speaker 1: to set off inflation. So in that context where we
Speaker 1: are right now, where miles from that happening, because the
Speaker 1: working class unions are being smashed, there's no real bargaining
Speaker 1: power for the individuals until you're in a really really
Speaker 1: tight market. And we're temporarily saying that, but I don't
Speaker 1: think there'll be a sustained flow through of it. But
Speaker 1: if you did get to the stage where you had
Speaker 1: job guarantee very lower unemployment, people who didn't have a
Speaker 1: lost their private sector job would get a lower, lower
Speaker 1: paid but still job guaranteed income. That would potentially increase
Speaker 1: the bargaining power of workers and you could have struggles
Speaker 1: over the distribution of income, which would lead to inflation arising.
Speaker 1: So I think in that situation, you've got to start
Speaker 1: talking about really in national agreements over income distribution, the
Speaker 1: sort of thing that the Swedish government used to do
Speaker 1: back in the sixties and seventies when they dramatically industrialized
Speaker 1: in Sweden by having a sort of agreements between capitalist
Speaker 1: workers and the government about how to develop a Swedish
Speaker 1: society over time. So once once you realize that you
Speaker 1: can have full employment, then you've also got to have
Speaker 1: some agreement about the distribution of income and how money
Speaker 1: is spent. And you know, I'm not going to suggest
Speaker 1: that's going to be an easy thing to do. So
Speaker 1: if we if we actually start getting the government using
Speaker 1: the capacity it has to generate a level of aggregate
Speaker 1: demand that gives you full employment, then we're going to
Speaker 1: have to work out what's the power relationship between workers
Speaker 1: and capitalists in America. And it can't be as extreme
Speaker 1: as it's got to be in the last thirty or
Speaker 1: forty years. Will be to one little caveat there. It
Speaker 1: isn't the industrial work capitalist who have got that power.
Speaker 1: It's the financial system. So we're gonna have to take
Speaker 1: on financial capital, and that always sends it to be
Speaker 1: a lot more fun than you'd like it to be.
Speaker 1: I mean, what are the chances that we actually got
Speaker 1: a real discussion on that issue in the US, and
Speaker 1: what are the obstacles to people taking that on. Frankly,
Speaker 1: I don't think we're going to get that conversation. I've
Speaker 1: got to take my head off to Stephanie Krlton and
Speaker 1: the modern monetary theory people have made been very successful
Speaker 1: and raising this to the stage where Congress even has
Speaker 1: debates about it, and you've seen some Congressman realizing, well,
Speaker 1: they don't have the constraints they thought they had, and
Speaker 1: they're changing their attitudes. But the political pressure back in
Speaker 1: the opposite direction is enormous. So I'm not convinced that
Speaker 1: we're going to get a conscious decision to go about
Speaker 1: doing it. But a bit like COVID before COVID struggling,
Speaker 1: I'd say December twenty of two thousand and nineteen, if
Speaker 1: you ask anybody with the government shod on a deficit
Speaker 1: of of GDP next year, they would have kicked you
Speaker 1: out of the room. That's what the government ran next year. GDP.
Speaker 1: And if you look back at the last time we
Speaker 1: had spending on that scale, I was during the Second
Speaker 1: World War, and the impact of that, you know that
Speaker 1: that was when we realize we're in an existential crisis.
Speaker 1: Was either spend the money or you know, start saying
Speaker 1: highlhead lap. So we spent the money, and nobody discussed
Speaker 1: that there was too much money being spent buying that
Speaker 1: next German tank or or whatever is being constructed with
Speaker 1: with the government money that was being spent on private
Speaker 1: corporations to build tanks rather than cars. So when you're
Speaker 1: face an existential crisis like that, you tend to throw
Speaker 1: the real book out the window. And that's when you
Speaker 1: look at what happened with how people actually involved in
Speaker 1: doing that, People like barns Barnsley Rummel and people who
Speaker 1: are running the Federal Reserve. Back in the night and forties,
Speaker 1: they realize there were no constraints on government spending. There
Speaker 1: was a tag that there's actually a paper called taxes
Speaker 1: or obsolete for government spending by the President of the
Speaker 1: Federal Reserve of New York and nine. So that since
Speaker 1: necessity is the mother of invention, now if you don't
Speaker 1: have necessity ideology comes back in. So I think if
Speaker 1: if we didn't face any future existential threats, there would
Speaker 1: be this pressure to return to the old balance the books,
Speaker 1: government spending as a burden on the future, that ideology
Speaker 1: would come back. But I don't think it's going to
Speaker 1: get a chance. So can I ask the I guess
Speaker 1: the flip side of that question, which is, you know,
Speaker 1: we're talking about physical capacity, and how do you create
Speaker 1: appetite to expand that. How do you actually um tackle
Speaker 1: the private debt problem because you have this massive financial
Speaker 1: sector that is incentivized basically to keep creating debt because
Speaker 1: every time they do that, they earn money. How do
Speaker 1: you go after that? And like, what is the political
Speaker 1: appetite to take that aspect on? I think the political
Speaker 1: apposites on the zero because if you look at politicians themselves,
Speaker 1: the main people they talk to people on the finance sector.
Speaker 1: So eisenhow used to talk about the military industrial complex.
Speaker 1: I talk about the political financial complex. And therefore what
Speaker 1: finance wants is what politicians tend to allow, and finance
Speaker 1: wants to create as much debt as it can because
Speaker 1: that's how they make money literally literally by creating the
Speaker 1: debt but for themselves. Figuratively, the more debt the private
Speaker 1: sector takes on, the more income that the private sector
Speaker 1: has to pay to the financial sector, so that their
Speaker 1: opposition to reducing debt is enormous. But the trouble is
Speaker 1: we've now we've now reached levels of private debt which
Speaker 1: are historic in the history of capitalism. So America. I've
Speaker 1: got data in America going back to eight and thirty four,
Speaker 1: and the level of private debt we've got now is
Speaker 1: greater than the peak level of private debt compared to
Speaker 1: g DP during the Great Depression, which was the previous
Speaker 1: peak driven by a massive deflation between thirty and thirty three.
Speaker 1: So we have this enormous overhang of private debt, and
Speaker 1: what that means is banks are a bit reluctant to
Speaker 1: lend because they now realized there's a possibility they won't
Speaker 1: get repaid, and the non bank public is reluctant to
Speaker 1: borrow because they were already carrying an enormous amount of
Speaker 1: debt even with low interest rate. So that combination means
Speaker 1: you've got very stagnant demand coming from the credit from
Speaker 1: credit when credit is part of a small amount of
Speaker 1: credit demand is a healthy part of a growing economy.
