The Great Simplification with Nate Hagens - Steve Keen: "Mythonomics"

Episode Date: August 3, 2022

On this episode, we meet with Economist, Author, and Research Fellow at the Institute for Strategy, Resilience, and Security at University College in London, Steve Keen. Keen discusses how mainstream economics misses the centrality of energy to our economy and to our futures, the naive treatment to the risks of money and debt creation, and the disconnect economic theory has to climate change risks. About Steve Keen: Steve Keen is an economist, author of Debunking Economics and The New Economics: A Manifesto, a Research Fellow at the Institute for Strategy, Resilience, and Security at University College in London. For Show Notes and Transcript visit: https://www.thegreatsimplification.com/episode/30-steve-keen

You're listening to The Great Simplification with Nate Higgins. That's me. On this show, we try to explore and simplify what's happening with energy, the economy, the environment, and our society. Together with scientists, experts, and leaders, this show is about understanding the bird's-eye view of how everything fits together, where we go from here and what we can do about it as a society and as individuals. As listeners of the Great Simplification are aware, I spend a lot of time debunking economic theory as the explanatory story for how the human ecosystem functions. But joining me today is a real economist, Steve Keene, who pretty much full-time writes and speaks on debunking economics. In addition to teaching heterodox economics, Steve is also currently a research fellow at the Institute for Strategy, Resilience, and Security at University College in London.

Today, Steve and I discuss how mainstream economics misses the centrality of energy to our economy and to our futures, the naive treatment of the risks of money and debt creation by standard economists, and the disconnects economic theory has with respect to climate change risks. I hope you enjoy this wide-ranging conversation where Steve, Steve Keene does not hold back any punches on explaining how our world really works. Hello, Steve. Hi, Nate. Good to see you.

Good to see you. I can't remember the last time I saw you. It was quite a while ago. Yeah, well, the COVID has done that to quite a few relationships. That's right. So where are you now? And maybe for our listeners, you could give a brief background of what you currently do and your work.

Well, I'm actually coming in Amsterdam right now. A long story. I moved out of here because of COVID. We've moved back because we're looking to sell an apartment. Now we're staying in it. And Europe tends to be where I do most of my works. It looks like possibly between Amsterdam and Budapest. My work really is on two things, building up systems for doing proper non-linear, non-equilibrium monetary modeling of capitalism,

and then working on how we bring energy properly into economic theory, and castigating the complete neglect of that in mainstream economic. which has led to total understatement of the dangers of climate change. Excellent. Well, our work is highly aligned and overlaps. So I assume at some point back in the day that you were an orthodox economist, what happened? Can you explain your own path to where you are now when you're debunking economics? I think I was an orthodox economist until I was 18 years and three months old. and that's very lucky because my brain,

what we now know about how people learn your neural pathways end up being reshaped by the paradigm that you live inside, whether that's believing in God or believing in equilibrium, which is the god of neoclassical economics. So I was just lucky to have a brilliant lecturer, a guy called Frank Stilwell, who was, I think he was about 28 when he gave the lecture that had the impact on me that changed my perspective in economics.

And so I was a serious believer in neoclassical economics without even knowing that it was neoclassical economics at the time. It was just economics, though, I thought. And Frank, in the middle of the first year lecture, explained what's called the theory of the second best. And what that meant was, if neoclassical economics makes you, you try to bring in perfect competition, your ideal is to make the real world look like your textbooks.

And what the theory of the second best said in the way Frank explained it, well, let's just consider that we're actually, we're not at perfection right now. or at least two steps away. So if you look at, say, the wage bargain, you don't have competitive workers facing competitive firms. You have workers and unions facing firms in industrial organisations negotiating over pay rates. And then the theory of the second best would apply to that example said, well, what happens

if you remove one but not both of those imperfections? And the answer was, according to advanced but still conventional neoclassical economics, you'd make social welfare worse. Now, you don't normally learn this particular thing until you're doing an honours or a PhD program. And by that stage, you're willing to accept virtually anything. When I got that right in the middle of the first year, I thought, hang on a second. Something that I thought was obvious from the theory, which is that you should abolish both trade unions and monopolies, suddenly looks ridiculous.

You know, you can't get rid of all the world's imperfection in one swipe. So if you try to change the world to make it better, it'll make it worse. What's going on here? And then I went down to the, this wasn't mentioned in my textbook. I went down to the university library instead, and I just looked for, then I was looking for articles critical on economics. And I found one by one radical, and best person called Paul Samuelson called a summing up. And I read that paper, and in this paper, Paul Samuelson confided defeat over the issue of how you measure capital and what's noted the capital controversies. And that was written in 1966.

