ReSolve Riffs with Steve Keen on MMT, Limits to Growth, and Climate Accounting

A casual observer of modern economies might be forgiven for feeling that life is pretty good. And they might reasonably credit neoclassical economic principles for facilitating what appears to have been a great leap forward in global prosperity. At the same time, we are occasionally confronted with news of looming global calamities, which are a product of the exact same policies that brought about this apparent prosperity: irreversible climate change, unprecedented global private credit, global asset bubbles to name just a few.

Our guest this week, Professor Steve Keen, has spent a lifetime demonstrating why neoclassical economics is fundamentally self-terminating because it fails to account for realities imposed by the physical world. He walks us through the root issues and describes an economic framework for sustainable growth and more even prosperity. In particular we discussed:

  • The roots of the 2008 global financial crisis and how he predicted it in advance
  • How the 1972 report “Limits to Growth” successfully forecast how the global economy would run headlong into resource boundary conditions
  • Richard Vague’s findings that accelerating growth of private credit has presaged every major financial collapse in the past few centuries
  • How the misguided work of two economists in the early 1990s has led to catastrophic policy and climate consequences
  • The financialization of housing and its impact on home prices, demand for private credit, and a return to feudalism
  • How to incorporate resource consumption and waste into modern economic models
  • The character and potential positive impact of a modern debt jubilee

Professor Keen is not a man who minces words. Pour yourself an Irish coffee and settle in for a jarring ride.

This is “ReSolve Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

Thank you for watching and listening. See you next week.

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Professor Steve Keen
Honorary Professor, UCL & ISRS Distinguished Research Fellow

Steve Keen is an Australian economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen’s thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay. Hyman Minsky’s financial instability hypothesis forms the main basis of his major contribution to economics which mainly concentrates on mathematical modelling and simulation of financial instability. He is a notable critic of the Australian property bubble, as he sees it.

Keen was formerly an associate professor of economics at University of Western Sydney, until he applied for voluntary redundancy in 2013, due to the closure of the economics program at the university. In autumn 2014, he became a professor and Head of the School of Economics, History and Politics at Kingston University in London. He is also a fellow at the Centre for Policy Development. He has since taken retirement and is crowd source funded to undertake independent research as well as being a Distinguished Research Fellow at the Institute for Strategy Resilience & Security, University College of London.

Richard:00:01:02Good morning. Happy Friday.

Steve:00:01:06Evening all from my point of view.

Adam:00:01:10Yeah, that’s right. We should probably do our disclaimer, Rodrigo.

Rodrigo:00:01:15Me? Okay. Well, just to make sure that everybody understands that this is not investment advice, it’s purely for informational and entertainment purposes only. Do not take advice from any of the scallywags here, go to your financial manager. Take their advice, maybe bounce some ideas off them. With that, Adam, Richard, I know Adam you’ve been a fan for more than a decade.

Adam:00:01:40Many years. Well, Steve, your career has gone through several stages over the last decade. Actually it might be helpful for you to characterize your career for us to set the stage.


Steve:00:01:54Okay. Probably I go back 50 years, because I did a degree in arts and a law degree at university, which gave me the choice of economics which is what I wanted to major in with anything else I wish to choose. I did mathematics and psychology as well. And right in first year I was exposed to an intellectual hole in mainstream economics. From that point on I flipped from being a fan of economic theory of capitalism to realizing it doesn’t describe capitalism at all, it’s actually a catastrophe. And I’ve been fighting that idea of economics ever since. And much, just that normally puts you on the outside, I managed to end up being a professor and head of School at Kingston University in London. And that was largely a result of being a contrarian. So I published a book called Debunking Economics back in 2001, a sequel in 2011. And then Can We Avoid Another Financial Crisis, in 2017. And I’ve just finished a new book which will be coming out in October I believe in Europe and December in the US called The New Economics: A Manifesto.

And what that does is explain what I can fundamentally call a non-equilibrium, monetary, biophysical approach to economics. And that’s in contrast to the barter world, equilibrium vision, that neoclassical ‘s have. And that’s what we call neoliberal economics. And to me, if anything is going to destroy capitalism, it’s going to be in neoclassical economics.

Adam:00:03:21Wow. Okay. So there’s a lot to unpack there. There’s a lot of syllables to unpack.

Rodrigo:00:03:27I love that that’s how we’re going to start. All right, not pulling any punches today.

Adam:00:03:32Exactly. So why don’t you if you don’t mind give us a general explanation of what characterizes contemporary economic canon and then why you think there’s a gaping hole in the middle of that that’s going to suck us all in, and then how you might view an alternative theory.

Contemporary Economic Canon

Steve:00:03:57I think, if you do origins or what we call economics today, go back to the 1870s. And before then you had what was called the Classical School of Economics which was stuff from Adam Smith, David Ricardo and boo boo, hiss hiss, Karl Marx. Now, in the hands of Smith and Ricardo, classical theory was a champion capitalism against effectively feudalism. And what Marx did was to turn and attack capitalism in favor of what he thought would be socialism. And at that point, the intellectual backing for economics changed from being the Ricardo and Smith model to people who meant three particular characters matter. William Stanley Jevons in the UK, England in Menjer in Austria, and Valros in France, and they all said capitalism is a system designed for the satisfaction of human wants. And they had a subjective theory that is, all about capitalism lets us maximize our utility, compared to what we would get if we had a central distribution system or so on.

An essential part of their thinking was that capitalism achieves equilibrium. And they did that not because they believed that it achieved equilibrium, but they realized the mathematics of modeling non equilibrium is just too hard. And they also left money out of it because again, was hard enough modeling trade, trying to model trade and monetary as well, just too difficult. Well, they were practical choices about how to model the economy back in the 1870s which became points of religion in the 20th century. So rather than seeing equilibrium as a short term crapshoot, we can delve down into develop dynamic analysis methods which is what the 19th century forebears of neoclassical economics expected. In the 20th century they said, capitalism achieves equilibrium and capitalism is really a barter system. We can ignore all of this monetary stuff.

So you have the dominant analysis of capitalism presuming its main features is achieving equilibrium, and the believing that the monetary system doesn’t matter. Now, what planet is that? It’s not the one we’re on. The strengths of capitalism are it’s how it copes with non-equilibrium, disequilibrium, change and vitality. And funnily enough, Marx said it best talking about the bourgeoisie, as he called them in The Communist Revolution. He said previous dominant social classes is all about maintaining and not changing the social and political and economic structure. Therefore a bourgeoisie cannot exist without revolutionizing the system and everlasting uncertainty. This was one of his phrases. And that’s beautiful and that’s true and that’s the strength of capitalism. It’s far better at everlasting uncertainty within the parameters of the planet that we had back when you could describe it as William Beaumont did , that is cowboy capitalism when you’ve got the vast open spaces of the prairie rather than spaceship capitalism, overcrowded all together now. So what we have is a completely inappropriate model of capitalism, exalting it for equilibrium, which is not a feature of capitalism, talking about it being a barter system, which is not capitalism. That’s the dominant way of thinking about the economy.

But it’s one of those classic things which I think it was Mencken, the great American humorist Mencken put it this way, he said to every human problem there was a solution that is neat, plausible and wrong. And that is fundamentally mainstream economics. And in numerous times, they’ve proved their own logic wrong. And their excuse is to see if, let’s make a simplifying assumption and hop over this problem. And at the superficial level if you don’t go down and examine the substructure, and what is the foundations itself, it can look quite persuasive. Supply and demand diagrams, utility maximizing models and stuff like that, when you go and look at the foundations are all rotten. And therefore, when they make a simplifying assumption, it’s absurd simplifying assumption like, for example, and I’m not joking. This is about Paul Samuelson. Let’s assume there’s a centralized authority that redistributes income before trade takes place. And that’s part of the model of capitalism, 1956 Paul Samuelson, taught these days in the main textbook.

So what people think is an explanation for capitalism if you sit outside economic theory, is a complete distortion of the system itself. And that therefore has led us to catastrophes like the financial crisis without having any warning for it whatsoever from their theory. When if you don’t have their blinkers on, it was obvious there was going to be a financial crisis. So it’s something which works in good times and is catastrophically bad in bad times. And despite Rodrigo being an optimist here, I’m going to say we’re in bad times. We need a theory that you can cope with the world in a bad situation. And it’s not neoclassical economics.

Adam:00:09:01Okay. Richard, you were going to ask about… because you touched on the 2008 financial crisis, and I know that you are known or I originally came across your work because you were prognosticating about the financial crisis in advance. And so I dug in and started to try and learn about some of your modeling and how it differed from classical modeling. So I wonder if you can sort of take us back to that time and explain how you arrived at the conclusion that there was going to be a major crisis. What were the underlying mechanics that everyone else was missing but that fit your model so well?

Predicting the 2008 Crisis

Steve:00:09:42Yeah. Very good question. I wish I had a couple of screenshots ready for you on that, I might bring them up after we talk. But I am a mathematically oriented thinker, and most critics of mainstream criticize the mathematics. And I said well actually no, what they do is not mathematics. I call it, what neoclassicals do, mythamatics. So I wanted to use complex systems analysis and do decent mathematics. And I found a model of a cyclical economy done by an American economist called Richard Goodwin. And I realized that I could add a financial sector to it because in that model he had capitalists investing all their profits. And what you got out it was a cyclical system, booms and slumps, wage growth share and profit share fluctuating, and so on. And he assumed all profits are invested. And I said, well, the obvious thing is more than all profits are invested during a boom, you borrow money. Less than all profits are invested during the slumps, so you pay some of the debt off. And then there can be a tendency for the level of debt to ratchet up over time because you borrow money during a boom, you have to repay during a slump, you don’t quite have the cash flow you expect, and you get a ratcheting up effect. And this was all built on the work of Hyman Minsky who’s the ultimate contrarian economist of course.

So I took Hyman Minsky’s ideas, combined them with Goodwin’s models and got a mathematical model myself. And one striking feature of that model was that there were a series of booms and slumps before you finally had a final crisis in the model, but the booms and slumps got smaller. There was diminishing cycles over time. And that was not something Minsky predicted. Minsky talked about how stability is destabilizing, which is a fantastic line. But he had applied it to a single cycle. So instead of a single cycle, have a period of stability that will lead to more euphoric expectations, over investment, too much borrowing, and then a slump. And that was a single cycle. Mine was getting this over a series of cycles, quite a striking visual too, I’ll bring it up and show it on screen later. And that therefore meant that when what the American economists called the Great Moderation started to happen, when there were diminishing cycles from 1982 roughly on, I was thinking, oh, this is looking like my model. And then the whole lot of circumstantial reasons why between doing the model and writing my PhD and then publishing Debunking Economics. I didn’t actually look at the data for quite a few years.

And then in 2005, December 2005, I was asked to be an expert witness in a court case on predatory lending. And experts in the Australian legal system are, even though you’re paid for by one side, you’re an employee of the court. So you can’t make a hyperbolic statement. And I said, the debt ratio has been rising exponentially, meaning private debt. So I knew I couldn’t rely upon the hyperbole, I had to go and back it up. And I thought I’d have to remove the word exponential. So I first of all took a while to put the data together, plotted the Australian debt data which I could get, and it was a pure exponential curve, exponential increase in the ratio of private debt to GDP. And I thought, oh my God, what’s the American situation? Again, a few hours to get that data together. And again, same sort of thing not quite as purely exponential, but exponential rate of growth in the debt to GDP ratio for 1952 forward. And I thought, well, this means this can’t continue forever. When the rate of debt growth slows down there’ll be a crisis. But I’m probably the only person looking at this stuff certainly in Australia, I’ve got to stick my neck out and warn about it. And that’s when I started doing it.