Speaker 1: But if you look at Chaumpado is argued in favor
Speaker 1: of the private banking system. The main argument you made
Speaker 1: was that the banks should be providing money to entrepreneurs
Speaker 1: or they don't, but that's what they should be doing.
Speaker 1: So what we've got is a huge overhanger private debt.
Speaker 1: We shouldn't have left private debt anything like level all
Speaker 1: it's at. I think it should to set. A hundred
Speaker 1: and seventy was the peak when America was during what
Speaker 1: we call the Golden Age of capitalism, between the late
Speaker 1: forties and the the early seventies, the level of private
Speaker 1: debt began at about GDP and something between and seventy
Speaker 1: of GDP. That's money you've borrowed for recent for realistic reasons.
Speaker 1: You've got working capital for companies, you have money for
Speaker 1: households to buy large consumer items. You have some funding
Speaker 1: of entrepreneurs. That's a creative role of the financial sector.
Speaker 1: When you get to the hundred and seventy percent, you
Speaker 1: can regard that is pretty much parasitic behavior. And what
Speaker 1: I proposed, and I've worked, I've done a Minsky model
Speaker 1: of how this could actually work. We need a modern
Speaker 1: debt be We can't just write the debt off because
Speaker 1: they would cause the banking system to collapse. We can't
Speaker 1: just give money to people who borrowed money from the
Speaker 1: banks and say how you're get off with that, because
Speaker 1: people who didn't borrow, people who were frugal, can say,
Speaker 1: you know, that's moral hazard. What what? Where's mine? Or
Speaker 1: My agument is, let's use the capacity of the government
Speaker 1: sector to create private money and use the government government money,
Speaker 1: fear boast money, and use that to replace credit boast money.
Speaker 1: So you give everybody in the country, every adult, the
Speaker 1: same amount of money. If they have debt, they must
Speaker 1: pay that down off their debt. If they don't have debt,
Speaker 1: what I would require is that they by newly as
Speaker 1: corporate shares, where those corporate chairs are used to pay
Speaker 1: down corporate debt. So you could reduce both household debt
Speaker 1: and corporate debt quite substantially. You wouldn't change the amount
Speaker 1: of money, and the economy just changed that rather than
Speaker 1: being mainly backed by credit and private debt, it's now
Speaker 1: mainly backed by FEA and government money creation capability, and
Speaker 1: with that you would dramatically reduce the inequality that we've
Speaker 1: got in society. You'd also stimulate the economy by putting,
Speaker 1: because there's more workers to be receiving the money than
Speaker 1: there are bankers and capitalists getting the same sum per head.
Speaker 1: You'd stimulate the economy of as workers have to spend
Speaker 1: faster than bankers or capitalists, and they'd be, as I've
Speaker 1: modeled it, quite a substantial burst of the economy with
Speaker 1: no additional money creation. So we could do it, and
Speaker 1: I'm certain we won't. Do you have a what's the
Speaker 1: dollar amount, like say in the US, and how do
Speaker 1: you how would one go about driving the rate amount?
Speaker 1: When I when I said whether you, I wouldn't necessarily
Speaker 1: do it in one go because unlike a standard economists,
Speaker 1: I'm not confident in my idea is going to work magically,
Speaker 1: so I'd like to do a test run. But if
Speaker 1: I did the whole caboodle. The model that I did
Speaker 1: was giving every adult American a hundred thousand dollars over
Speaker 1: one year, where a hundred thousand said, if you're in
Speaker 1: debt had to be used to pay debt down. If
Speaker 1: you weren't in debt, you had to buy corporate shares,
Speaker 1: which we used to per cancel corporate debt. Now, that
Speaker 1: worked out to a hundred thousand dollars per person, which
Speaker 1: is about a hundred and ten percent of GDP. And
Speaker 1: if we did it, we'd reduce the level of private
Speaker 1: debt from a hundred and sixty hundred and seventy down
Speaker 1: to sixty sevent of GDP, which is back on the
Speaker 1: sweet spot for the golden capitalism. And that of course
Speaker 1: would mean a shift in the allocation of debt, so
Speaker 1: private debt would fall, government debt would rise. But when
Speaker 1: I modeled it, what the would result I wasn't expecting
Speaker 1: is because this meant there was much more money in
Speaker 1: the hand of workers and middle class people than beforehand.
Speaker 1: The economy went into a boom, and the boom meant
Speaker 1: the debt ratio fell. So we're not worried about the
Speaker 1: level of debt, We're worry about the ratio to GDP
Speaker 1: and the impact of the In my model, the impact
Speaker 1: of this hundred thousand per person was the first of all,
Speaker 1: boost government debt by a hundred percent of GDP and
Speaker 1: dropped privacy the debt by the same amount. But over
Speaker 1: the next ten years or so, the level of debt
Speaker 1: debt dropped back to you had a hundred percent fall
Speaker 1: in the level of total debt from say is that
Speaker 1: the monte about two hundred and six hundred and sixty
Speaker 1: six private debt and a hundred percent government debt. That
Speaker 1: was a reduction in the debt burden. So it's a
Speaker 1: way of doing it that would actually work and stimulate
Speaker 1: the economy. It caused more profits for firms. Even the
Speaker 1: bankers could come out okay because if you sold jubile
Speaker 1: bonds to finance it, the interest rate in the jubile
Speaker 1: bonds could make up with the fact they weren't getting
Speaker 1: interest on the private debt that had been canceled by
Speaker 1: the modern debt tubile. So it's all doable. I justcent
Speaker 1: sure it won't happen. So we were talking about attitudes
Speaker 1: towards UM fiscal spending and how they might be changing,
Speaker 1: but possibly UM not to the degree UM that you'd
Speaker 1: be advocating, Professor Kean. But I know you've been critical
Speaker 1: of the European Union over the years, and I'm curious
Speaker 1: how you feel about it now and whether or not
Speaker 1: you see some attitudes changing towards UM fiscal cohesion. I
Speaker 1: think the European Union was always The European Union was
Speaker 1: a good idea. The Euro was a big mistake, and
Speaker 1: that might aitian. That hasn't changed because the whole logic
Speaker 1: I'm talking about a private and public debt assumes you
Speaker 1: have a treasury and a central bank that can back
Speaker 1: whatever you do with your fiscal policy. Of course, when
Speaker 1: when the country of the European Union joint formed the
Speaker 1: euro they gave that right away, and you have this
Speaker 1: sort of supernational central bank. There's no supernational treasury, there's
Speaker 1: no supernational spending. So in that sense, all those governments
Speaker 1: have turned themselves into effectively being in the same situation
Speaker 1: as a private borrower. And we're seeing how disasters that's been,
Speaker 1: particularly for Greece, but also for Spain and Italy and Portugal.