I was studying in 1971. no mention of that in the textbooks. The mainstream conceded it had lost the debate over how you measure capital and how that impacts on income distribution and production theory and so on. And I thought, this is crazy. I'm being lied to. So I broke away literally at the age of 18 years and three months. So let me ask you this. If you had discovered the things that you just described when you were 28 years in three months, would that have changed things? Yeah, I might hope that I'm somewhat different. But the more you go through neoclassical economics, the more you get used to accepting what they call simplifying assumptions, which are actually fantasies.

And if you become, you know, rabidly oriented around maintaining that paradigm, that way of looking at the world, then you'll get to something like this and just accept it. And I've seen plenty of examples of that since then when I've shown, we're both extremes, neoclassical at one or three, Marxist, the other. I've shown them logical flaws in their arguments either developed by being or developed by other people and they'll just throw their hands on it doesn't matter you know we can assume our way around that problem and this is really a human flaw you become wedded to the way in which you view the world more than the world itself so when you face a contradiction between it for most people

they'll turn their eyes from the contradiction in my case i might be different there are some indication that i am but more contrarian by nature but once i'm having that so early i didn't go through the inculcation of another 10 years of being fashioned to think in a mainstream way. I think there is some truth to that, because I've always been kind of a contrarian by nature. Not contrarian per se, as much as curious and skeptical of the conventional stories. I always want to look around the edges. So for our listeners who might not be fluent in these issues, can you just briefly define what you mean by neoclassical economics?

and that is in contrast of what else? Okay. Well, the easiest way to say, if you think in terms of supply and demand curves, you're a neoclassical economist. And this goes right back to Alfred Marshall back in the 1800s, early 1900s. So it's a vision of economy as a self-equilibrating system, which will give and left alone to its own devices,

it will reach a situation where producers and consumers become as well off as they can be subject to the constraints of their own income, where people earn their marginal product and are therefore paid fairly. It's a vision of an equilibrium system, which disturbed from equilibrium will return to that equilibrium, and it sees capitalist society as a means to maximise people's welfare, subject the constraints of their income, which, as I've said, is fairly distributed. That's the vision. In a sense, when you look at it from this point, from the political science point of view, it's a vision of a self-managing anarchist society. And do practicing neoclassical economists assume that that will hold indefinitely in the future?

They have no real concept of times. I think the answer has to be yes, because the future is just a projection of today. I mean, I'm sure there'll be neoclassical economists choking on the cornflakes right now. After the summaries that I've provided, they'll say there's curricatures. And yes, they are, frankly. I don't think it believes it deserves anything better than a caricature. But fundamentally, they have an historical view of society and an analysis. their historical view of their own discipline. Most of them aren't even aware of how their own

theories developed over time, let alone that there are rival ways to think about the economy. Okay. Let's dive into this, Steve. So what are the core flaws, and we only have an hour and a half, so you can't list all of them? But what are the core flaws that you've discovered in the main macroeconomic explanations of our economies? Well, I might actually go back to micro to start to answer that question, because these macroeconomics has become applied micro. Dynamic stochastic, generally equilibrium models and real business cycle models,

which are the ones that dominate the former, much more than the latter, dominate how a neoclassical economists think about the economy today. And they are all models which are derived from the idea that you should be able to start from the concept of a utility maximizing individual and a profit maximizing firm and derive your macroeconomics from

all the optimization behaviors that are supposed to rule both consumers and producers. consumers and producers at the micro level. So they will often reason as if the entire economy is a single utility maximizing individual who works in the factory that he owns for a wage rate set by his marginal products and invest for an indefinite future for an infinitely long-lived dynasty. Again, that's a caricature, but that is, again, a summary of what you can find is the way they think. So their macro is applied micro.

micro. All the micro is wrong. To me, the micro completely misses who we are as biological animals. We can't just parse everything of value in the human experience into utility and assume that it will somehow be parado optimal because utility in our current economy is another deep dish pizza for a 400-pound person plus a six-pack of beer. Whereas other people in Africa, America and other places are starving. Number one, number two is we're not self-interested. We are to an extent, but we're very other regarding. When you smile at a baby human, the baby human will smile back at you.

We deeply evolved in a tribal group setting. And so how we care about others is not part of the equations. Even if it was, they're still wrong. And this is the point that I emphasize in my debunking economics. I'll start from the point, when I'm writing the third edition, it's where I'll start, and that's the theory of supply. Because in the theory of supply, given a certain price, how many units will be provided to the market by the firms in an industry?

And again, that's supposed to be set by profit maximizing behavior by the individual firms. And what they're supposed to experience, according to the theory, is as they increase output, they are buying factor inputs, labor and capital at the same price, but they're supposed to experience. have got a fixed number of machines, they're adding more and more labour to those machines, and each new worker adds more output, but a lesser amount in the previous worker. And what that means is you're paying a constant wage, you're getting less productivity per person out of each additional worker you hire, so you have diminishing marginal productivity, and what that translates to is rising marginal cost, and that is the foundation of the supply

curve. Now, every empirical survey that has ever been done of the actual cost, structures of actual firms, finds their marginal costs are falling, constant or falling. And the very last time that was done on a grand scale was actually by a leading conservative economist Alan Blinder, who has been Deputy President of the American Economic Association. He's been a vice chairman of the Federal Reserve, so absolutely impeccable orthodox credentials. And he did a survey what he called asking about prices, where he surveyed when he did the numbers, 15% of America's manufacturing sector.