So basically, looking at an unsustainable trend in private debt is what gave me the warning and being a non-orthodox economist thinking about that, that’s why I looked at it. Whereas the mainstream don’t think private debt matters at all. And so they ignore it. And if I can now just I don’t know how this is going to look on the monitor here, but let’s quickly try…

Adam:00:13:43Yeah. I think Professor Keen’s going to share his screen.

Steve:00:13:47Okay, pardon me, I’ll quickly go in and share it. I could make it larger but let’s go share the entire screen. Okay. Hang on with that. Share. Okay. So if you can see those graphs, they are going to be a bit small on the screen I imagine. But that’s the level of private debt to GDP that I was looking at in America. And when I started calling the crisis was 2006. And I said, this can’t continue. When it turns around there’s going to be a crisis and what that will be is that the credit based demand, so demand coming from borrowed money, is going to go from positive to negative. So you see credit here at 15% of GDP, and then by 2010 it was minus 5% of GDP. And expecting that to come and expecting it to be something which would cause a financial crisis is why I was one of the handful of economists who actually saw it coming.

Rodrigo:00:14:43Sorry, credit demand, Can I just understand what credit demand? How do you capture that?

Steve:00:14:50Okay. Well, debt is the dollars you owe. Credit is the new debt you take on in a particular year. So in this instance, we’re using accountant’s definitions of both. So debt is dollars you owe, credit is dollars per year, the change in dollars per year that you owe. In mainstream economics they pretend the banks are intermediaries. So banks like Richard lend to Adam. And of course, Richard’s got less money, Adam’s got more, Richard’s spending goes down, Adam’s goes up, they cancel each other out. For the real world, and this is what I’ve been arguing with non-orthodox economists for 50 years now, and the Bank of England finally came out and said it in 2014 as well, banks aren’t intermediaries,  banks originate debt,  and when they originate debt they create money, and that money which was created, nobody gets into debt for the sheer pleasure of being in debt. You borrow to spend. So the change in debt, which is credit, becomes part of aggregate demand and aggregate income. And it’s extremely volatile. So income based demand can fluctuate but it will never go negative. Credit based demand can go from positive to negative, and that’s what happened back in 2007. And it was the first time that had happened in the post-World War history of American capitalism.

Adam:00:16:05I’d love for you to…You go ahead Richard.

Richard:00:16:08No, I was just going to kind of jump on the Great Financial Crisis diagnosis that you foresaw, I guess using a combination of Stein’s law and kind of the debt overhang, and the subsequent deflationary forces that came about that forced what some have called secular stagnation? Do you see those same forces persisting even kind of in the wake of the current push for fiscal stimulus? And how do you square that with the current COVID situation? I mean, how do you put those things together?

Secular Stagnation and COVID

Steve:00:16:40That’s about a three hour answer there. I’ll try. Well, first thing is that most people think with my book, can we avoid another financial crisis? I thought the answer was going to be no. My answer was yes, we can avoid one because to have a financial crisis, you’ve got to have a burn beforehand. And given that the level of private debt has reached such an astronomical scale in America’s history, that debt levels of 170% of GDP, private debt back in 2008 was the highest in the history of American capitalism. So that meant I’d expect that even though the rescue attempts, that QE, Cash for Clunkers, all that sort of stuff from the government, stopped at being a drastic fall in debt like we had back on the Great Depression, the impact, while she had a still very high level of debt, so a fall from 170% to 150%, but I thought there was very little likelihood for it to burn again because first of all borrowers were already carrying five, six times the level of debt compared to income that applied back in the golden age of capitalism, were unlikely to want to borrow that much, banks are unlikely to want to lend all that much having burned their fingers badly in 2008.

So I thought you wouldn’t have much credit demand and therefore if you had a downturn in credit demand, it wouldn’t be coming from the high peak like it was back in 2007. So I said, I didn’t expect secular stagnation, that’s bloody Larry Summers useless phrase, I expected credit stagnation. That’s what I called it. So credit stagnation was my conclusion out of, can we avoid another financial crisis. I thought the financial crisis would occur in countries that managed to borrow their way through that which included both Australia and Canada. But I was wrong on those countries having a financial crisis of course, this pre- COVID. And the reason for that is fundamentally it’s the other side of the money creation process. Banks create money by lending more than they give back on deposits. Governments create money by spending more than they get back in taxes.

This of course brings up the arguments of Modern Monetary Theory. And if that money were being used to boost demand for goods and services, that would be fine. Instead, in most of those countries it was used to boost the house price market, the house prices, schemes that give tax breaks to people buying properties, that give first time buyers, in particularly Australia’s been famous for that. Grants to the first time buyer which, they call them the first time buyers grant. I called them the first time vendors grant because you’re giving people an extra roughly one for one comparison, an extra $25,000 flat. Here’s 25 grand, go buy a house. Well, they’d go with the 25,000 at the bank. And so that’s great. You’ve got 25,000. Here’s 250,000, go get a house, and then factor out by a factor of 10 and you get both the government seeding it but also more private debt being taken on, and it ended up being money in the vendor’s pocket, not enabling the buyers to buy more houses.

In fact, the effect of all this stuff has been reduced levels of homeownership. What it does is increase house prices. And that’s become a large focus of government policy, which is one reason I’m not 100% in the MMT camp, because I’ve seen how it can be abused to maintain asset bubbles rather than being used for sensible consumption and investment, which is the way it should be used.

Adam:00:20:11Yeah, it seems like credit, the policy over the last decade has been to acknowledge that credit growth can’t be supported by income. Instead, we need to support it by increasing asset prices. And so the vast majority of credit that’s been issued over the last decade is asset backed credit. Obviously there’s been a huge corporate borrowing binge but I think, would you say at the margin, that keeping asset prices higher has enabled an even greater level of acceleration of credit creation?

Steve:00:20:45Yeah, and that’s a tragic mistake. Because you don’t become wealthy by selling secondhand houses to each other, or secondhand shares to each other. Individuals do, but the society doesn’t. I want to see new capital formation by corporations. I want investment capital and IPO capital not higher prices for speculators selling shares to each other. And the same in the housing market. And again, I’ll do a bit of a share screen here with slightly better graphics. And I’ve actually got France here, because I gave a talk in France recently. And what this really shows is what we’re talking about isn’t just an American or Australian phenomenon, it’s a global phenomenon that’s keeping house prices high, being almost government policy. So I’ll just actually quickly share again, we can do that?


Steve:00:21:36Okay, share the screen, entire screen, hang on what’s going on there? Why am I not getting choose what’s share entire screen. Got to click down on the image on the screen. Okay, this is the data for France, and the blue line is the house price index in France, and you can see it took off under the Euro, bounced around since then, the red line is household debt which has gone from under 20% of GDP in the mid-1970s to 70%. Again, lower than America, lower than Australia, lower than Canada, it’s still the same basic trend. And what I argue is that what actually causes rising house prices, is rising levels of new mortgage debt. And the logic there. This is a graph, this is household debt, as I said, the debt of the household sector is the red line. And the logic is that if you’re buying a house, you don’t buy it with cash, you buy it with borrowed money. So the demand for housing in a monetary sense is new mortgages. And then if you divide that by the price level, you’ve got how many houses can be purchased. Of course, we know supply is very rigid in the housing market. So the demand is the volatile bit. So you have a relationship between new mortgages or new household debt change, which is change in household debt, or what I call household credit, and the price level. And therefore there’s a relationship between change in household credit and change in the price level.

And this is now showing that dynamic. So there’s your data for the house price level and the level of debt. And here’s the change in household credit. So change in new mortgages effectively, and change in the house price index, and that’s over a 20-year period and are getting a correlation coefficient of .645 for that particular piece of data.

Adam:00:23:24There’s a pretty substantial divergence at the moment. What’s going on?

Steve:00:23:27Well, I think that’s probably because COVID is here. That’s 2020. If you want to see it for America, I can rapidly change it to being for America if I just change.

Rodrigo:00:23:40That was Australia?


Steve:00:23:43Yeah, I can do it.

Rodrigo:00:23:44No, I was just curious. I wasn’t sure which one it was.

Steve:00:23:46 That’s Australia. So it’s not going to change the labels, the labels on the charts are still going to say France, but the data itself will now be the USA. And now I take a look at that.

Rodrigo:00:24:01For those listening, the charts that Steven was showing showed high correlation, visual high correlation as well as the stat that you mentioned up until 2020 where household debt went down, and housing prices continued to go up.

Steve:00:24:17Yeah, and I think there’s a range of… the government supports that are occurring. And also possibly people use of the cash they do have, I’m not sure about that. But I think it’s largely the impact of QE to the nth degree, and things like I believe, was it BlackRock that’s heavily involved there in buying housing right now. So you’ve basically turned housing from, what housing should be is a consumption item, long term consumption item, will turn it into an asset class. And now, all this stuff has been, the volatility you see in the share market is ending up in the housing market as well. And it’s just the wrong way to treat housing.

Rodrigo:00:24:59Right. Where the American dream used to be that every American should be enabled to own a house for the long term, then it’s turned into, let’s keep housing prices up in order to have the wealth effect, to now BlackRock pushing out actual homeowners and it becomes an asset class or an asset management firm. So we’re not even enabling the dream anymore. We’re just enabling the wealth effect for portfolios and RIAs.

Steve:  00:25:28I know. It’s an appalling development.

Home Ownership?

Adam:00:25:33Again, it comes back to a government policy to continue to find new ways to enable credit creation. And so they keep moving from asset to asset and finding ways to securitize new groups of assets in order to continue to drive asset prices higher to enable more credit to be borrowed against those assets. It’s the ultimate Minskian Ponzi Scheme. Maybe you can solve a riddle for me because I’ve been struggling with how to square this circle in conversations. I’m looking at these home prices rising and household borrowing rising exponentially and thinking this is crazy, thinking it’s irresponsible to be buying homes at these prices. But the counter argument which I’m struggling to overcome is that if you look at the total cash flow cost of home ownership right now, because mortgage rates are so low, that in fact if you go back to the 1970s, even though obviously interest rates were very high, home prices are so low. And so the actual size of the mortgage relative to incomes was really small. Now, the size of the mortgages relative to incomes is gargantuan but it doesn’t matter because interest rates are near zero. And so the carrying cost of home ownership is so low. But I think this is unsustainable and I still feel like it’s irresponsible to go out and buy a home at 10 or 15 times your income. But help me square this circle.

Steve:00:27:10Well, partly because the deposit is what’s been rising in scale. Yes, once you have the deposit to buy a house, then the cash flow costs are very low, but that deposit is enormous. And what is often happening, people in Australia talk about going and borrowing for the house, to the bank of mum and dad. So the previous generation pays for the next generation, where they are homeowners. But if you don’t have that, if somebody is from a poorer background, you can’t even get on there, on that black ladder. And I was actually thinking about my own parents, just recently on this front. They bought their first house. Actually they got a gift for, what they did, have the house, a bank of mom and dad that got them going. But the house price was so low that a 30% deposit was the rule. Now what’s happened over time is banks who said well we’ll help you out, we’ll make it a 20% deposit, and then a 10% deposit, and then a 5% deposit. And hey, we’ll give you 120% and you can pay for the furniture as well. And what is happening is we’re letting the finance sector take over the ownership of the economy. And that’s really been the overall impact. And then if you look at the age of which people are buying properties, and my parents were there, my father was 22 when he got married, and it was a common thing for somebody in their 20s to have a mortgage on a home they own. And then as time’s gone on, it’s now 40 year olds that do it.