Speaker 1: There's been a beneficiaries have been the ones who've got
Speaker 1: like Germany. You did very very well, thanks very much,
Speaker 1: out of the fact that countries like Italy could no
Speaker 1: longer devalue their currency when they had a trade deficit
Speaker 1: with Germany. So I'm still a critic of it, And
Speaker 1: of course when you see how it first of all
Speaker 1: handled the COVID outbreak and then the vaccine rollouts, and
Speaker 1: then the idea of providing people with money to enable
Speaker 1: them to pay their financial commitments when they couldn't go
Speaker 1: to work because of COVID. It was it was I
Speaker 1: was going to use the word starting with cluster and
Speaker 1: ending with duck was trying to avoid it. But you
Speaker 1: do nowhere did nowhere near as well as America, which
Speaker 1: is always the model for the European un or even
Speaker 1: UK at that stage, even though the UK managed the
Speaker 1: stuff uprow COVID royally. So I'm no great fan of it.
Speaker 1: What I have seen is again experiences teaching them some lessons.
Speaker 1: All the things they were worried about happening out of
Speaker 1: large levels of government spending haven't occurred. So in that sense,
Speaker 1: there's been a bit more realism creeping into the European Union.
Speaker 1: But it's still one of the first things I would
Speaker 1: do is go back to the Lira, go back to
Speaker 1: the pace, so go back to the mark and just
Speaker 1: use the Euro for internal trade in the European Union.
Speaker 1: But again they seem to be so wet it to
Speaker 1: the idea of this supernational currency that that's again not
Speaker 1: quite as unlikely as a modern that do you believe
Speaker 1: it unfortunately pretty unlikely. You know, before we delve a
Speaker 1: little bit into the climate discussion, and obviously it's you know,
Speaker 1: it's part of this discussion. I want to go back
Speaker 1: to something you said. You know, there's sort of like
Speaker 1: I guess it's like the politics of full employment. Like
Speaker 1: there's that famous essay the Political Aspects of full Employment
Speaker 1: by clerch Key, and he's sort of anticity. You know,
Speaker 1: you said that, you you talked about, Okay, if the
Speaker 1: government were to ever really be in to take a
Speaker 1: permanent fiscal stance where it's always going to maintain aggregate
Speaker 1: demands such that we have full employment somehow, that's when
Speaker 1: the real political fight begins. And of course we're already
Speaker 1: seeing that. I mean we have, like you know, we're
Speaker 1: nowhere near anything resembling full employment in the US right now.
Speaker 1: We always already see major pushback against you I major
Speaker 1: frustration among companies at their ability to hire easily. Right now,
Speaker 1: What what do you see, like how brutal could it get?
Speaker 1: You know, as we get as labor markets get tighter
Speaker 1: and tighter, what do you expect to see or if
Speaker 1: this current person, if this currently currently remarked conditions persist.
Speaker 1: What do you expect to see on the part of
Speaker 1: the sort of like capital class, bosses, etcetera, pushing back
Speaker 1: against these policies. Well, they could will and truly try
Speaker 1: to do that. That's definitely the case. It could be
Speaker 1: quite destructive of the stability you're trying to bring about
Speaker 1: through modern monetary theory to begin with. That's why I
Speaker 1: think you've got to include the idea of an income
Speaker 1: compact at the same time as part of it. It's
Speaker 1: also why I focus on not just looking in terms
Speaker 1: of workers versus bosses, but workers versus bosses versus bankers,
Speaker 1: because we're the real and this is intensive on my
Speaker 1: mathematical modeling of what I call of Minsky's financial instability hypothesis.
Speaker 1: One thing which came out of the model was that
Speaker 1: the rising level of debt where I had had firms
Speaker 1: of borrowing money to actually invest in real factory. So
Speaker 1: it was the sort of borrowing borrowing for the sort
Speaker 1: of reason you'd want to see. But you could have
Speaker 1: such a level of euphoria during a boom that capitalists
Speaker 1: borrow more than they could repact during it. During a slump,
Speaker 1: and you've got this ratcheting up the private deb and
Speaker 1: you finally had a debt crisis. But a side effect
Speaker 1: of this was again was not not built into the models.
Speaker 1: What's called an emergent property is that even though it
Speaker 1: was the firms therefore the capitalists doing the borrowing and
Speaker 1: the workers did no borrowing at all, it was the
Speaker 1: workers who paid for the higher level of private debt
Speaker 1: because increasing the little level of private debt led to
Speaker 1: a falling worker's share of income. So the transfer of
Speaker 1: money wasn't from firms to bankers, it was from workers
Speaker 1: to bankers, and the firms were sitting in the middle.
Speaker 1: So I would want to reduce the power of the
Speaker 1: financial sector and say, if we make the financial sector
Speaker 1: less powerful, less of a burden on both households and firms,
Speaker 1: both workers and capitalists can benefit from that. We've got
Speaker 1: to reduce the size of Wall Street. Wall Street as
Speaker 1: a burden on American capitalism, not a shepherd to the
Speaker 1: golden future. But nonetheless, I can just see if you
Speaker 1: had full employment, and you had the animosity that exists
Speaker 1: now between American workers and American core operations after last
Speaker 1: thirty or forty years, if you gave power to the
Speaker 1: workers by having full employment. There could be a lot
Speaker 1: of we're going to get even now type attitudes amongst
Speaker 1: workers in terms of you know, you want me to
Speaker 1: come and work for you, pay me more money. There
Speaker 1: there could be those those things leading to a conflictual
Speaker 1: approach and then coming back and trying to screw the
Speaker 1: bargaining power of the workers by bringing back unemployment once more. So,
Speaker 1: by no means do I see a rosy future where
Speaker 1: everybody's holding hands and singing coombay are. This could be
Speaker 1: unless it's done sensibly, you could you could have an
Speaker 1: outbreak of political conflict coming out of the change and
Speaker 1: the power balance that appreciating what mm T means about
Speaker 1: government spending and the capacity to generate full employment actually
Speaker 1: means okay. So speaking of non rosy futures, that's probably
Speaker 1: the perfect segue to finally talk about climate change. So
Speaker 1: you have been incredibly interested in this topic and also
Speaker 1: incredibly scathing when it comes to Some other economists work
Speaker 1: on the actual price or cost of climate change, including
Speaker 1: a certain Pulitzer Prize winning economist who's done a lot
Speaker 1: of work in the Pulitzer Prize is close It was
Speaker 1: a work of fiction, but he's actually in a William
Speaker 1: Northhouse Norbel Prize, which itself is a worth of fiction
Speaker 1: because it's not a Norbel Prize. I'm sorry this is
Speaker 1: as a good slips the right line, though I think
Speaker 1: we stick with that. The Pulitzes are great because it
Speaker 1: actually it's a work of fiction. The Norbel Prize and
Speaker 1: Economics is not a Norbel Prize, and what Lord House
Speaker 1: does is by more is fiction than anything related to fact.
