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

Introduction (00:00:00)

• Steve Keen discusses Marx's political philosophy and economic argument that the tendency for the rate of profit to fall would lead to socialism.

• Marx believed that the advanced economies would be the first to undergo a revolution, while primitive economies would need to go through a capitalist transition.

• The Mensheviks believed that Russia had to go through a capitalist phase before becoming socialist, while the Bolsheviks believed they could achieve socialism in one go.

• Keen criticizes much of modern economics and proposes new theories and models that integrate ideas from various thinkers, including Karl Marx, John Maynard Keynes, and Hyman Minsky.

• He is a scholar of Karl Marx's work and has written several books, including "The New Economics and Manifesto" and "Debunking Economics."

Defining economics (00:01:51)

• The goal of economics should be to understand and maintain human civilization, but it has deviated from this purpose.

• Economics should adopt the tools of systems engineering, such as differential equations, to accurately model aggregate economic behavior.

• The current use of difference equations in economics is inadequate for aggregate modeling and hinders the discipline's ability to understand and maintain human civilization.

• The world is complex, and the human mind, economy, and biosphere are some of the most complex systems on Earth.

• Economics is a fascinating complex system made up of human minds, which are difficult to model but can be approximated.

Schools of economics (00:08:50)

• The Physiocrats believed that wealth comes from the sun's absorption by the soil and plants, while Adam Smith argued that value comes from labor, not land, and that the price of goods reflects the effort involved in their production.

• Karl Marx critiqued capitalism, transforming the classical school of economics into a critique of the system.

• The neoclassical school defends capitalism using the subjective theory of value, which states that value is determined by individual satisfaction from different objects. This school ignores the role of money in the economy, assuming that the economy operates through barter and that money plays no creative role.

• Keynesian economics acknowledges capitalism's instability but lacks sufficient mathematical tools to fully capture its dynamics.

• Austrian economics, a rebellion against the classical school, focuses on the market's tendency to reach equilibrium but also its constant disturbance from it. Joseph Schumpeter expanded on these ideas, emphasizing the role of money and entrepreneurs in capitalism and viewing deviations from equilibrium as sources of innovation and vitality.

• Modern Monetary Theory (MMT) recognizes money as a product of double-entry bookkeeping, not a commodity but a claim on someone else, fundamentally the liabilities of the banking sector.

• Private banks create money when they lend money, increasing their liabilities (deposits) and assets (loans). The government creates money when it runs a deficit, spending more than it taxes, increasing people's bank accounts and the reserves of private banks at the central bank.

• Money creation is essential for economic growth, development, and commerce, allowing for the exchange of goods and services.

• The sum total of all financial assets and liabilities is zero, meaning that for every asset, there is a corresponding liability. Money is the liability side of the banking sector, while assets can be created by banks or the government.

• In a monetary economy, transactions involve the buyer, seller, and bank, with money being a triangular transaction involving the exchange of promises to pay between these parties.

Karl Marx (00:33:10)

• Steve Keen admires Karl Marx's economic thinking despite their differing views.

• Influenced by Hegel's philosophy of change, Marx's ideas were introduced to Keen during a strike at Sydney University.

• Keen and other students studied Marx's "Capital" during a summer break, leading to the establishment of a political economy department at the university.

• Keen challenges Marx's labor theory of value, arguing that machinery and capital also contribute to a commodity's value.

• Keen proposes an alternative interpretation of Marx's dialectic, focusing on the foreground (capacity to work) and background (other human qualities) aspects of a unity.

• In capitalism, a commodity's foreground is its exchange value, while the background is its use value. Both are necessary for a commodity's success.

• In feudalism, a commodity's focus is on utility, while in capitalism, it shifts to exchange value, making use value necessary but irrelevant to pricing.

• The neoclassical theory's price ratio determination, based on marginal utilities and costs, is criticized by Marx as a concept from a previous society without a real production mechanism.

• Marx's objective utility model focuses on a commodity's function, while the neoclassical subjective model relies on individual feelings and preferences.

• Marx argues that marginal utility, which includes subjective valuation in pricing, is a misrepresentation of actual change in a capitalist economy where large-scale production is for sale and has no utility to the seller unless sold.

• Marx's labor theory of value states that profit arises from the difference between the cost of production (subsistence wage) and the value created by workers' labor (surplus value).