So the more we drive up the prices, the smaller a cohort is actually able to buy into the housing you get, it becomes a form of class division again, which is bad enough to begin with and makes it worse. And then also, it’s so late for people, they’re coming in with so much debt now, with how everything goes, housing debt in America of course, and Australia too. In the UK, you’ve got student loan debt, et cetera. You simply can’t even imagine getting that deposit together without effectively becoming a slave of the financial sector. Now, that is what is going to become the outcome of that. We are all slaves to Wall Street. And I’m sorry, this is supposed to be capitalism not a slave system. But when you’re a peon of debt, then you might as well be owned by Wall Street. And that’s what we’ve let happen.

Rodrigo:00:29:28I will add that. Even countries like Canada that added a mandatory 20% money down, the financial system has found a way around that where, yes, if you’re buying a mortgage you have to put 20% down but just you know I have a friend of mine that can offer you a HELOC or line of credit that has a variable rate interest rate, and will pay the other 20%. So we know many people that are 100% in debt and 20% of that is variable. So it breeds that instability that we’re all kind of worried about. Moreover, the mortgage payments that would be X amount with a 20% money down are that much higher when you’re adding, stacking on top of that the interest rates so you’re going to pay on the variable HELOC or line of credit. So it’s just, there’s even when the governments are trying to create these roadblocks, Wall Street and the financial system finds a way to get around that.

Adam:00:30:24But they’re not really creating roadblocks, it’s clear policy will continue to drive home prices higher in every economy. So these are false barriers, right? They take with one hand and they hand out with another.

Steve:00:30:42They look like they’re giving to the buyer and they’re giving to the vendor instead. That’s what my other first time vendors grant does. I mean, if you go back and look at quantitative easing came from which is generalizing the discussion of it. The … quite literally said the objective here is to make consumers feel wealthier so they’ll consume more. Now, what QE did was drive up share prices which mainly made the wealthy feel wealthier. All these things, this, because the government’s run by a bunch of neoclassical economists, and they really do have the…they’ve got the government’s balls in their hands in the sense that that’s how they think, or their brain cells even worse than their balls. So all this stuff is that they actually think rising asset prices is a good thing. And no, I think there’s a ratio of asset prices to income from assets. that’s a good thing. And if you get an exaggerated level, that’s a bad thing.

When you take a look at what’s been done with all the rescues of Wall Street over the last 40 years, ever since the Greenspan Put began, the last time we had a boost to house prices, as you can to share prices being absolutely necessary government objective, was when the S&P 500 had fallen 666, one of my favorite numbers, and when you look at the ratio at that stage, the share price ratio on Schiller’s excellent capital cyclically adjusted price to earnings ratio was 14, which was the long run average.

Rodrigo:00:32:11That’s right.

Steve:00:32:12So they panicked and they go back to the long run average. And so in that sense the government, particularly the central banks, have been dedicated to driving the ratio of asset prices to income above what was the long term average for a capitalist system?

Rodrigo:00:32:26I remember seeing that number, and thinking, okay, we’ve hit the median or the average and we’re going to wait to 10 before I start buying, which is obviously the worst mistake I could have made at the time. But it seemed like hitting the median is not going to be enough.

Steve:00:32:45It would have continued if it hadn’t been for QE, and that you can directly blame on particularly Ben Bernanke, but then the entire Federal Reserve System, the bank, and this comes back to economists running the Federal Reserve. And their attitude has always been that they believe share prices are rational, except when they go down, you know, the whole efficient markets hypothesis. And they saw nothing wrong with driving up share prices. Ironically, there’s a very good research paper that shows there is no wealth effect from shares. And it’s a research paper by the Federal Reserve Bank of New York. You get a small wealth effect out of house prices, not out of shares. That didn’t stop them getting in there and deliberately, it’s in writing by Ben Bernanke. The idea of QE is to drive up share prices.

Richard:00:33:40But it also helps drive home prices and protect… I wanted to touch on this criticism of neoclassical economics which was just something that I’ve heard you tackle numerous times and the idea that they lean too heavily on the equilibrium models but also this idea of the rational economic men which we all know doesn’t really exist, because we are slaves to our biases and to incentives and things like that. So how do you see…I mean, Michael Harris asked a good question, what was the alternative to QE? Let the economy collapse? Assuming that the rational economic man is wrong, and we should be tailoring policy with the biases and the actual behavior of people in mind. What are some of the policies that might have helped then or might help us now?

The Rational Economic Man

Steve:00:34:36Well, for a start let’s look at how they define rational. Their definition of rational is somebody who has a model that can accurately predict the future. So anybody here rational?

Rodrigo:00:34:47My wife is watching so I’ll just lift my hand.

Steve:00:34:50Yeah, you’re a Nostradamus, so the female version is in the background and Virgo’s. So they’ve got a definition which any sane person would say is pathetic. That’s their definition of rational. And secondly, the problem has been caused by too much private debt. So the solution is to reduce private debt. And that’s what I proposed back in I think 2011, 2012, what I call a modern debt jubilee. Find a way to use the state’s capacity to create money to reduce the level of credit based money and increase the amount of fiat based money. We live in a mixed economy, the government creates money by fiat, the banks create money by credit. Because we fell for the neoclassical vision, the government money creation was bad, and private money creation was good, we had far too much credit creation, that’s where the huge debt bubble came from. And of course, the banking sector very much enjoyed that because they benefited out of that rising debt level as well. So you could use the state’s capacity to create money to give everybody an equal amount of money. So you and I would get the same amount of money as Donald Trump. 100,000 bucks each, let’s say. And if you have debt, you must pay your debt down. So Donald will have no spare money, you’d have to have to reduce these debts by 100,000. Some of you might have 100,000 in cash.

The second part, so it didn’t benefit people who gambled against those who didn’t. That’s the first thing, no moral hazard in that sense. And then if you had any money left over, you would be required to buy newly issued corporate shares where those newly issued corporate shares would have to be used to pay debt down. So you’d have reduced household debt, you’d reduce corporate debt, and you democratize the ownership of companies partially reversing the increase to inequality caused by QE. So there is a way to go about it. And I’ve done the mathematics on this, a model of that is part of my new book, The New Economics.

Rodrigo:00:36:41Can you explain the last part? I just want to make sure the audience understands it fully. So that everybody gets that excess, you are forced to buy shares of a corporation and that corporation is in charge of buying back.

Steve:00:36:56What you’d have, you’d use an index fund, that’s probably the way to go about this. You create an index fund. Corporations that wanted to take advantage of that would have to issue shares which could be bought, part of the index fund, where those shares, the proceeds of those share sales would have to be used to reduce corporate debt, because corporate debt is now the highest it’s ever been in the history of American capitalism. We look at the level of corporate debt now, I’ve forgotten the actual figures, it’s about as close as to 80, 90% of GDP. So you had a huge increase in corporate debt. There’s far too much debt and far too little equity. So this is why to rebalance it, to give a more equitable share system, or corporate system.

Rodrigo:00:37:40Can I just understand, I think I understand your thesis and forgive me guys, but I don’t know much of Steve’s work. But from what I understand, what you are railing against is unproductive debt by households, right? You’re getting a debt and you’re giving it back to whoever benefits from a mortgage. What would work is to make that money productive whether it’s infrastructure or possibly new businesses, middle class people starting their own businesses and the like.

Richard:00:38:10Job creation, things like that.

Rodrigo:00:38:11Job creation. So are you saying getting money into corporate hands or corporate debt is not productive for society, they’re not using it for …

Steve:00:38:21Corporate debt, there is too much corporate debt. If you look at what’s called the Modigliani-Miller Theorem, if you know that particular piece of neoclassical nonsense, that argues that the ideal situation for a company when there’s tax to be paid, on when you get a tax deduction for having interest payments, is 100% debt backing. So we’ve had the mainstream economists being cheerleaders for corporate debt as well as household debt. And when you look at the level over time, the level of corporate debt is the highest in history.

And it’s again, I think that’s unproductive. I think I’d rather have that debt, I’d rather have that share capital, being what people have, as the financial foundations for corporations, rather than private debt. And of course, there’s also been a huge amount of corporate debt being used to purchase shares and cancel them. So there’s a ludicrous overload of corporate debt as well as household debt. It’s not just the household sector that has too much debt.

Richard:00:39:33And until we’ve solved that, do you do see the deflationary forces continuing to push us to low economic growth and low inflation? I mean, there are other forces, technology and demographics, obviously, but it does seem like the argument of there being too much debt in the system continues to be sort of this overwhelming force in the West.

Steve:00:40:00Yeah. I can say it’s a suppressing force in all sorts of ways. I mean, for example, if you have debt and your mind is always focused on how do I reduce my debt level, then one way one individual does that is by spending more slowly. And if you spend more slowly you have more of an accumulation of money in your bank account. But of course, because you’re spending more slowly, there’s less money in other people’s bank accounts. If you look at the velocity of money over the last 40 years, it’s fallen drastically from the levels it was back in the 80s when it was about 3… we’re looking at the money of zero maturity measure, that the Fed used to maintain, that was about 3.5 in the 1980s, probably too high. Was sort of close 1.8 to two before the inflationary bubble in the 70s to 80s. It’s now below one.

So what you’ve got is less productive circulating money. And then now we’ve got so much debt accumulated as well that people aren’t willing to get more money that way. So what you’ve got is very little monetary demand in the economy. And as a monetary economy with a little monetary demand, it’s going to be running a level of stagnation. The Japanese situation, also want to mention quickly too. When you look back when people thought Japan was going to take over the planet back in 1990, levels of corporate debt were enormous. And most Japanese corporations are financed by debt through the keiretsu system. Now, in the post period after that, there’s been very little investment by Japanese companies. I think a major reason as to why is they are focused on paying their debt off, they’re not investing. So Japan, which if you look back to the old movie, The Rising Sun, it’s a bit of a laugh when you look at it now.

Adam:00:41:36That’s a great movie and great book.

Steve:00:41:38It’s a good movie, good movie. And Japan is going to take over everything. 30 years later, who’s got the world’s most advanced cars? America. Who has the world’s most advanced sound systems? America. Whatever happened to Japan? And Toyota, and Sony and so on. So this much debt is a deleterious impact on the productivity of a capitalist economy.

Approaching Debt Criticality

Adam:00:42:03So Steve I’m thinking of Didier Sornette, for example and the idea of sort of approaching criticality, a critical state. And then I’m trying to connect the dots with what you were observing in 2005 and six and seven in terms of the exponential acceleration of private credit growth. And I’m wondering whether your models provide a sense of sort of thresholds or other types of metrics or indicators that…because I hear you say there’s too much corporate debt, or there’s too much private credit? How do you define too much?