Speaker 1: My media bias showing here entirely focused on one day
Speaker 1: Joe Pulitzer for all thoughts. Okay, I have a bunch
Speaker 1: of questions on this, but like one, why your intense
Speaker 1: interest in the space, and secondly, what is it about
Speaker 1: economics in your traditional economics in your opinion, that makes
Speaker 1: it ill equipped to deal with climate change or to
Speaker 1: model it propperately? Well, the first question, I've been fascinated
Speaker 1: by how we actually include the physical reality of production
Speaker 1: and economic models ever since the seventies, when I first
Speaker 1: became a critic of the main stam economics. Of course,
Speaker 1: at the same time Limits to Growth came out, which
Speaker 1: I thought was a superb piece of work. I understand
Speaker 1: system of dynamics, and I was doing working as doing
Speaker 1: mathematical studies at the time, so I thought it was
Speaker 1: superb and then economists trashed the hell out of it.
Speaker 1: And the economist who did most to trash it was
Speaker 1: one William Nordhouse who wrote a paper called Measurement without Data.
Speaker 1: So that was the beginning of my interests. I didn't
Speaker 1: engage in the academic work on it until two thousand
Speaker 1: and sixteen or seventeen, when I was working with some economists,
Speaker 1: a guy called Bob Airs, who's a physicist who has
Speaker 1: been trying to bring energy into economics for a long
Speaker 1: long time. And then we're working with Bob. I was saying,
Speaker 1: how do we bring the role of energy into how
Speaker 1: economists think about production? Because if you look at not
Speaker 1: just the way that neoclassicals do, but even my more
Speaker 1: realistic post Kanzian school of thought, they might output is
Speaker 1: being generated by labor and capital. Now you can't produce
Speaker 1: anything without energy. So the fact that it wasn't there
Speaker 1: just didn't make any sense to me, and it pushes
Speaker 1: how do you bring it insensibly? And what would happen
Speaker 1: if you look at work by Stielets and Solo To
Speaker 1: very mainstream economist back on the seventies, they said, well,
Speaker 1: let's just add energy in as another factor of production.
Speaker 1: You put labor and capital and energy together and you
Speaker 1: get output. Well, yeah, okay, I'm going to throw I'm
Speaker 1: going to throw a hand grenade into a factory and
Speaker 1: see how many widgets I can produce that way. You
Speaker 1: can't just add energy like you put machines or workers
Speaker 1: inside it and work. Walking through Bob's house one day,
Speaker 1: which is full of statues, a little flash of insight
Speaker 1: popped in my mind. Labor without energy as a corpse,
Speaker 1: capital without energy as a sculpture. In other words, energy
Speaker 1: is needed as an input to both labor and capital
Speaker 1: to allow them to do work. Ten minutes later, I've
Speaker 1: done this idea of bringing energy into models of can
Speaker 1: models of production. So I thought, with that done, the
Speaker 1: paper was published in two thousand and nineteen with the
Speaker 1: innocuous title of the Note on the Role of Energy
Speaker 1: and Production, I thought it was time for me to
Speaker 1: engage in this discussion about climate change. And then in
Speaker 1: two thousand and eighteen Northhouse got the so called Nobel
Speaker 1: for it. Well, and my initial reaction was, at least,
Speaker 1: they're giving a Nobel Prize for environmental work. But then
Speaker 1: I thought I'd better read the literature, which is I
Speaker 1: always dive in even if I can't stand near classical economics.
Speaker 1: I still read it, and I couldn't believe the garbage
Speaker 1: I was reading. Quite frankly, I'm not going to be
Speaker 1: polite about this. This is the worst work I've read
Speaker 1: in fifty years, and the fact that it was given
Speaker 1: a Nobel Prize is not a reason to trust the research.
Speaker 1: It's a reason to shut the Nobel Prize down under
Speaker 1: shut mainstream economics down as well. It's that bad. So
Speaker 1: what is it for people who aren't familiar with the
Speaker 1: work once you've daved into it. What are the What
Speaker 1: are the claims that Nordhost is making that you think
Speaker 1: it's so discrediting of the Nobel Prize. Well, the main
Speaker 1: climb claim that he makes is how trivial climate change
Speaker 1: is going to have you have an impact on the economy.
Speaker 1: So in his Nobel Price speech, which people can find
Speaker 1: on the web quite easily, he said that the with
Speaker 1: no abatement of the impact of climate change, just letting
Speaker 1: the economy roll on. If there if there were no
Speaker 1: damages from climate change at all, then you get a
Speaker 1: certain level of GDP if you include the damages from
Speaker 1: climate change on our productive capabilities, a six degree increase
Speaker 1: in temperature would cause an eight point nine fall in
Speaker 1: g d P six degrees temperature. This is that's published
Speaker 1: in the paper in the American Economic Review, one of
Speaker 1: these specialist journals, in two thousand and nineteen, I think,
Speaker 1: and in his Nobel Price speech he actually says the
Speaker 1: optimal temperature changes of four degree increase in temperature over
Speaker 1: pre industrial levels. Now, I just I couldn't believe it.
Speaker 1: How the hell does you reach those results? So I
Speaker 1: dived into his research, and there's a particular paper in
Speaker 1: called too Slower or Not to Slower the Econimics of
Speaker 1: Global Warming or Economics of Climate Change, And in that
Speaker 1: he assumed, simply assumed that seven percent of industry would
Speaker 1: be unaffected by climate change because it happens in what
Speaker 1: he called carefully controlled environments. That he lumped all manufacturing,
Speaker 1: all services, all of government spending. He even lumped mining
Speaker 1: in there. The only thing those things have in common
Speaker 1: is they happen undercover. Except you know, he didn't everythink
Speaker 1: about open cut mining. Obviously, He's simply saying a root
Speaker 1: will protect you from climate change. Well, I'd like the
Speaker 1: people of Alberta and Calgary and Vancouver and Spokane to
Speaker 1: come and have a conversation with William Nordhouse about how
Speaker 1: much of root protects you from climate change. It is
Speaker 1: an absurd assumption. But this, this is what economists do
Speaker 1: all the time. They want to They make what they
Speaker 1: call simplifying assumptions, which actually, if the simplifying assumption is
Speaker 1: a genuine superfyling assumption is false, you have to you
Speaker 1: have a slightly more complicated model if if these assumptions
Speaker 1: are wrong, the whole world is different. And that's the
Speaker 1: sort of assumption they defended simplifying. So you did that
Speaker 1: first of all, he said, simplifying assumption a root will
Speaker 1: protect you from climate change? And then another one he
Speaker 1: did said, well, we can use the current relationship between
Speaker 1: temperature and income across the United States to say what's
Speaker 1: going to be the impact of climate change, as if
Speaker 1: what we're experiencing now in terms of the before climate
Speaker 1: change hit, in the fact that Florida is poorer than
Speaker 1: New York, and New York is richer than North Dakota
Speaker 1: though the temperature differences there. He said, you know, you
Speaker 1: might get an attempt to see increase in GDP if
Speaker 1: you move from North Dakota to New York, and at
Speaker 1: ten per cent fall if you go from New York
Speaker 1: to Florida. That's all that's going to happen. If we
Speaker 1: have a six degree increase in temperature to get us
Speaker 1: from North Dakota to New York and another six to
Speaker 1: get us from New York to miam that is insanely stupid.