• In capitalism, labor is a commodity with exchange value (cost of production) and use value (the work performed).

• Treating workers as commodities creates tension between their role as a commodity and their humanity.

• Marx believed that workers' demands for more than their value would eventually lead to political and economic changes, potentially ending capitalism.

Labor theory of value (00:51:24)

• The labor theory of value, proposed by Karl Marx, states that the value of a commodity is determined by the amount of labor that goes into producing it.

• Marx initially believed that labor is the only commodity with both commodity and commodity power but later revised his theory to argue that the value of a commodity is determined by the tension between its use value and exchange value.

• Steve Keen emphasizes the importance of reading Marx's works chronologically to understand the development of his ideas and highlights the significance of Marx's footnote on page 267 of the Penguin edition of the Grundrisse, where Marx discusses the relationship between use value and exchange value.

• Marx focused on labor as the sole generator of both use value and exchange value, while the classical school focused on exchange value and the neoclassical school focused on use value.

• Marx integrated use value and exchange value, considering them as a unity, unlike Ricardo and Smith who disregarded use value.

• Marx's theory of value distinguishes between use value and exchange value, but when applied to production, the exchange value becomes objective, representing the labor hours required to produce a commodity.

• Marx's labor theory of value states that profit comes only from labor, but his reinterpretation sees both labor and machinery as means to harness energy and produce useful work, making them interchangeable sources of surplus.

• Marx's prediction of a falling rate of profit leading to socialism contradicts his own logic, as machinery can also be a source of profit.

Socialism (01:11:10)

• Socialism, as defined by Marx, refers to the public ownership of the means of production, while fascism involves state direction of private industries.

• According to the late Hungarian economist Janos Kornai, socialism failed because it attempted to transition from a primitive economy directly to an advanced industrial society, leading to resource constraints and a lack of innovation.

• Socialist volume production lacks innovation, while capitalism drives innovation through competition.

• Marx's vision of a socialist utopia requires going through capitalism, but it is unclear if human civilization will ultimately reach this utopia.

• Capitalism is currently facing challenges and may be reaching a point of crisis.

• Elon Musk's vision of a Martian society suggests that resource constraints will naturally lead to more equality, as excessive inequality becomes impractical.

• Steve Keen argues that true scarcity arises when resources become depleted or when production damages the biosphere, and that our current economic system has distorted our perception of scarcity.

• Keen believes that a truly sustainable utopia must prioritize the well-being of the entire ecosystem and respect all forms of life, rather than focusing solely on human desires and needs.

Soviet Union (01:26:12)

• Karl Marx's ideas on socialism may have contributed to the rise of Stalinism and atrocities due to the concentration of absolute power and its abuse.

• The Mensheviks believed socialism could be achieved without going through capitalism, unlike the Bolsheviks.

• Hyman Minsky, inspired by Marx, developed an analysis of capitalism based on financial instability and questioned the possibility of great depressions happening again.

• Steve Keen argues that neoclassical theory is empirically wrong in its view of capitalism as resource-constrained.

• In capitalism, companies have excess capacity and compete through innovation and volume production, leading to a cornucopia of goods and overwhelming variety.

• Resource constraints in socialism lead to unhappy people, and the best way to control unhappy people is to suppress them.

• Citizens of the Soviet world and Cuba did not feel freedom due to a lack of commodities and limited production.

• The shortage economy in Cuba, caused by central ownership and control, persists and negatively impacts the culture, demotivating Cubans to work due to low wages and a lack of incentive.

• Entrepreneurship does not flourish in some socialist countries due to the absence of a spirit in the people to start businesses and launch new endeavors.

China (01:39:33)

• China's economic success stems from its shift to decentralized economic control while maintaining centralized political control, allowing for innovation and infrastructure development.

• Despite concerns about censorship and surveillance, many Chinese citizens express contentment and happiness, although this may be due to limited awareness of alternative possibilities.

• China's rapid development and infrastructure improvements reflect the selection process of highly qualified political elites who make intelligent decisions.

• Centralized decision-making in China, involving actual engineers, has led to significant improvements in infrastructure, social services, and overall freedom for its citizens.

• There are concerns about the potential negative effects of centralized power, such as the emergence of personality cults and the suppression of dissent.