Steve:00:42:45Yeah, good question. I haven’t been sold on the empirics on that. But what I do get out of out of my modeling is it’s an element of Chaos Theory. So if you know the Lorenz, the idea of, the Lorenz butterfly effects. One sub component of the Lorenz dynamics is called the intermittent route to chaos, which is, I’ve forgotten the name of the two authors of that main publication Pomeau and Manneville determined it. And what you have in that is in fluid dynamics, which is where Lorenz comes from, you can have a period of laminar flow. So water is first flowing smoothly with a dynamic that means it gets smoother and smoother and smoother over time, and suddenly it becomes turbulent. I get that effect in my models. And what I‘ve.    normally been focusing upon because it is, the dangerous situation is where you have that transition from smooth to turbulent flow. And so I’m looking at the process that leads to a total breakdown. But that level in my model with American parameters came out at about 60% of GDP. Getting north of 60 to 80% of GDP was a problem.

Again, I’ll rapidly share my screen because I’m bringing up part of my book where I show the dynamics of my model here. And this is an extremely simple version of my model. But what you have is a period of diminishing cycles in GDP, and then they start to rise again. And the same thing when you plot employment against wages what you find is those cycles are causing falling wages share over time, and giving your parents stability, and then you get crazy instability developing out of it. And what is happening is a shift of income distribution is going from workers who are losing the amount over here, capital is remaining constant, what workers lose ends up in the share of bankers. So this is the situation I don’t want us to be in, but it’s the one we’ve got into by basically letting the financial sector decide what’s the appropriate level of debt and there’s no level of debt that’s too high when you have the financial sector, because that’s what made them put their fingers into your pockets.

Adam:00:45:02I wanted to dig into the idea of economics being a function of consumption. And when I go back and I read some of the classical economic texts, what I understood as capitalism was a mechanism for capital formation which is a function of investment. And yet, somehow over the last 50 or 60 years, capitalism has come to focus almost exclusively on consumption. And so, can you walk me through how we got here? Like why are we so obsessed with consumption?

Steve:00:45:43That’s a very good question. And I think it comes back to the point I was making earlier about the transition from the Classical School of Economics to the Neoclassical School, because when you look at Ricardo in particular, but also Smith, what you find is that they both believed there would be a future stationary state, kind of be a point where capital accumulation ceased. But their idea was to continue capital accumulation and growth and investment for as long as possible. Now, we’ve got problems about growth, which we’ll come back to later in our conversation, I’m sure. But the idea was capital formation investment, that was the whole focus of the Classical School of Economics. When the Neoclassicals come along, it’s all about utility maximization, it shifts over to consumption.

And ultimately, over 150 years of this school of thought dominating the economy, that’s people’s default way of thinking, increasing consumption. That’s the important thing. And there’s a lack of physical realism to the Neoclassical School as well. They have models where you produce output by putting workers and machines together in a factory. Well, that’s great, put them all on there and they’ll start…the machines won’t move and the people won’t turn if you don’t put energy into either of them. So there’s a physical unreality to it. But the whole focus of neoclassical economics is maximizing utility which you get through consumption. And that’s ultimately seeped into the entire ethos of the age.

Adam:00:47:12Okay, so that explains why as I observe the policy response to COVID, for example, I scratch my head because I see 5,6,7 trillion dollars being spent. It’s essentially being fire hosed into consumer pocketbooks. And I use the word consumer because the entire objective of these policy responses seems to be to maximize the spending power of consumers. And I’m wondering why we haven’t seen any material response in the form of genuine infrastructure spending. Spending on raw infrastructure, bridges and roads and light rail, and the types of things that the CCP for example has been spending on for the past 15 years, which would be investments that generations of Americans, Europeans, Canadians, etc, would benefit from. We don’t see any of that, we don’t see major spending on education, which again is a massive investment in future productivity. Instead, we see all these programs to continue to find new ways to firehose money into people’s pockets and/or facilitate easier credit growth. So we’re going to lower standards for lending, or we’re going to incentivize banks to lend to certain constituencies, etc. Is this informed by this neoclassical view and can this go on?

Steve:00:48:52Very much. It can’t go on, it is informed by neoclassical and it can’t go on indefinitely. If you look just like the private credit side of things, then there would have been a stopping point there because ultimately when you get so much debt taken on that you can’t finance it out of your income that debt helps you generate, then you’ll have a breakdown like the 1930s and that’s the end of the bubble. But with the power of the Fed being harnessed by neoclassical economists now, and whether that certainly wasn’t the case back in the 1930s, there’s an unlimited capacity of money-creating government to create money, and that is all being done, not all, most of it being done by the Fed. And that’s what’s driving up the asset prices.

And their attitude to credit, neoclassicals is don’t believe the credit’s a problem. If you read Paul Krugman, we would have seen that crazy debate back at him, in 2012. And he literally says, in macroeconomics, he was all for including banks and stores where they matter. But why do banks matter to a story about debt and leverage? I just went, oh shit. It’s that easy to get a Nobel Prize, isn’t it? In their model credit doesn’t matter. In fact, they think stimulating credit conditions is always a good thing, because it’s a case of getting money from Richard who hasn’t got any good ideas for spending, across to Adam who does have good ideas for spending, or Rodrigo who’s really wants to spend now, all this sort of stuff. And that’s optimizing in a utility sort of sense.

And they think, well, credit’s always good. And they don’t think it changes the aggregate level of demand. And that’s literally again in my debates with Krugman, he says, he talks about credit as though it adds to aggregate demand. But that doesn’t make sense in any model I understand, which is the one thing he said in that debate that I agreed with. And he doesn’t understand the right models. So their mentality is, credit’s always good. So that comes on the credit side. And then on the other side they think, well, we should leave everything to the private sector. The government should not be involved in “picking winners”, and therefore the government shouldn’t be funding education and shouldn’t be funding research and all the stuff that happened back in the 60s, shouldn’t have occurred.

Well, you really have to think in terms of not who’s better at doing it, but who’s capable of coping with it. And back in the 60s there’s no way Elon Musk could have financed his expedition to the moon. That was NASA. And it was done to fight the Soviets. And the government has this capacity to create money, for whatever reason it wants to, and that caused enormous growth in the technological basis of American capitalism, is a major part of its success for the subsequent 20 years. And then we cut its balls off, with this belief in their classical economics and we cut back on all those programs, and now the private sector can do it. But it wouldn’t be able to do it without that 40 years or so of building the capability on the government side. So there are some things which are too big, too long lasting, to have the private sector doing. You want the government to do those. Others which are short term with the investments feasible for a small group, you want the private sector to do that. There’s a symbiosis between the two, rather than the antagonism that’s a built into the way neoclassicals think about it. Funnily enough, they’ve got the same antagonism that Marxists have, only in the reverse direction.

Richard:00:52:16A cynic may respond that the government that were responsible for the Apollo program, or DARPA, with Manhattan Project of the mid-20th century no longer exists, and they’re all captured by special interest groups and crony capitalism being the norm and the regulatory framework and urban guardrails pushing us to this winner take all or winner take most dynamic, in the economy. So how would you respond to that? The idea would be governments can’t do it, you have to force it to the private sector. But as you rightly pointed out…

Governments Can’t Do it

Steve:00:52:51That’s been a very successful neoliberal policy. My favorite example is Cameron, David Cameron, the previous Prime Minister of UK who gave us Brexit. He imposed austerity in the aftermath of the crisis in the UK, and one effective way to impose that austerity is to stop funding local councils. And when local councils aren’t funded they’ve got to shut various services down. And finally, somebody complained to him about it that he took seriously, i.e. his mother. Mother wrote and complained about the library in her local constituency being shut down. So David, dutiful son, wrote to the to the mayor of that Council who happened to be a Tory. He got a seven-page reply back from him, the Tory councilor saying this what we’ve had to do courtesy of your cutbacks of our funding. And he said we don’t even have a contract. Get rid of some of the back office activities. We already did, here are three councils this area, we’ve all sacked our own clerical staff and pulled together to have this separate service doing work of three councils and the library clerical staff have gone. We can’t get rid of them they’re already gone.

So we had to shut the library down. And then people say, oh that’s a sign of how bad government is. So in this, there’s a deliberate, what’s called public policy approach, in neoclassical economics to treat people in the public service as being venal, just in the same sense that Donald Trump is venal. I’m sorry. If people are going into public service, quite frequently you’ve got the public, genuinely have a public sense of interest in mind and we’ve been over time they’ve been… nobody goes into being a nurse in ICU because they want to make a profit. There’s a real sense of caring for human beings there which we’re finally recognizing in the middle of COVID. But we’ve undermined that belief in public service that people have so much, and we’ve underfunded it that the public ends up being pretty bad, we think we’d be better with a product. That’s exactly what with the neoliberal politicians want us to think.

So if you have well-funded public health for example, which is still the rule, thank god in my home country of Australia, and people can experience it, then there’s a fight to the death attitude from the public, not to let the Tories, and we have a local bunch of Tories called the Liberals, undermine it. You never had it in America. And they’ve been very successful in undermining it in the UK. So often,  the failures of the public sector are caused by being strangled financially by neoliberal politicians.

Rodrigo:00:55:32So one thing I have a hard time, if we were to look back and take your policies into account versus the amount of credit that existed throughout the 1990s, 2000s and now, would we end up in the same place? We have, I think all the fiber optic cable that exists around the world was funded by debt that eventually everybody had to write off, now we have this massive infrastructure, same thing for oil fields. I mean, there’s arguments to be made that debt and credit have actually gotten us much farther as a society than something that would be a combination of government with corporate planning.

Steve:00:56:16Yeah, I agree with that. And one book I recommend if you haven’t read it yet is The Brief History of Doom by Richard Vague. Are you aware of that book?


Steve:00:56:24Okay. Richard is a billionaire, he once told me how much he’s worth but he’s a billionaire, courtesy of being quite successful running two financial corporations in Texas. And he’s looked at the history of … and one of my lots of facts and looked at the history of debt crises around the world and said, every last major financial crisis has been caused by private debt, that forget about government. The cause of the problems is private debt. But he is somebody who worked in the Texas banking sector during the oil boom of the 80s, and he’s very conscious that a lot of the construction was debt financed, the railways in the UK and America were largely debt financed. So debt does play a creative role when it’s the servant of the industrial sector. The trouble is when you let it become the master. And that’s what we’ve done.

So if you constrain finance, a certain amount of debt and turnover of debt is quite creative, I don’t want to have zero debt. I want to have about 60% of debt, 60% of GDP debt, 40 to 60%. That’s quite a sustainable level. And I want to have cooperation. When you can’t get money, you can’t borrow money from a bank anymore. I’ve had a very painful personal experience of a family member wanting to start a business and being unable to get a loan. So I gave it a loan that worked out very badly for my family unfortunately. But if it had been an old fashioned bank manager, when you were a successful business person, this member of my family was, then she would have got a loan. And it would have been a successful business able to finance itself out of the debt commitment, would have been no problem. But because the only way she could get a loan was why mortgaging a house that was already mortgaged, she couldn’t start a business.

So I want to get financing or lending to companies again for genuine investment for working capital and so on rather than at the moment the funding as Adam said earlier is for asset bubbles.

Rodrigo:00:58:16Right, that was my next question. We have this massive private credit all around the world. Canada’s huge as well as we’re mostly Canadian. And what you’ve shown is that most of that credit goes to mortgages. How do you get money into entrepreneur’s hands that otherwise go to the to the mortgages? Is it a universal basic income with some caveat.