Speaker 1: And those assumptions are essential part of coming out and
Speaker 1: saying that a six degree increase in temperature will only
Speaker 1: reduce to PAY by eight points. No interesting, I think
Speaker 1: it was, it'll eliminate our spaces. That's closely to what
Speaker 1: the impact will be. So there's something you said there
Speaker 1: about traditional economics, uh, not dealing that well with the physical.
Speaker 1: And this is also something we've been talking a lot
Speaker 1: about on odd lots like this idea that for instance, UM,
Speaker 1: some classical ideas of the benefits of free trade for instance,
Speaker 1: and competitive advantage don't actually take into account transport costs.
Speaker 1: So in a year like when we suddenly see um
Speaker 1: borders closed and gridlock and shipping and shipping costs going
Speaker 1: up quite a lot, Uh, classical economics isn't well equipped
Speaker 1: to deal with that, or to work around it, or
Speaker 1: to sort of synthesize it. I'm wondering, are you looking
Speaker 1: at that aspect of the economy as well, like this
Speaker 1: idea of things being more complex than traditional economics has allowed.
Speaker 1: Is that something that has proven in your mind? Oh? Well,
Speaker 1: and truly yeah. I mean the whole idea of the
Speaker 1: fact we've got these incredibly long supply chains when they're
Speaker 1: up to a hundred countries involved in manufacturing an Apple iPhone,
Speaker 1: or the Apple iPhone stops being made when cloud cloak
Speaker 1: COVID hits. There's an incredible fragility in the economy we've
Speaker 1: designed to make it incredibly efficient. Efficiency is the enemy
Speaker 1: of resilience. An efficient bear has no fact when it
Speaker 1: goes into hibernation and therefore starts. So you have to
Speaker 1: have buffers. You have to have surplus resources to be available,
Speaker 1: surplus beds, for example, so that when when climb, when
Speaker 1: you go pandemic hits, you've got room and you've got
Speaker 1: root extra intensive care beds. Instead. We've seen the panic
Speaker 1: we've been through because we trimmed it down to the
Speaker 1: stage where there was only slightly more supply than you
Speaker 1: would get from demand in a normal situation, normally doesn't
Speaker 1: exist anymore. So yeah, it's it's incredibly ignorant about the
Speaker 1: physical world. And this is why they can make the
Speaker 1: stupid assumptions they make about manufacturing. All you need is
Speaker 1: a roof to protect you from climate change. Well, if
Speaker 1: you can't get energy, your faculr machine stop turning. If
Speaker 1: you can't get workers, because the temperature where you're living
Speaker 1: is simply incompatible with human life, there will be no
Speaker 1: workers to manage those machines. So there's a there's a
Speaker 1: physical unreality to mainstream economics, and that's why one part
Speaker 1: of another group called the Institute for Biophysical Economics trying
Speaker 1: to say we have to build a physically grounded, biologically
Speaker 1: realistic model of the economy because we certainly haven't got
Speaker 1: it now, and that's why we've let ourselves up the
Speaker 1: climate change guid garden path. Yeah, I want to talk
Speaker 1: more about that because you know, you mentioned and you're
Speaker 1: sort of like the idea of like, okay, capital as
Speaker 1: we know it physical capital without energy is is a
Speaker 1: statue which I thought it was a really nice way
Speaker 1: to put it, and that we can't just think of
Speaker 1: like energy as yet, you know, wrap that into capital
Speaker 1: or just sort of another one of the factors of production.
Speaker 1: What happens when you introduce energy into the equation, So
Speaker 1: as you describe, okay, we need to labor, capital and energy,
Speaker 1: what are the new outputs in sort of like the
Speaker 1: models once you break it out that way, well, once
Speaker 1: you get like, for example, if you know the what
Speaker 1: they call the cab Douglas production function that the mainstream uses.
Speaker 1: One of the mysteries they've had for a long time
Speaker 1: is that that that that attributes output to being a
Speaker 1: factor of your technology times labor times capital. And they
Speaker 1: always thought that, you know, the labor and capital would
Speaker 1: be the main sources of change and apple. But the
Speaker 1: phone is actually technology, and they call it what they
Speaker 1: call the solo residual. Now, when I put my energy
Speaker 1: as an input to labor and capital into that function,
Speaker 1: what I get is that the so called technology, which
Speaker 1: it still is obviously a form of issue of technology,
Speaker 1: is the energy consumption level of the typical machine of
Speaker 1: a particular generation. So if you look at the energy
Speaker 1: consumption of a James what steam engine, that was about
Speaker 1: ten tons of cold per day. If you look at
Speaker 1: the elon Musk's Falcon rocket, that's about effectively ten tons
Speaker 1: of kerosene per second. So that's where the dramatic increase
Speaker 1: and income has come from. We really are benefiting out
Speaker 1: of all of us work as capitalist bank as the
Speaker 1: works are benefiting out of using far more energy for production.
Speaker 1: But what that then gives you is, well, how sustainable
Speaker 1: is that? And when you have energy as an input
Speaker 1: to production, in this sense you also get the necessity
Speaker 1: of both waste energy and waste materials. You can't produce
Speaker 1: output without energy and matter. You therefore can't produce useful
Speaker 1: output without waste energy and waste matter dumping into the environment.