• Centralized planning might be more effective in addressing global catastrophic events than decentralized systems, as seen in China's handling of the COVID-19 pandemic.

• Neoliberalism promotes small and efficient governments, which are effective in handling small-scale challenges but inadequate in addressing systemic issues, as exemplified by the UK government's failure to maintain an adequate supply of masks during the pandemic.

• Capitalism may not be effective in insuring against systemic catastrophic events due to the lack of profitability in such scenarios.

Climate change (01:59:24)

• Climate change is a catastrophic challenge that will permanently alter the planet's weather patterns and the stability that has enabled sedentary civilizations.

• Economists' simplified climate models often ignore crucial factors like precipitation, leading to inaccurate predictions about the impact on food production.

• Climate models are constantly improving but still have limitations due to the complexity of Earth's systems.

• The rapid increase in global temperatures is unprecedented and raises concerns about geopolitical pressures and the potential for nuclear war.

• Climate breakdown could exacerbate warlike aspects of human nature.

Economics vs Politics (02:21:27)

• We should respect and enable a harmonious life for all species on Earth, including humans, and integrate the labor theory of value and the value of life into our economic systems.

• To ensure our survival, we must respect the biosphere, limit our exploitation of free energy, and reserve a significant portion of the planet as a protected area for non-human species to evolve without human interference.

• We need to shift away from the current exponential progression mindset and adopt a more cyclical view of life, similar to many native societies, as the main threat to human civilization is human civilization itself.

• Complex systems require people who understand them to make decisions, and democracy should respect the complexity of systems and be uncertain about the consequences of actions.

• Humility is important when considering the pros of capitalism and the catastrophic effects of climate change, while boldness is necessary in space exploration to expand human knowledge of the universe.

Minsky's model (02:29:30)

• Steve Keen's book, "The New Economics: A Manifesto," uses system dynamics modeling to analyze the interconnectedness of economic factors such as capital, output, employment, wages, profits, investment, and private debt.

• Minský, a software that employs system dynamics modeling, simulates the economy at the macroeconomics level, focusing on top-down analysis.

• Richard Goodwin created a mathematical model of Marx's cyclical system in 1967, based on the Lotka-Volterra predator-prey model.

• Keen extended Goodwin's model by including finance, predicting booms during high profits and slumps during low profits due to depreciation.

• Keen developed a chaotic economic model with three system states: income share, employment level, and private debt level. As private debt rises, the share of income going to workers falls, while the share going to bankers rises.

• Keen observed that the period from 1990 to 2007, characterized by diminishing economic cycles, corresponded to the "Great Moderation" celebrated by neoclassical economists. He warned that the rising private debt levels indicated an impending financial crisis, which occurred in 2008.

Financial crisis (02:44:14)

• The 2008 financial crisis was caused by a rising level of private debt.

• Credit, which is the annual change in debt, plays a crucial role in aggregate demand and aggregate income.

• When credit goes from positive to negative, it causes a slump.

• Credit is very volatile and can go from positive to negative, while consumption demand and investment demand never go negative.

• The correlation between credit and unemployment from 1990 to 2010 is about -0.9, indicating a strong negative correlation.

• This correlation applies to every country that had a financial crisis during that period.

Inflation (02:49:31)

• Inflation can be beneficial at a moderate level, encouraging the use of money as a means of exchange, but high inflation erodes its value as a store of value.

• Hyperinflation, often caused by excessive money printing to repay debts, can lead to societal collapse.

• The Wörgl experiment showed that a depreciating currency can stimulate economic activity and reduce unemployment.

• Some Bitcoin advocates and gold standard proponents suggest zero inflation to balance money's store of value and means of exchange functions, but this approach can lead to negative inflation and rapid appreciation of money's value relative to commodities.

• Cryptocurrency principles are based on investment philosophy rather than value creation.

• Excessive focus on limiting government money creation can result in increased private debt and financial crises.

• Debt deflation, caused by excessive private debt accumulation and falling prices, amplifies insolvency, leading to a situation where debtors pay more but owe more.

• Excessive lending and private money creation by banks are the root causes of debt deflation.

• The 1920s economic boom, attributed to a government budget surplus, was accompanied by a housing bubble and increased margin debt.