Getting Money to Entrepreneurs

Steve:00:58:42I have a range of things. I mean, yes, universal basic income is something I support. I love the Modern Monetary Theory, and people don’t, I do. I think it’s a good idea. But in terms of the banking sector, I’d want to go back to small regional banks again, where they know their local business people and can therefore lend on their knowledge of who’s a good and who’s a bad business person. My father was a banker of that nature back in the 60s and 70s, and he believed, he literally knew every business in Circular K, which is where he was based. So his knowledge of who was worth lending to and who wasn’t was pretty comprehensive. And you can get a loan as working capital or investment capital for a going concern. Getting money to entrepreneurs is much harder. If a bank lends to entrepreneurs as a general rule they’re going to lose their money.

So one thing I proposed was to change the nature of banking to make it a bit like a combination of retail banking and venture capital, that you could have a bank lending and taking an equity position in what I call entrepreneurial equity loans. So you might lend to five companies. Four of them go bust, one of them succeeds, and the capital gain on the one that succeeds makes up for the capital losses on those that fail. By the way, some of my patrons, when I mentioned that threw their hands up in horror and said, I don’t want a bloody banker on my board. And I can completely understand that. So you’d have to have controls on how much control the bankers themselves had. As a result of that their short termism tends to get in the way. But something I meant, banks would actually lend to entrepreneurs, and then also more fiat money in existence. So you don’t need to borrow as much because there’s more cash flow.

Adam:01:00:25You also have to have an economy that has enough of a safety net to allow more people to take risks.

Steve:01:00:33Definitely, yeah. That’s why I say basic income.

Adam:01:00:36Yeah. And I know you’ve already advocated for publicly funded health care and a stronger education system and better more comprehensive welfare and joblessness support and unemployment income, and all that kind of stuff. But does that run counter to the neoclassical model too?


Adam:01:01:03Why? Because you’re creating mal-incentives?

Steve:01:01:08They have a vision like, if I do this what am I drawing, supply and demand curves. And the intersection is Nirvana, that’s where Nirvana occurs. And anything which deviates you from Nirvana is a bad thing. But that’s the mental framework of somebody in classical economics, supply and demand, let the market choose. And if you have any intervention whatsoever, whether that’s trade unions or governments, you move away from that equilibrium point, that’s a bad thing. And that’s become the mindset we have. When you have a mindset instead that says this is a symbiotic relationship between government and the private sector, then there are some things which are better done by the private sector, some things are better done by public. I’ll use an example in universities, I think university education should be difficult to get, hard to get into university, but free once you are there with the state paying the finance, and that would mean the students are then spending the money they get from the state. It’s not a bureaucrat deciding where the money goes, it’ll be the students receiving the scholarships.

But in terms of the food on the campus, I want them to be big capitalist, thanks very much, have experienced University mess halls. Give me the local, like the street food in Bangkok any day over the mass production stuff you get out of bureaucracies. So there’s ways you can say there are areas where it’s better to have public funding, and there are areas where it’s better to have private innovation.

Rodrigo:01:02:41Sorry, Richard is Brazilian. So I went a few years back, he says, you got to come to Rio, you got to come to Sao Paulo. So I decided to book Brazil on my way there. And it was shocking to me to see how much of the industries Brazil is known for, were incepted and created by government. Petrobras, the car industry. They tried their hand in the computer industry and that didn’t work out. And then the university institutions, these technical institutions that sprouted from that initiative is what continued to not only feed the Petrobras and the car industry, but we ended up meeting with quantitative investors. We met those people who came out of university, didn’t get a job in Petrobras and ended up in the financial industry or in other areas that required technical knowledge, that continued to kind of push forward the Brazilian ingenuity and innovation and becoming a global player.

So to me, that was a key moment in my life where I’m like, maybe some government partnerships and intervention is not a bad thing. Like we’ve been led to believe that every, as a capitalist, every government intervention from a business perspective is wrong. Anyway, that’s just kind of interesting observation with regard to corporate and private funding.

Richard:01:04:04Putting in a good word for the Brazilian government is not something you hear every day especially on our podcast, so good on you Rodrigo for doing that. Professor, I wanted to kind of understand your views given where we are, given what the incentives are currently in the economy. How do we walk backwards? Walk away from this disequilibrium, from this wealth concentration and so many of the other issues particularly debt overhang that we see, to something that is more akin to how you would view to be a more productive use of labor and capital and technology.

Steve:01:04:43A major part is reducing the power of the financial sector. And that means reducing the level of private debt. And that’s where the Modern Debt Jubilee came in. And I’ve actually modeled that in my Minsky software by the way, how it could actually be done. And one outcome that I didn’t expect was a Debt Jubilee which created money, that basically swapped credit based money for third person money, caused an economic boom. And the reason being that because the distribution of income has become so skewed towards the wealthy, by giving a per capita gift to everybody across the economy you push it more into the hands of the poor and the middle class, who spend a lot more. So the amount of demand goes up on the economy which of course would benefit corporations. And so it’s possible to do it. I know it won’t be done, and what really scares me is more though the ecological question I think, as well as encouraging us to take on too much debt, neoclassical economics, particularly William Nordhaus, it’s really good names here, have encouraged us to grow far larger than we should ever have done on the planet. And I think our future is going to be shrinkage, not growth.

Adam:01:05:51Okay, so this is perfect because this is exactly where I was hoping we would transition to, because I know a lot of your work focuses on how the modern capitalist system does not properly or even at all account for externalities. First, second, third order externalities whatsoever, and sort of going back to limits to growth, and as our consumption oriented economy begins to knock up against the limits of our biosphere. So maybe walk through the work that Nordhaus did and how he arrived at his conclusions and why they’re so misguided and what the implications are now for the world and the environment and climate.

The Nordhaus Implications

Steve:01:06:49Yeah, I think the only way I can rationalize how Nordhaus thought about climate is that it comes from this neoclassical school. He is writing the Samuelson textbook these days, which is the original neoclassical economics textbook. So he’s become the custodian of the conventional wisdom. And because that is a model which says, well, capitalism can cope with anything, an automatic thing that will catch…if capitalism copes with anything, therefore climate change can’t be too much of a problem. And he first began by attacking the Limits to Growth. He rubbished the analysis they use, completely misunderstanding it as far as to point it out in a journal article.

Adam:01:07:31Walk us through the details of that, because I think people will find that really fascinating.

Steve:01:07:36Okay. What we call the Limits to Growth are published by what’s known as the Club of Rome. But the people who wrote it aren’t a bunch of hippies or even a bunch of Italians. They are MIT engineers who developed the whole new approach to modeling complex systems called system dynamics. And they built the world’s first large scale model which basically looks at feedbacks. And what you have is amplifying and dampening feedbacks in a system. So if you for example have more food, that is an amplifying feedback for the number of children, but if you have more food, you also have more income and that dampens the need to have more kids to keep you alive later in life. So when you put all these feedbacks together, what you get with rising income is declining population growth, for example. Now what Nordhaus did was feed that particular part of Limits to Growth into an equilibrium model and say, look, it predicts rising population with rising income, which is the opposite of what the Limits to Growth study actually found.

So what you have with Limits to Growth was a way of handling feedbacks in a complex system with non-equilibrium behavior. And I know from speaking personally to one of the authors, Randers of the Limits to Growth, they actually thought economists would welcome this technology because it would enable them to escape from having to assume everything happens in equilibrium. And they were horrified and shocked by the hostility that economists showed towards them because what they wanted to do is go back to equilibrium thinking. They didn’t want to stop thinking in equilibrium, they want to make everybody think in equilibrium terms. So that was get rid of the capacity to think in a non-equilibrium fashion, which is what the Limits to Growth was about.

And then over time, Nordhaus gradually developed his own approach based on an equilibrium way of thinking. But his main paper, I want people, you can actually find it on, pretty easily on the web, a 1991 paper called To Slow or Not To Slow: The Cost of the Greenhouse, and in that he assumed, simply assumed that 87% of industry would be unaffected by climate change because it happens in what he called carefully controlled environments. No, that included manufacturing, services, all retail and wholesale, government, mining. Now what if all those things got in common? They are either underground or under a roof? So he basically said anything not exposed to the weather is not exposed to climate change, assumption number one. Now, if you do that, first of all it shows you don’t know what climate change is, and secondly if you do it you get trivial numbers for climate change. So he came out in that paper saying, using his calculations, the impact of a five degree Fahrenheit increase in temperature across the planet would be a zero, a one quarter of 1% fall in GDP.

Adam:01:10:25So that’s not annual GDP, that’s like one quarter of 1% in cumulative GDP, right?

Steve:01:10:35It’s basically saying, the GDP of the global economy in 2100 will be one quarter of 1% less than it would be if there was no global warming. And that in terms of an impact on the rate of growth is like a 0.002% fall in the rate of growth which you can’t even measure. And that’s what they pumped out. I’m sure it’s Larry Summers who was one of the experts that Nordhaus surveyed for one of his papers, who said that he was impressed by the fact that it takes a very fine pencil to tell a difference between an economy with or without climate change, or with or without mitigation. And they literally assumed it was trivial. And then that’s where their arguments for carbon taxes and so on have come from with small numbers, because the worst estimates they gave were I think of a 13% fall in GDP compared to what we would be in the complete absence of climate change when in 80 years’ time we would be six to eight times as wealthy, anyway.

Adam:01:11:42So I think going through the analysis that Nordhaus did, how he arrived at his numbers, because I think that’s it’s fascinating that at the time he felt and I mean, I went back and looked at that paper, and then looked because so many papers on climate science reference that 1991 paper, I went back and read it after you, I heard you mention it. And it’s fascinating how he arrived at those conclusions with this strange linear thinking. Like almost like taking a cross sectional approach and then extrapolating it longitudinally and assuming linear effects.

Rodrigo:01:12:25Just on that, is he saying that all these industries can control their own buildings to maintain any adverse effects to the environment because they’re closed off. Is that what it is? What about like where do they get their energy?

Steve:  01:12:46Well, you don’t need energy. You don’t need energy to produce output. You just need to put the machines. This is where neoclassical economics is so dangerous because they became divorced from the whole physical world. So their model of output, the mental model they used to call the Cobb-Douglas Production Function. And that says, output is a function of labor and capital, and technology, no energy. Now I’m on my little inside, they got me into this here in the first place. So I wanted to say, well that’s wrong. Energy has to play a central role. How can you bring it in? And one of my favorite little sayings that originated a new approach for me in economics was to say, Labor without energy is a corpse. Capital without energy is a sculpture”. So you have to have energy as an input. And if you have zero energy in, you’ll get zero products out the other side, but they in their models, you can have zero energy in and produce tons of output out the other side. So literally they’re mentally divorced from the physicality of the real world. And therefore, they can come up with these models and not even realize how absurd they are.

And I’ll give you a quote, this is the quote from their paper. Let’s say table five shows a sectional breakdown of United States national income for the economy as subdivided by sensitivity to greenhouse warming. The most sensitive sectors are likely to be those such as agriculture where output depends upon, in a significant way upon climatic variables. At the other extreme are activities such as cardiovascular surgery or microprocessor fabrication in clean rooms which are controlled and carefully controlled environments that will not be directly affected by climate change. Our estimate is that approximately 3% of US national output is produced in highly sensitive sectors, another 10% and moderately sensitive and about 87% in sectors that are negatively affected by climate change. In other words, all you need is a roof. You guys got a roof? No worries. I mean, it’s insanely stupid. It’s beyond parody how bad this stuff is.

Adam:01:14:43How did he derive his models? I don’t want to lose that.