Speaker 1: So you then have a link between the economy and
Speaker 1: your ecology. And of course the question is there's many
Speaker 1: many questions out of it. What is the impact of
Speaker 1: using all that energy and using all that matter on
Speaker 1: the sustainability of the ecosystem And you would be thinking
Speaker 1: about that right from the outset. We have been completely
Speaker 1: blindsided by that over the last fifty years, and in
Speaker 1: the perfectly two generations of humans, we've troubled or quadrupled
Speaker 1: alert on the planet. And that's where we're seeing things
Speaker 1: like the impact of climate change driving up temperature. That's
Speaker 1: carbon dioxide is one of the forms of ways to
Speaker 1: we dump into the environment, and we're now seeing the
Speaker 1: impact of that in an incontrovertible way in Canada right now.
Speaker 1: But you therefore have to think in terms of the
Speaker 1: physical constraints of a production system on a planet, and
Speaker 1: we have completely ignored that and we're now paying for it.
Speaker 1: Given that framework, what's your solution for it then, Because
Speaker 1: of course the challenge here is always that, um, well,
Speaker 1: first of all, people don't seem to appreciate the physical
Speaker 1: aspect of economic growth. But secondly, uh, it's that sort
Speaker 1: of classic commons problem right where everyone can abuse the
Speaker 1: environment because they individually benefit from it. So how do
Speaker 1: you actually fix that? Well, I think we could have
Speaker 1: fixed it if we listened to the limits to growth
Speaker 1: arguments fifty years ago. We could have fixed it gradually
Speaker 1: using market mechanisms like carbon taxes and carbon pricing would
Speaker 1: have been feasible, and also constraints on population growth and
Speaker 1: a whole range of other issues that when the limits
Speaker 1: growth through their simulations, they had about I think about
Speaker 1: fourteen simulations, and three or four of them led to
Speaker 1: a sustainable future where we continued having up to three
Speaker 1: times the standard of living. The average standard living they
Speaker 1: got for the whole planet was about three times the
Speaker 1: standard living at an American in nineteen seventy, and since
Speaker 1: Americans in nine and seventy, most of the martine better
Speaker 1: off today than they were back in nine in seventy.
Speaker 1: Given the skew and income distribution, that would be a
Speaker 1: pretty a pretty darn nice world now. Instead, because we're
Speaker 1: delayed it for fifty years and troubled or quadrupled a
Speaker 1: load on the planet, I think we're in massive overshirt
Speaker 1: and to get to a sustainable level, we've got to
Speaker 1: go backwards. We have to have our people are calling
Speaker 1: the growth, and we're not going to do it voluntarily. Again.
Speaker 1: I think we'll do it because we're forced into it
Speaker 1: with events like the Canadian heat wave and worse to come.
Speaker 1: I can't that that will be something which has to
Speaker 1: be done by a command economy. You can't do it
Speaker 1: using market mechanisms. So I think in that sense we've
Speaker 1: got ourselves into another war. But it's not that it's
Speaker 1: not the war on climate. It's a war to restore
Speaker 1: the climate, and that means really a war on our
Speaker 1: over consumption on the planet. And you know, the only
Speaker 1: way I can see it happening is people that people
Speaker 1: truly realize that this is an existential threat, not for
Speaker 1: their children or their children shouldn it's an existential threat
Speaker 1: for anybody alive today. Thinking back to the beginning of
Speaker 1: the conversation, of course, and you know, there has been
Speaker 1: like there's a big turning point, perhaps from a fiscal perspective,
Speaker 1: in rejecting austerity. And you pointed out to that, you know,
Speaker 1: at times of like extreme crisis, such as prior to wars,
Speaker 1: necessity changes people's perception of like what the government is
Speaker 1: capable of doing. And I think that, like you know,
Speaker 1: right now the political debate around climate there seems to
Speaker 1: be a lot of impulse to address it, but not
Speaker 1: a lot of impulse to do what you've just described,
Speaker 1: which is essentially a form of de facto austerity, except
Speaker 1: it's not about um. The pre you know, the pretext
Speaker 1: or the argument is not fiscal sustainability but sort of
Speaker 1: ecological sustainability, Like how do you build the politics though
Speaker 1: for what you're describing, it would for most people like
Speaker 1: be uh, you know, a sort of an austerity regime.
Speaker 1: It won't be done in any voluntary sense. I mean people,
Speaker 1: most people clearly uninterested in economics. I've got, I've got
Speaker 1: used at the time. It's only obsessive like us who
Speaker 1: really want to know how the economy operates at all times.
Speaker 1: Most people a bit like me with a car. I
Speaker 1: only want to know how the energy works when it
Speaker 1: stops working, you know, Otherwise ourssum it's just going to
Speaker 1: continue ticking over and I hop in the car and
Speaker 1: turn the engine on and driveway on going and turn
Speaker 1: it off again. And I don't think about all the
Speaker 1: complicated mechanics involved in making that possible. So the same
Speaker 1: thing applies to the economy for most people, and therefore
Speaker 1: they can't see any need to restrain their own spending.
Speaker 1: They won't voluntarily turned vegan, they won't voluntarily walk rather
Speaker 1: than hop in the car and drive to the local shop.
Speaker 1: It's going to be a thing, I think, Holly hell,
Speaker 1: if I don't do that, we're all going to die. Now.
Speaker 1: If you look back to the the the Second World War,
Speaker 1: that realization hit England after the Phony War period, when
Speaker 1: they had to suddenly evacuate what was left to their
Speaker 1: army out of Dunkirk, and you had very rapid rapid
Speaker 1: procession Pole and falls, France falls and suddenly really held
Speaker 1: us is serious. We've got to throw all our resources
Speaker 1: at trying to defeat this enemy. And then in that
Speaker 1: situation people accepted rational. Now, I think the same thing
Speaker 1: is going to apply here. We are going to need
Speaker 1: some serious crisis, and then when it does, people will
Speaker 1: suddenly realize this isn't something for two or three centuries
Speaker 1: in the future, which is what William Nordhouse literally says.
Speaker 1: He says limited small damages, relatively small damages in the
Speaker 1: next two centuries. That's in one of his published papers.
Speaker 1: It's not relative small damages. They're huge damages. They're becoming
Speaker 1: if we're lucky in the next thirty years, if we're
Speaker 1: unlucky in the next ten and when that realization hits
Speaker 1: then it's an existential threat. Then in those situations, people
Speaker 1: are willing to accept constraints on what they can do
Speaker 1: to drastically reduce our level of consumption and give us
Speaker 1: some possibility of throwing our resources rather than producing more
Speaker 1: and more plastic furniture. All this junk we we consume
Speaker 1: drastically reduced. It is just a center true consumption, and
Speaker 1: all our resources are directed at creating non carbon generating
Speaker 1: energy systems and reducing our load on the planet, trying
Speaker 1: to restore the biodiversity, to restore the things like the
Speaker 1: artic which we're obviously losing, the Arctic summer see us,
Speaker 1: we're losing right now. Everything has to be going to
Speaker 1: VACTU trying to restore the stability of the climate that
Speaker 1: we have just with the Holocene climate that we evolved
Speaker 1: our societies and we've got to rebuild that for our
Speaker 1: societies be able to continue existing. Only once that realization
Speaker 1: hits I think will anything be done. And in that case,
Speaker 1: we're not going to be getting there ahead of it.