• Steve Keen emphasizes the dangers of excessive private debt in causing economic instability and proposes a target range of 30% to 70% of GDP for private debt.

• The US currently has a private debt level of 170% of GDP, posing a significant risk.

• To prevent financial instability, speculative lending should be curbed, and lending should prioritize innovation, investment, and essential consumption.

• While financial cycles are inevitable, financial breakdowns can be prevented by focusing on instability.

Marxism (03:02:46)

• Steve Keen argues that the term "Marxism" is often misused, especially among young people who may not fully understand its meaning.

• Keen proposes that the government should run a deficit to provide a decent standard of living for those less successful in the capitalist system, thereby reducing social unrest.

• Keen believes that while humans are individually intelligent, they can be collectively stupid due to their tendency to share beliefs, leading to self-delusion and hindering progress.

• Keen suggests that humans should focus on maintaining and extending life on the planet, which would foster creativity and limit the negative aspects of human behavior.

• Keen criticizes economists for promoting the idea of infinite consumption on a finite planet, considering it irrational.

• Keen expresses his appreciation for the host's invitation to Austin and mentions his reluctance to visit Sydney due to its vitality, which might make him want to stay there permanently.

Space and AI (03:10:06)

• Steve Keen proposes that capitalism may be more successful in space due to reduced environmental impact from waste disposal.

• Space expansion is crucial for humanity's survival as the sun's eventual transformation into a red giant threatens Earth's orbit.

• Automation through robots and AI will replace human labor, leading to fully mechanized production.

• Creating conscious machines with a fear of mortality, similar to human evolution, could challenge the labor theory of value and potentially disprove Marx's economic theories.

• The development of AI carries both risks and benefits, requiring cautious consideration to harness its potential for beauty while avoiding destructive outcomes.

Advice for young people (03:16:11)

• Learn system dynamics instead of pursuing an economics degree.

• System dynamics can be applied in any field, including economics.

• A base engineering education is more valuable than an economics degree.

• Steve Keen's life is chaotic, but he wouldn't trade it for a conventional life.

• His friends who pursued safe careers, such as accounting, expressed regret for not taking risks like he did.

• Keen feels compelled to challenge economic theories he believes are wrong.

• He would rather endure the challenges and chaos of his life than compromise his integrity.

Depression (03:20:02)

• Steve Keen experienced depression after reading a paper by Richard Toll on climate change.

• Toll's paper used a flawed assumption that the relationship between GDP and temperature over space would apply over time.

• Keen was shocked by the stupidity of the assumption and felt that economists' arrogance was jeopardizing the lives of billions of people.

• His wife's Buddhist perspective helped him out of his depression by reminding him to accept the flow of life.

Nature's Resilience (03:20:02)

• Keen believes that life will survive humanity's actions, but many lives will be lost unnecessarily.

• He criticizes Richard Toll's oversimplification and arrogance in his papers.

• Keen approaches topics with humility and values those who are humble over those who are arrogant.

• He believes that nature is the only entity that can be arrogant, but it chooses not to be.

Love (03:24:35)

• Karl Marx had a passionate love affair with Jenny von Westphalen and wrote love poetry to her before writing Das Kapital.

• Marx also had a complicated view of love, impregnating his housekeeper and having numerous daughters.

• Love is vital to the human condition, providing a deep bond beyond sexual attraction.

• Love should be extended not only to the rest of humanity but to all species.

• Humans must maintain a sense of respect and avoid losing love, despite the destructive and hateful aspects of human nature.

• Humans are on a spectrum between chimpanzees (destructive) and bonobos (peaceful), and should strive to be more like bonobos.

• Love is an essential part of life and is vital to the human condition.

Mortality (03:28:35)

• Keen discusses his thoughts on mortality and the nature of consciousness.

• He expresses his fear of the process of dying but not of what comes after.

• Keen believes that religion exists because the existence of reality cannot be scientifically explained.

• He compares the unknown before and after life to darkness.

• Keen believes that individuals may not survive death, but their impact on human consciousness can ensure their legacy.

• Keen expresses his gratitude to Lex Fridman for coming to talk to him.

• He compliments Fridman's brilliance, humor, and humility.

• Keen invites Fridman to his "sex dungeon" and promises to send him the Wi-Fi password.

• The podcast ends with a quote from Karl Marx: "To be radical is to grasp things at their root."