Steve:01:14:47Yeah. The models were based on, what’s taken over neoclassical economics since the recycled rational expectations revolution, is the work of polymaths in the early 20th century called Ramsey, and Ramsey build a model, I would call the model to work at the optimum savings rate for an economy. And that has growth occurring, again because of capital and labor being combined together. And this approach, that again assumes equilibrium. Now, when you look at the Ramsey model, he literally talks about a bliss point in the far future and that bliss point is where the rate of change of head per capita consumption and the rate of change of the capital labor ratio, stabilize. And that, the equilibrium of that system is what’s called a saddle, the saddle node. Now, there’s three basic types of equilibria. You have a stable one which will be like a ball, you throw a ball bearing into a ball and it’ll end up in the bottom of the ball, or you turn it upside down it’s a hill, you throw it on the hill and it will slide down. A saddle, if you are a magician who can throw a ball bearing so that it runs up and down the spine of the horse, it’ll stay on the horses back. But of course, it’s going to slide off. Well, that’s the actual equilibrium, it’s unstable mathematically.

So Ramsey assumes that you could go back in time and find the consumption level, then therefore the investment, investment being effectively output minus consumption, find the consumption level that puts you on the path to land on the bottom of the horses back and the bliss point in the far future. And they call that a jump variable. Now that’s the model that Ramsey used. So that Nordhaus uses. So in his model, you hit the bliss point in 2500 effectively, and no matter what happens to the economy, no matter how much damage occurs, and we showed this in a recent paper which we hope will be published in Proceedings of the Royal Society in the next few months or so, we hit that with a damages of 98.4% of GDP destroyed. And it hit the bliss point in 2500. Even though only one point every 1.4% of GDP was left. And at that point with maximum damages, the capital to output ratio, or the output to capital is normally about one to three. If your output’s a billion, your capital is going to be valued at 3 billion, the output to capital ratio and that was 20. So $1 of capital produces $20 of output, that was necessary to sustain the model. And the Cobb-Douglas Production Function happily gave you that result.

So we have a completely nonphysical, non-biophysical vision of how output is produced, that is essential to the results these models are returning. So if we live in a world where you don’t need physical goods to produce output, everything’s going to be fine.

Rates of Decay and Temperatures

Adam:01:17:52We sort of lost track because we pursued to a couple of different directions. But the point I was trying to get out there too was that my understanding was that the way that Nordhaus arrived at his rate of decay as a function of increases in global temperature was by observing productivity in, for example, New York State and observing productivity in Florida, and then determining that there was a gradient, like fitting a linear function on the gradient between the difference in productivity between New York State and Florida and the difference in average temperatures in New York and Florida.

Steve:01:18:37That’s the second method. So there are two main methods. They made up their numbers, I’m not going to call them data. The first one is what I mentioned to be originally where they simply assume that a roof will protect you from climate change and then they say, well, what’s left which is affected, there’s an optimum temperature for agriculture and so if you’re in a region where the temperature is lower than the optimum, and global warming raises the temperature, that’ll be good for you. And there are others which are too warm and there’ll be bad and unbalanced minor effects. But the other thing is the one you talked about, and that was the first one I realized, because I read Richard Tol’s, 2009 paper, The Economic Impact of Climate Change, and I literally, my wife hadn’t walked into the room with some food for me as she’s done here a short while ago, and she’s very Buddhist about these things. I would have gone into a deep depression because I read it and thought, so can I swear on your program?

Adam:01:19:28Absolutely, it’s encouraged.

Steve:01:19:29It was so fucking stupid. You fucking idiots you’re going to kill us all. That was my reaction. Because what he said was they assumed that the temperature, the GDP variation we find today can be used to proxy climate change, and that’s what you’re talking about here. So if you look at for example, and I’m going to use two states of America in this example, if you look at Maryland and Florida, they differ here in temperature by about 10 degrees Celsius, which is about 16 degrees Fahrenheit. And Florida’s got about $20,000 per head per capita income lower than Maryland’s. So they said all that means that if temperature rises by 16 degrees Fahrenheit, GDP per head will fall by about 20%.

Now, if temperature rises by 16 degrees Fahrenheit, we and most of all life forms on this planet will be extinct. We’re totally, ludicrously saying we can compare spots on the planet today and the temperature difference and GDP difference can be used to predict the impact of climate change. They haven’t got a clue what climate change really is. Did they make up their own numbers and reproduce some? It is totally absurd.

Adam:01:20:44It’s absurd to think that we could enter another ice age and have 60 to 80% of the planet covered in glaciers or enter a new regime of higher temperatures, five or 10 degrees Celsius higher than today globally which would have total desertification of the planet, and only experience a cumulative 20% reduction in total output or a reduction annual reduction in GDP per capita of 20%.

Steve:01:21:18It’s crazy. You have a good point with the phrasing but as well, because Nordhaus’ damage function which is, what is going to be the impact of climate change on GDP is a quadratic, and the quadratic Y equals X squared. Well, the big question for a quadratic, the only thing is, what’s the parameter before the X squared, and his parameter before the X squared is now 0.00227, meaning if rich, if there’s a one-degree increase in temperature, the decline in GDP will be less than one quarter of 1%, that’s back to the first number he used 0.00227. And then if it’s two degrees, it’s four times that which is less than 1%, you get up to 4%. It’s about a 4% fall. So there’s trivial amounts but it’s a quadratic. Now, we know that the Ice Age was roughly four to six degrees Celsius, six to 10 degrees Fahrenheit colder than now, and at that point New York was below a kilometer of ice, and so is Chicago and half a bit of Northern Europe. And according to that model, the GDP would be 7.9% smaller than it is today, and that’s how stupid it is. It deserves to be laughed at not to be taken seriously.

But these guys have taken it seriously. And like the worst I’ve seen, one thing, a paper that I’ve written, which I’m hoping to be published in Proceedings of the Royal Society sometime soon, one of my coauthors is Tim Lenten who’s a climate scientist. He first started researching tipping points. And tipping points are things where I got a small change in temperature can cause a total qualitative flip in something, so the clearest one is the Arctic. When the Arctic goes from being ice covered during summer to clear of ice during summer, it goes from reflecting 90% of the solar energy that falls it on a to absorbing 90%. So they get a dramatic increase in energy. That’s a tipping point. And in this paper, written in 2008, Tim surveyed a whole lot of experts on different major components of the climate. And the conclusion was that it was highly likely that we’d already tipped the Arctic. Already tipped, and Greenland and Arctic are clearly likely to go this century and five of the six other systems could also surprise us by having a nearby tipping point. And Nordhaus’ summary of that was to say their survey found no critical tipping points for the next three centuries for a temperature rise of less than five degrees Fahrenheit.

Now, I looked at that and I thought if any school student or university student that submitted this paper as a summary of that paper. I would have failed him and properly kicked him out of the course.

Richard:01:24:06Show me the incentives and I’ll show the actual, I showed the opinions right. I don’t think we need to dive too deep into this, but it’s likely that Mr. Nordhaus had an incentive misalignment let’s call it, with perhaps what would be the best interests of the planet as a whole and I think Jason Buck rightly invoked Gell-Mann Amnesia. We should definitely take Nordhaus’ opinions with a huge boulder of salt specifically in this topic.

Adam: 01:24:40The challenge is that Nordhaus’ seminal research has permeated the entire canon of economic thought on climate change. To what extent, for example, does the new IPCC report rely on Nordhaus’ work for their modeling?

Steve:01:25:01It’ll be in the second or third report. Not the first one, it’s by the scientists. So that doesn’t get polluted by economists. But I think it’s working groups 2 these days that does it. I’m not really sure. That’s what the economists publish it. And they literally came out in a 2014 report where one of the chief coauthors was Richard Tol who is a total acolyte of Nordhaus. They actually had a frequently asked question saying, will other industries be affected by climate change? And guess what, industries that aren’t exposed to the weather, aren’t exposed to climate change. Exactly the same assumptions. And they came out saying, everything you can possibly think of will be more important than climate change. So I’m waiting to see what the economic section is like this particular time around, but largely speaking it’ll come up with the same sorts of conclusions. So he’s poisoned the whole field.

Richard:01:25:52Do you think that the fact that neoclassical economics and this broader philosophy ignores the role of energy in production, is a key variable in not accounting for the externalities that are leading us towards this Doomsday path as…

The Role of Energy

Steve:01:26:12Absolutely. And I don’t blame Nordhaus there, I blame Adam Smith. Because if you go back far back enough in economic history, history of economic thought, the preceding school to Adam Smith was the physiocrats based in France, which is highly rural compared to in Scotland which is highly industrial. Smith actually went to France and met the leading physiocrats and their argument came from a book by Richard Cantillon which is, I can’t think of the title right now, but Richard Cantillon, you’ll find the book online, and the opening paragraph of that book says, land is the source of all wealth. I got a mosquito trying to make me part of its food supply over here. Pardon me. One of the joys of living in Thailand. So they said land was the basis of all value. And you look at the first chapter of Smith’s Wealth of Nations, and he’s taken land out and he put labor in. And I can understand it again from his point of view, he’s in industrial Scotland.

If you’re down in France you put a seed in the ground and you see your seed becomes 10,000 seeds in the plant, then it’s obvious you’re getting a free gift from somewhere being the sun, and they actually talked about the free gift of nature. And that was the sort of thinking they had, which fundamentally, energy played an essential role even though the word energy hadn’t been invented at that stage, when energy was only written, they’re going to that I got him beauty, invented in 1809 by an English polymath, but they saw a central role for energy and said, that’s what we’re exporting and turning into wealth, whereas Smith said, it’s labor. Now what that set up over time was the labor theory of value battle. Where does profit come from? Was it labor or capital? And we then had Marx coming out of that. And then the neoclassicals come along and say it’s labor and capital together. But in the process, were forgotten energy, were forgotten the real world. And so you have models of production in which energy plays no role. And if you have energy in there, by definition, you have to have waste. And we have waste. You then have a question of what’s the capacity of the system to absorb that waste, and so on and so forth.

So if we hadn’t been diverted by Smith, we hadn’t been built on what the physiocrats said, we would never have got into this situation. We would have been aware that to actually have production on the planet we have to take available energy which we get for free from the universe, turn it into useful work, and that will necessarily cause waste energy and waste materials, and we would have been thinking about that right from the very outset. Instead, we’re going to realize it in the middle of a crisis.

Richard:01:28:43      Couldn’t it be the case Smith wrote…Sorry Rod…take this forward. It could be because Smith wrote this column two centuries ago, he was using labor as a proxy for energy, because it was the labor of men that kind of drove forward the production function.

Rodrigo:01:29:01Men and donkeys?

Richard:01:29:03Yeah, exactly. Men and beast. And it was our job as a society in the 200 years that followed to evolve our thinking towards ethnology energy. So perhaps he used the proxy that he had in place given his surroundings as you so rightly put in Scotland.

Rodrigo:01:29:20I want to add because that was along the same lines, and maybe you can answer that. So with that in mind, I always thought that the cost of capital embedded the cost of energy and that the theories on “externalities came later” also fit in the model of taking that cost into account. Or is it the fact that capital or the idea of the cost of capital does not account for energy?