Speaker 1: We're going to be in cata catastrophe catch up mode.
Speaker 1: I want to see it happened as soon as possible,
Speaker 1: just so we reverse direction before it gets even worse.
Speaker 1: What about this sort of like liberal optimists would say, well,
Speaker 1: nuclear power and carbon sequestration and other technologies that can
Speaker 1: address some of these things without the sort of like
Speaker 1: extreme austerity regime that you're describing. I assume your skeptical
Speaker 1: of those paths. What I'd like to hear why yeah.
Speaker 1: I mean to two reasons. First of all, where's the
Speaker 1: engineers for this. I have a lot of engineers on
Speaker 1: my Patreon website, and some of them are totally pro
Speaker 1: solar and some are totally pro nuclear. And I've come
Speaker 1: out in a balance of both saying, yes, if we
Speaker 1: had a well designed energy system, we'd have both nuclear
Speaker 1: things like thorium reactors rather than uranium, but those and
Speaker 1: and lots of solar power and wind as well. But
Speaker 1: the reality is we haven't produced one thorium reactor since
Speaker 1: the very first trial one was done before America scrapped
Speaker 1: the thorium for uranium reactors because that way you could
Speaker 1: make nuclear weapons. So we simply don't have the technology
Speaker 1: or the engineers able to produce them as rapidly as
Speaker 1: we need to. And then it's actually easier to produce
Speaker 1: the solar power, because so long as we can make
Speaker 1: the solar cells out of the factories, the work of
Speaker 1: installing them as trivial compared to the work of building
Speaker 1: and installing a thorium nuclear reactor. So in that sense,
Speaker 1: I see solar is a more immediate way of addressing
Speaker 1: our need to get away from coal. But the other
Speaker 1: trouble is it isn't just carbon dioxide. The whole focus
Speaker 1: on carbon diox that actually suits to some extent the
Speaker 1: climate change trivial arcers like Born Lomborg and Norderhouse and
Speaker 1: all that mob because it's leading out things like an
Speaker 1: impact on biodiversity. Now you may you may that have
Speaker 1: seen this was a segment recently on snot ocean snot
Speaker 1: off the coast of Turkey, huge disturbance to the bio
Speaker 1: the biological patterns in one of the ocean between the
Speaker 1: Mediterranean and the and the Black Sea. And this is
Speaker 1: the sort of damage we're doing by the runoffs we have,
Speaker 1: the fertilizer runoffs are putting into the ocean, the way
Speaker 1: we're wiping out species. That layer of snot is in
Speaker 1: some places apparently up to a meter thick. It means
Speaker 1: that any fishment ooth that are going to starve have
Speaker 1: lose oxygen and and we're going to have mass die offs.
Speaker 1: So it isn't just the carbon, It isn't just the
Speaker 1: energy issue. It's the whole pressure of putting on the
Speaker 1: boss sphere and we have to restrain ourselves in ways
Speaker 1: that humanity in general, it isn't just under capitalism, humanity
Speaker 1: in general has never practiced restraint, and until we do,
Speaker 1: we're not going to have a sustainable future on the planet. Sorry,
Speaker 1: I have one more question based on that, but a
Speaker 1: big part of our conversation has been how do you
Speaker 1: change attitudes, whether it's towards um physical capacity and the deficit,
Speaker 1: or towards climate change, or towards the relationship between capital
Speaker 1: and labor. What do you think is needed to change
Speaker 1: or to shake up classical economics and maybe change the
Speaker 1: way um economists are are viewing a lot of these issues.
Speaker 1: I think economists wal lost cause, frankly, because once you
Speaker 1: believe this stuff, it's a self contan belief system. And
Speaker 1: this is not just being critical of economists, it's something
Speaker 1: about humanity as well. Max Plank, who's the guy who
Speaker 1: discovered quantum mechanics by solving what was called the black
Speaker 1: body radiation problem using complex mathematics. He realized that part
Speaker 1: of the solution involved energy being discreet coming and what
Speaker 1: we now call quanta, rather than being continuous, which was
Speaker 1: the assumption of the Maxwellian physicists that he was raised
Speaker 1: and all these colleagues were Maxwellian physicists. Now, he tried
Speaker 1: to persuade his fellows that, you know, they had to
Speaker 1: think of energy and discreete units of quanta rather than
Speaker 1: being smooth, and they simply couldn't do it. And he
Speaker 1: finally wrote a wonderful line which is summarized by saying
Speaker 1: science advances one funeral at a time. That works in
Speaker 1: sciences because the experiments that prove that the Maxwellian thing
Speaker 1: didn't work, you can do those experiments thaying it exactly
Speaker 1: the same results. You can reproduce what sciences did back
Speaker 1: then to find that the old theory doesn't work. And
Speaker 1: so when students come in, they've got these professors who
Speaker 1: are still teaching them the old stuff. But these students
Speaker 1: are aware of that us that the old stuff us
Speaker 1: and solve this new problem. And so when the professors
Speaker 1: get to the stage they've got to replace themselves. They
Speaker 1: retire or they die. They've got a higher new star
Speaker 1: students as staff. And those students are dedicated in a
Speaker 1: new way of thinking. That's why his science progresses one
Speaker 1: funeral at a time. But in economics, you can have
Speaker 1: a crisis like the Great Depression, and it becomes a
Speaker 1: history nobody knows about it. You can't reproduce the Great depression,
Speaker 1: we have the Great recession. You can't reproduce that and
Speaker 1: see whether postcamcing approach would work better than a new
Speaker 1: classical approach. So we tend to forget history, We forget
Speaker 1: the experience we've done in the real world in which
Speaker 1: we live, and then new people come along and get
Speaker 1: taught by the same old neoclassical lot. And the neo
Speaker 1: classical vision is a beautiful vision of an effectively an
Speaker 1: anarchist society with no power to corrupt everything, and where
Speaker 1: there's no need for government. It's all done by the market,
Speaker 1: and it's all nice, anonymous and egalitarian. And that is
Speaker 1: such a seductive vision that these nerds who come along
Speaker 1: and fall for this stuff end up reproducing it again.