Steve:01:29:44That doesn’t account for it at all. I mean, a bunch of non-orthodox economists and engineers and scientists have been trying to incorporate the energy in economic theory of production for decades. One of them being a good friend of mine, Robert Ayres. And throughout they’re saying that you have to have energy playing a critical role in your thinking. Now I have, for example, I had a meeting with the United Nations Environment Program in Bangkok as it happens, about a decade and a half ago, when I was doing a report along with Australia’s primary research center on resource sustainability in Southeast Asia. And at one point in debating with the chief economist of the United Nations environment program, he said, “We don’t have the most energy. We can combine labor and capital to make it”. And myself and it was I think of … first name, but one of the other non-orthodox physicists/economists said, so, you believe in perpetual motion machines, do you? He had no idea what we’re talking about. So they simply don’t have an understanding of energy, the laws of thermodynamics don’t even register with them.

So in that sense we’re failed. I mean, that Smith helped by distracting the argument for a century. And then the way out, it was a political resolution. The idea that labor and capital both contribute to production through Cobb- Douglas production functions and so on. So we’ve been sidetracked from thinking about the economy in a biophysical way right from the outset.

Rodrigo:01:31:16So the common narrative is that global warming does not lead to any major economic disasters. Clearly if we believe your work and understand it, small changes in weather can lead to major changes in GDP, possibly the extermination of humanity. The question that’s still out there is whether we can do anything about it and whether in fact it was the externalities of capitalism that are causing this global warming. You mentioned the Ice Age. That happened without any intervention. How much data and evidence is there right now that indeed it is human beings doing versus…

Global Warming and Human Beings

Steve:01:31:57Overwhelming. You’ve got to be a flat earther to believe it otherwise, I’m sorry. Anybody who argues against humanity being the main causing factor is a flat earther. It is just massive evidence in that sense. And in fact, the tendency that the natural cycles of the planet, we know them. They go to orbital cycles, … cycle that the whole range of different cycles about Earth’s orbit that affect the amount of energy reserved from the sun. There are cycles in the sun as well, et cetera. When you put all those together there was a cooling trend which apparently is about to reverse, but it’s been generally speaking for most of the last 200 years, those natural cycles have been making the earth cooler. So the contribution of humanity by increasing carbon dioxide has overwhelmingly been more than 100% of the cause of increase in global temperatures. And then the question is, what does this do to the mechanics of the planet?

And here, this is the point Adam had a moment ago, we mistake geography for climate. Now, you know if you drive from New York to Florida you’re going to have a warmer environment when you go down there. And Florida is going to be have a sustainable economy because it can buy wheat from Iowa. Now, if you increase the temperatures as much as we’re doing, so that the ideal growing range for wheat moves north faster than we can grow topsoil, then you’re not going to have food at some point. And then this is what’s going on. The neoclassical, particularly Richard Tol. I think few people are loathed more than Richard Tol on this thing. I say the personal stuff out in the open. But he’s arguing that the climate change changes slowly.

Well, if we’re changing the temperature, at the rate of something of the order of one degree Fahrenheit per 20 years, we’re driving the optimum location for wheat farming from Iowa towards the Canadian border, and that is faster than topsoil can form. So we’re going to be, on that front alone, we could, even though it might now become possible to grow wheat much further north, topsoil isn’t there. And if you look at what are the parts of the planet having the worst wildfires right now, Siberia. So we have caused far faster rates of change in the climate than there’s ever been experienced on the earth before with the sole exception of when the meteor knocked out the dinosaurs.

Adam:01:34:30So the optimists obviously will bring to bear the argument that human innovation is up to this task, is, we will be able to innovate our way around this anthropomorphic climate change in time. Are you seeing any evidence that…

Steve:01:34:56No I haven’t seen a Harry Potter movie for at least a decade. So I haven’t seen any evidence of that.

Adam:01:35:02So, boring magic?

Steve:01:35:04Basically what they mean when they say technology, they mean magic will solve everything. And actually, there’s a very interesting engineer that I’m now involved with who is actually an Australian mining engineer now working in Finland, Simon Michaux. I pronounced his last name wrongly. But he’s done brilliant work on what is involved in going from a fossil fuel economy to a mineral economy? Because his point is, if we’re going to go from fossil fuels as the energy source to solar, then we have to use minerals to get the solar energy. And what are the mineral constraints there, and they’re massive. At the moment the way we produce solar cells involves a lot of what are called rare earths, not the called rare as you know because they’re rare, but because they’re amorphous, they tend to occur with other deposits, and therefore it’s very hard to refine them and very wasteful, but the amount we need to do that shift like there’s…how many million cars would there be in America? 300, 200 million cars. How many of those are electric? Couple of million. So you got to convert 200 million cars, the equivalent of that. And that’s how many batteries do you need, how many solar cells to support them rather than coal fired power stations and so on.

So the physical constraints are there. The difference between magic and technology is technology takes material inputs. Now, when you look at those material inputs, we don’t have them. And there are various changes which can occur. For example, there’s recent research on batteries which use reversible rusting in ion batteries as a way of storing electric power. That might mean we can now have batteries that aren’t based on rare earth, they’re based on iron ore which comes in large deposits, that’s much more sustainable. I’ve seen his work on neo-carbon nanotube systems for solar cells and so on which again, but the thing is we are only in the very beginning of developing that technology. Take thorium nuclear reactors, which is another area which would be fabulous as a way of replacing coal based power stations. We haven’t got one yet. And it’ll be a five to 15-year development process before that’s finished. Again, technology, another difference between technology and magic, magic happens instantly, technology takes time. So in all those cases, if we started this 15, 20 years ago, then there might be a possibility of that technological solution working, but we’re behind the eye ball, and the only way to cope I believe is to drastically reduce our consumption levels.

Richard:01:37:30So what can we get there with market incentives?


Adam:01:37:33Can we get there with market incentives or?

Steve:01:37:36No, it’s too late for the market. No, you can’t put a price on carbon, that’s going to mean tomorrow people are going to put enough energy in developing thorium nuclear reactors. You’d bankrupt everybody else who might be able to get the thorium investment done. It’s going to be government funding and it’s going to be basically a war economy. That’s the only way. The government’s the only institution which can limitlessly produce money and use that to direct what people do. And it can also put controls on consumption as we did back in the Second World War, there was rationing to mean that, War Bonds were sold not to raise money, but to get money out of people’s hands so they wouldn’t be buying stockings when you wanted to be making parachutes instead. So all this stuff is only going to be done through a government system. And that’s why ironically I think neoclassical economics will be the theory which brings down capitalism, not Marx.

Richard:01:38:28But you’re focusing your criticism and rightly so, on the energy matrix and the inability of the market to create themes or for us to create the incentives to push towards a greener energy matrix. But I wonder if you might comment and to the extent that you’re familiar with the idea of solar geoengineering and some of the other ideas that the techno optimists might throw into this discussion and say perhaps there is a way for us to deflect some of the solar energy that’s being captured here. And obviously there’s some controversy around this because it would potentially mean that we would have a disincentive to actually clean up our act when it comes to pollution. So I wonder if you might comment on that side of actual human ingenuity blocking some of the heat coming from the sun?

Geo-engineering and Uncontrolled Capitalism

Steve:01:39:21Well, first thing I’ll say is we’re already doing geo-engineering. It’s called uncontrolled capitalism. That’s already geoengineering, already changing. We’ve already done it by accident. The question is, can we do it deliberately to reverse what we’ve done by accident? In that case, yes, there are some technologies we can do. But again, the scale is enormous. So I’ve seen some work for example saying there’d be, I think, I’d say some sort of degradable plastic balls that could be put on the surface of the Arctic to replicate the reflective power of the ice and then you could reform the Arctic. Of course, there’s sulfur dioxide seeding of the stratosphere to reflect sunlight before it comes in, that’s actually one of the cheapest and technologically the easiest ones to do. Growing massive kelp farms to absorb carbon out of the ocean and then have that in food substitute as well. All those things are there, but the scale of it is beyond anything. It’s not going to be down by market system, because the impact of a sudden collapse in our productive capacity will be such that the cash flow that corporations are used to simply won’t be there. So the only way you can get the cash flow is by government printing it, with inverted commas, which is the war economy approach. And I think we’ll all be forced into it.

I think the only question is how’s it going to happen? Will it be uncontrolled or will it be coordinated? And on the history of what we’ve done with COVID I’m going for uncontrolled and uncoordinated and rival countries doing it and “screw you” attitudes. If it affects your ecology in negative ways, we’re doing it because our people are dying.

Rodrigo:01:40:57Right. It’s always been the case that large positive shifts in humanity come from crisis necessity change… action and creating systems that over the long term will help us. The question about the ingenuity of human beings, I remember back in the beginning of COVID where they said, look, lockdowns will only happen in China because that’s a centralized economy. No democracy will ever be able to accomplish a lockdown. And yet every single democracy that I know tried their hand at it. And so when there’s a crisis and there’s a necessity, there is change and abatement of the problem. I think one of the things that as an optimist I might take offense to is that, we might not be able to solve this rationally. But when the crisis comes, there is some optimism even though COVID has not been perfect, that there was some sort of coordinated regime to manage it in the same way a phase shift in climate change might allow us to do as well. And it might lead to also like austerity, changing the way that people think about consumerism versus minimalism.

All these movements are coming along; it may lead to less consumption. I mean, I think there’s many reasons to believe that there’s going to be a reduction in population and therefore growth in the economy. All of those things come hand in hand. People think about it as a negative impact, but it might actually ultimately be a … as we get this crisis.

Steve:01:42:29Yeah. Well, in a sense I agree with you because I think, this is like a criticism not of capitalism, not of neoclassical economists, it’s the nature of humanity as well. The thing which distinguishes us from the other species isn’t just our intelligence, it’s the … where we can share beliefs. And then those beliefs empower us to do things which we could never do individually. But equally, they can generate a trend which is unsustainable, but you get positive feedback, and amplifying feedback for those people to talk to keep that trend going even though it’s unsustainable.

Now, normally in the past that’s many things like … and collapses and Easter Island runs out of trees, etc. But this is global. We are only going to react when we realize holy shit, this is serious. Now, holy shit this is serious for climate change is not going to be, even the fire domes in western United States aren’t enough for that. It’s going to be something which kills an entire city. Something of that nature. When for example one of my renewed worries is what’s called the AMOC. The AMOC, the Atlantic Meridional Overturning Circulation which we otherwise known as the Gulf Stream. The Gulf Stream. That is a water distribution system which goes right from the Antarctic to the Artic. But part of it that is in the northern Antarctic is called the AMOC. And that’s distributes heat from the equatorial regions of the Atlantic Ocean to Northern Europe. And it’s driven both by temperature differences and salinity differences. And if you dump too much freshwater into the northern regions of it, say for example melting Greenland and melting or the Arctic ice, then that breaks down the temperature difference and it cools the water too much, but it also dilutes the salt level too much and the AMOC will stop.

Now when that stops, the temperature is still being accumulated by the planet, but it’s stuck in the equatorial region. And therefore there’s a bigger gradient of temperature between the equatorial region and the northern region. Now that according to research by James Hansen and other scientists know what they bloody well talking about, generated super storms and they’ve got part of their evidence for that back, I could call the Eemian Period in climatology, where 1000 ton boulders strewn across some part of Ireland, which they proved ultimately wasn’t done by tsunamis but by normal waves, storm waves, the same super storms were a product of that temperature difference when the AMOC broke down. Now, there is recent data saying it appears to be breaking down. And what our economists tell us would be the impact of that, it’s going to improve GDP. I’m not joking, this is Richard Tol saying, we were proven in a recent paper came out four or five days ago, AMOC will reduce the damages because the temperature gradient will fall. If the temperature gradient drops a bit, that’s fabulous. If 1000 ton boulder lands on your house, that’s not so crash hot. And they’re leaving out those causal processes, reducing it all to temperature without looking at the temperature gradients that are going to exist, the super storms which could occur.

So I think what we need, I hate to say it, we need something like that to happen, a storm so big that we lose…a storm or a fire or some event like that that that wipes out just a large part of a place where humans happen to live and then in that case, holy shit, this was serious. And then the sort of changes you’re talking about would be possible. But again, it’s a bit like the phony war before the Germans, we had Chamberlain coming back signing a document to hand over Poland to Hitler, saying peace in our time. And you only had Churchill, one and only Churchill, but one of the most important ones saying, you’ve got to stop this madman, blah, blah, blah. And ultimately, the invasion of France occurs and suddenly, holy shit, this is serious. And then in that situation, people accepted all the rationing, they accepted having to become a volunteer for the army. They accepted everything being divided to a war issue, which was an existential threat.

Rodrigo:01:46:54They were days away from the Germans taken over all of the UK?

Steve:  01:47:01Yeah, it was close.

Rodrigo:01:47:05I just lost my headphones. Go on.

Steve:01:47:11There were a few events that if they hadn’t happened or they’re going to have in a different sequence, Germany would have successfully invaded the UK. So an existential threat tends to focus the mind. But until we actually see this as an existential threat, we won’t do anything about it. And when economists come out saying that a six-degree increase in temperature will reduce GDP by 7.9%. That’s not existential, that’s saying, don’t worry about it, which is what humans will fall back into. And then I can see this economist saying all we told you was going to be bad. No, you didn’t. You told it’s always going to be worth ignoring.

Richard:01:47:46So Jason asks an interesting question about bringing up AMOC and PDO and how that might change your models. Wouldn’t this suggests that the last 40 years have just been a single data point? How might that affect your current hypothesis?

Steve:01:48:05Last 40 years, I don’t quite follow the question.

Adam:01:48:12Yeah, that’s why I didn’t raise it because I didn’t understand it either.

Steve:01:48:15Yeah, I bring up the AMOC and Pacific I presume.

Richard:01:48:20The changes to the Gulf Stream would then sort of make meaningful changes to climate in general and the data points that you were drawing from before are no longer representative of the respective…

Steve:01:48:34And that’s exactly the point. These things will completely change the nature of the climate. So you simply can’t use statistical relations you find in the current climate to predict what’s going to happen if you shift the climate globally. And this is the problem, people normally, quite simply mistake climate for weather. Miami has a different climate to New York, which is true in a geographic sense but it doesn’t have a different climate in the sense of the climate change because it’s we’re in a circulation system driven by temperature levels determined by roughly 280 to 300 parts per million carbon dioxide on the planet. If we go to 450/500. and we trigger a dramatic change, for example, one of the ones that I like to speculate about because it makes a bit more sense to people is that we have three circulation cells for the atmosphere in each hemisphere of the planet. There’s the Hadley Cell from zero to 30 degrees north, there’s the Temperate Zone from 30 to 60 and there’s the Polar Zone from 60 to 90. Those are like if you had to have a pot of soup on the stove and you’ve got the temperature at a low level, you’ll get these rising and following columns. There’s a Bernoulli Pattern there. If you turn the temperature up, you can change it so you go from those three to one, a totally different dynamic inside  the soup itself. Ditto for the human climate.

Against studies I’ve seen by scientists say that, if anything above 5.5 degrees Celsius which is a 10 or 11 degrees Fahrenheit increase in their models will trigger a breakdown of the three cells into one. And that will therefore mean you get hot air rising at the Arctic, the equator, and falling at the pole. So the average temperature of the polar region becomes 22 degrees Celsius, that’s the yearly average, and then in the middle what you get is drought, along with super storms. Now, that’s what climate means, that what climate change means. Going from a climate where there are three circulation systems to just one. Going from one where the rain falls in the 30 to 60 range to where that’s the desert, those sorts of changes. Going from ones where the storms are, reach five on the Cyclone Scale because the amount of energy conversion is more, well it might reach seven. That’s climate change. And the mistaking climate for weather, is what the economists have made into a profession and continued fooling us to not worry about it, feeding off our own tendency to mistake the climate for the weather.

Adam:01:51:12So how might an opportunist view the next five to 20 years in terms of positioning, maybe not framing it as opportunists but how can people take action to manage risk effectively in this type of scenario?

Managing Risk

Steve:01:51:33One reason I moved to Thailand apart from COVID, and my wife being a Thai national which made it easy, is it’s a very short distance from the food fields here. It produces all its own food, it acts as a food exporter and it might be, I’ll probably underestimate, there might be a dozen hands involved in getting the food from the fields into my mouth. And if I wanted to move to a country or I could make it two or three steps, not just one. So shortening your supply chain, meaning you’re not reliant upon global supply chains. That’s a major element of how to cope with this. And if we are forced into the world of rationing supplies then you can forget about luxury goods. Your market has to be on what is going to be necessary for the vast majority of people to survive. And that again comes back to food and energy and basic energy levels.

So shifting over to something where you’re going to need more of a particular energy source rather than less. So renewables, thorium, are the energy level and then in terms of products, food, clothing, the absolute basics. Nobody made money selling silk stockings in the Second World War. You made money selling silk parachutes.

Rodrigo:01:52:51Have you thought about other geographies I always thought upper or middle Canada having access to water, having access to arable land, it doesn’t really have to watch out for hurricanes?

Steve:01:53:04Did you change your mind after Lytton? The town of Lytton burned to the ground.

Rodrigo:01:53:14That was the West Coast, wasn’t it?

Steve:01:53:16That’s okay. But who knows? Who cares about the Westies?

Rodrigo:01:53:19I’m just trying to think about, hey, listen, I’m going to buy three cottages, one’s going to be in Thailand. I’m thinking about somewhere in Canada because I got that nationality. I’m just looking for confirmation here. Where else? The Amazon Rain Forest in Peru?

Steve:01:53:32In this sense, I think the changes are more violent towards the northern latitudes than the middle latitudes, and more in the northern hemisphere than the southern hemisphere. So because most of the energy, most of the carbon dioxide pollution of course happens in the north, it appears that there’s lots of changes happening in Antarctica, but it’s so much bigger of an ice mass then the Arctic that it’s a slower process. So southern hemisphere safer than northern. I think this one again was a reason for Thailand, around the equator even though it becomes unbearably hot, it’s ridiculous how hot it is here now. That much more change won’t come its way whereas there might be a sixth, I can turn to the degrees Fahrenheit, six to 15 degree change in parts of the northern sections. And if that means a complete change of weather patterns that eliminate food, superstorms. I think the northern hemisphere, the north and further north are more dangerous you are. And I’d be looking for good water supply as well, independent of the climate. And on that front from what I’ve been told Uruguay ain’t bad.

The Demand for Minerals

Adam:01:54:48If we’re going to replace the carbon as the primary source of energy too, like you said, if we’re going to electrify everything, then we move from a carbon economy to a mineral economy. And so it seems like mineral extraction and mineral commodities might be another area where there is an acceleration in demand.

Steve:01:55:14Yeah, that’s another, lots of my friends who are speculators are popping into copper purchases and stuff like that right now, looking at elements of the periodic table that we’re exploiting far too much, and therefore going to drive the prices up. But equally, one of the dangers there is that’s also a reason to dig in back to the optimism thing, technologically develop away. So if we start getting on iron based rather than lithium based batteries for long term power storage, then that eliminates the lithium advantage, not completely because you need lithium because it’s so damn light. So it will be there for car transport but it won’t necessarily be there for long term energy.

Richard:01:55:50Not to mention the difficulty in securing reserves with all these rare metals because the larger reserves are in unstable countries like Congo, and China’s foothold in Africa is a clear signal of where this might be headed. So yet another essential focal point for confrontation between China and the West, which need…

Rodrigo:01:56:13Or cooperation, as they will need each other.

Richard:01:56:17Rodrigo, the optimist is back, I thought you were planning for Mad Max.

Rodrigo:01:56:21I’m not going to let that one fly. It could go both ways. There’s a cone of possibilities here.

Steve:01:56:26Yeah. The other possibility technologically is that the emphasis in technological development is going to be on trying to find ways to do things that use largely available minerals like aluminum and iron in the place of rare earths. So technologically, I’d be looking at companies that are trying to build aluminum or iron based alternatives for energy storage and carbon nanotube systems for solar power rather than silicon dioxide and so on. Gallium arsenide.

Richard:01:56:58We’re coming up on two hours and despite Rodrigo’s and partially my best efforts to try and bring some optimism either through technological means of other, I think we failed at that task. So I’m wondering, in terms of your general outlook, are we just headed for a rough few decades ahead in terms of your vision?

Steve:01:57:24I think this is the roughest decade since the collapse of the Roman Empire.

Rodrigo:01:57:29Could you imagine how resilient our children will be now that they’re finally going to start facing some issues, I think I’ve always said that I want my children to suffer as much as possible to have a fulfilling emotional life. So it will create a bunch of meditators and stoics. That’s the silver lining on that one.

Steve:01:57:51People also suffering from PTSD because of the stress of trying to stay alive, which is what’s scary. We’ve had a really low, even though we’ve had more continuous wars, courtesy of America’s imperialism for the last 50 or 60 years, nothing like the wars people experienced in the Middle Ages, and then post-Roman collapse as well. And you were living in a permanent state of PTSD. So I think that’s also what we might be leaving to our kids.

Adam:01:58:18Okay. I’m going to wrap it up because we’re hitting the two-hour mark. So I want to first of all to say thank you to Steve for giving us two hours of your evening. What is it? It’s sneaking up on 11pm there. So thank you so much, and it’s impressive that you’re able to remain so energetic and articulate.

Richard:01:58:41Please let everyone know where they can find you. I know you mentioned the book that’s coming out. Maybe you can remind us of the title and date and social media presence or other presence that you might think worthy mentioning.

Steve:01:58:55Yep. I’ll just bring up a little bit of screen sharing here if I can to finish off. Let’s just go and do a share here. So this is the title of my new book that’ll be coming out between October and December. This is actually good. As you can see the page proofs. One more editing needed in the index is still to go with The New Economics- a Manifesto. That’s October to December, in terms of of Europe to America. Social media, my main source of revenue is Patreon. So if people want to support me, they go to I’m trying to find one of my sites. This is my website. That’s the article on A Modern Debt Jubilee there, but it’s a That’s the main way to best support my work and keep in touch with it. And then if you like being aggravated on Twitter, you can find me @profstevekeen.

Adam:01:59:56Fantastic. Thank you so much Steve. This has been absolutely terrific, exceeded all my hopes. And thanks again. By the way, please like and share if you want us to be able to bring on guests like Steve, then we need your support and engagement. Really appreciate all the questions and comments from the peanut gallery today. Some really insightful ideas and questions and directions that we were able to go in. So thanks for that, like and share and…

Richard:02:00:29We’ll have to have you Steve back for round two in the coming months for sure.

Steve:02:00:36I can’t wait to have some off-screen conversations with you guys as well about some business developments I’m doing too, because my first meeting with you blokes, I like what I’ve experienced and I’m working on some other stuff apart from climate change you might find interesting.

Rodrigo:02:00:49We’ll stick around that after the commercial.

Adam:02:00:53Thanks all.

Steve:02:00:53All right. Okay. Bye.

Rodrigo:02:00:55Thanks everyone.

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