Speaker 1: You can't get rid of them. So I say economics
Speaker 1: does not progress one funeral at the time. We have
Speaker 1: to replace a lock stock and barrel. And I'd be
Speaker 1: sending these economists off to go plant trees somewhere, or
Speaker 1: maybe teach a few mathematics classes to history students, rather
Speaker 1: than you can't convince them, you can't convert them. But
Speaker 1: with the last people to realize the world has changed, well,
Speaker 1: Professor Keen an absolute pleasure speaking with you. Thank you
Speaker 1: so much for coming on odd Blots and really fascinating conversation.
Speaker 1: So thank you and thank you for the inside of
Speaker 1: a lot of Funapple. Wasn't it got a bit hairy? There? Have?
Speaker 1: It didn't get to Harry? No, that was great, really good. Okay, great, Yeah,
Speaker 1: it's really good. Thanks so much, Chess So Joe, uh,
Speaker 1: really a fascinating conversation and there's so many bits and
Speaker 1: pieces to pull out of it. One thing I really
Speaker 1: liked well, in addition to Professor Keane's emphasis on the physical,
Speaker 1: which again has been one of our themes for this year,
Speaker 1: this idea that economics actually doesn't do a very good
Speaker 1: job of taking that into account. But I really like
Speaker 1: the distinction between public and private debt, and if you
Speaker 1: just look at the way the world works, it's absolutely
Speaker 1: true that like classical economics seems to put much more
Speaker 1: emphasis on public debt than it does private debt. Like
Speaker 1: even if you look at the European Union and things
Speaker 1: like the Masters Treaty, like that is all about constraining
Speaker 1: government debt and doesn't say anything about private debt. It's
Speaker 1: incredible how backwards so many people's intuitions are about I mean,
Speaker 1: it couldn't be more spotted. There's so much, as you say,
Speaker 1: the Mastic Treaty embedded in the law of this idea
Speaker 1: that like the public debt specifically must be contained, so
Speaker 1: much you know, fearmongering about like fiscal expansion and having
Speaker 1: to pay for it, etcetera. It's almost like it's it
Speaker 1: really feels like it's a hundred and eighty degrees backwards
Speaker 1: when you look at you know, any crisis, how often
Speaker 1: it originates in the banking system, the private sector, household debt.
Speaker 1: It's so forth. It's kind of like amazing, how consistently
Speaker 1: back how totally backwards. A lot of people's and tuitions
Speaker 1: are about this totally And I'm just thinking back to
Speaker 1: like Spain during the Eurozone crisis, the problems that were
Speaker 1: entirely on the banking slash private debt side, and meanwhile
Speaker 1: the EU is sort of wringing its hands over government
Speaker 1: debt ratings and things like that in fiscal austerity. It's
Speaker 1: I kind of wish I'd known of Professor Keane's work
Speaker 1: back in you know, I guess two thousand and twelve
Speaker 1: like that would have been a really helpful framework for
Speaker 1: actually viewing the Eurozone crisis. And like, you know, I
Speaker 1: really think I've said it many times. It's so like
Speaker 1: I do think that within sort of like more like
Speaker 1: eellectual economics, economic circles, there does seem to be like
Speaker 1: a certain sneering at accounting. That's just like what the
Speaker 1: person in the back office does, like balance his books.
Speaker 1: But it's consistent. Who is it a Stephen Clapham. Clapham
Speaker 1: we talked to, Like so many of the most interesting
Speaker 1: conversations we have are rooted in accounting. I want to
Speaker 1: just you know, like going back to like the climate portion,
Speaker 1: because it's really interesting. Like I do feel like there
Speaker 1: is a lot of like I would say again, sort
Speaker 1: of liberal climate optimism that it's sort of like we
Speaker 1: can get two things. I want green new deal. Green
Speaker 1: new deal implies a new deal everyone's jobs, sort of
Speaker 1: a message of abundant green. We can do it in
Speaker 1: a way that um, you know, environmentally friendly. And Professor
Speaker 1: King's message is at this point and I think, you know,
Speaker 1: no one wants to hear it, and I don't. I
Speaker 1: don't know. I don't have an opinion whether it's right
Speaker 1: or wrong. But no one wants to hear. That's essentially
Speaker 1: like the only message, like extreme austerity is the answer
Speaker 1: to the sort of too ecological crisis. Well, it's again
Speaker 1: like sort of totally at odds with classical economics, which
Speaker 1: is all about economic growth, and then suddenly you switch
Speaker 1: into well, actually, in order to save the planet, um
Speaker 1: and ensure that we all survive in the long run,
Speaker 1: ha ha ha um, you have to restrain economic growth.
Speaker 1: Like I don't know, and yet you kind of made
Speaker 1: this point. But yet people, people seem comfortable sometimes, or
Speaker 1: at least in classical economics, people seem comfortable with the
Speaker 1: idea of fiscal austerity in order to preserve the budget,
Speaker 1: and yet like there seems to be a lot of
Speaker 1: difficulty with the idea of physical austerity in order to
Speaker 1: save the planet and preserve the planet, or just sort
Speaker 1: of consumption austerity. More broadly, it's like fiscal expansion consumption austerity.
Speaker 1: I loved um, And again I thought it was a
Speaker 1: very interesting phraseology or characterization, like neo classical economics as
Speaker 1: actually like a defect of form of like anarchy. And
Speaker 1: I hadn't really thought about that before. But if you're
Speaker 1: sort of like assumption is then in this sort of
Speaker 1: like the natural state of nature is for things to
Speaker 1: come into balance, right, for things to come into balance,
Speaker 1: that two lines intersect on a chart, and there's the
Speaker 1: price that if we just let that happen, then everything
Speaker 1: balances out. We just sort of like what neoclassical economics
Speaker 1: is rooted in these assumptions of equilibrium, But that is
Speaker 1: also like implicitly anarchist, because then the best the government
Speaker 1: can do at that point is create distortions and create
Speaker 1: you know, or maybe necessary but unfortunate distortions in what
Speaker 1: would otherwise be this perfect harmony. Is sort of this
Speaker 1: very interesting, anyway, fascinating, provocative conversation with Professor Kan. Yeah. Absolutely, um.
Speaker 1: It reminds me a lot of that The anarchy point
Speaker 1: reminds me a lot of that quote about you know,
Speaker 1: things fall apart the center cannot hold. Okay, shall we
Speaker 1: leave it there, Let's see it there? All right. This
Speaker 1: has been another episode of the All Thoughts Podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe Wisn'tal. You can follow me on
Speaker 1: Twitter at the Stalwart. Follow our guest on Twitter, Steve Keane.
Speaker 1: He's at Prof Steve Keane. Follow our producer Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesca Levi at Francesca Today, and check out all of
Speaker 1: our podcasts on Twitter at Bloomberg onto the handle at podcasts.
Speaker 1: Thanks for listening.