So that's a pretty damn good survey. And his conclusion was, and I'll quote from his book, the overwhelmingly bad news here, brackets for economic theory, is that the vast majority of manufacturing goods are produced under conditions of falling marginal cost. Now, what does his textbook say? This guy wrote a textbook 15 years later. He talks about diminishing marginal productivity

and rising marginal costs and completely ignores his own research. And the reason is, if you have falling marginal cost, then marginal cost is below average cost, and therefore there is no segment of the marginal cost curve above average cost, which is called the supply curve. So the very foundation of the theory empirically false, and you find the same thing in demand, everything about the theory is unsound. So what is the implication if the truth is that the falling marginal cost is the reality? What does that imply for the whole system and for distribution and etc? Well, it implies, first of all, they don't maximize profit by equating marginal cost and marginal revenue,

which is the litany they get toward in first year microeconomics. Because if they do, the price will be below average cost and they'll lose money. So what firms actually do, rather than choosing a profit maximizing output level, they try to flog as many units as they can because in a competitive industry, the more units you sell, the more profit you make. your average cost are falling as your output level rises. And this is an explanation for large firms evolving and for the competitive behaviour of firms

where they always try to sell as many units as they can. If the neoclassicals were right, the main job of a marketing manager would be to sell the sales staff, stop selling or reach the point where marginal cost exceeds marginal revenue. Now, no sales manager who says stop producing output and stop selling would keep his job for an, nanosecond in American capitalism because it completely false guide as to how you actually maximise profits. You maximize profits by selling as many units as you can. So the behavior

of firms is different. It can't be doing this equilibating of marginal utility against marginal cost. That can't comply. The demand curve can't be derived. The market demand curve doesn't exist in the shape that they draw in the textbooks. That's also been proved by logical arguments by neoclassical economists. So the whole thing, thing is a belief system which has undermined itself using mathematics and empirical research, but they continue pumping it out there because it's a vision to them of the perfect society. I'm going to come back to that, but on this falling marginal cost, wouldn't that also imply that the most efficient structure would be a monopoly or one firm producing everything?

Well, that's where when you see what your competition actually uses, it's product diversification. It's not uniform product. So the whole idea of a market where you've got an infinite number of firms producing a standard commodity just doesn't apply. So you have either cars, okay, but that means they've got, are you talking an ICE or an electric car? Are you talking Tesla or Volkswagen, et cetera, et cetera? So product differentiation and innovation is the way you compete, not by price so much. So what you'll get is you'll get a dominant firm in the industry. And then that sets up a target for other firms to move into that industry.

throughout the form of competition is one over innovation, product differentiation, not over price. What would a hundred respected neoclassical economists say if confronted with your anecdote about Alan Blinders' research and his subsequent book? They simply don't look at the data. This is what I find absolutely stunning about them. They will just dismiss it and say, well, you can't trust what the firms say. The firms might say that they think they know how to maximising profit, but according to our assumptions, they can't maximise profit unless the following.

They must be a misunderstanding question. And that was actually what Blinder wrote himself and his survey as well. But he was having a theory explained to senior managers of large corporations by students with postdocs and students during PhDs in economics. So uniformly they got the result that for 89% of the firms, they purported either constant or falling marginal cost. And the students would continue explaining and the staff would continue saying, no, we don't face rising marginal cost. It sounds kind of like a religion or a cult, which wouldn't be a problem except it, is the cargo cult that is ruling and steering the leaders of our world right now into an abyss the way that you and I see it.

That's right. And that's the real dilemma is that if we had realistic economics, which actually understood the relationship between the economy and the physical biosphere, we would never have got into the severe situation we are now where we could be on the brink of a collapse in the capacity of the biosphere to support our sedentary civilizations. So I want to get into different paths for economics going forward, but I do want to really unpack your work and views on energy as it pertains to our standard Cobb Douglas general equilibrium model, as well as how neoclassical economics treats climate change and environmental costs.

So what are the core flaws in macroeconomic or any economic theories with respect to energy? The fundamental one is they don't include energy as an input. Other than its dollar cost? Not even its dollar cost. I mean, they simply don't include energy as a factor of production in their standard theory. So if you go back 40 years, economists used to use what they call computable general equilibrium models. and at their core they had an input output matrix and as part of the input output matrix you had the other industrial sectors which were inputs to your own industrial sector and you also had raw

materials turning up there so before the so-called rational expectations revolution there was a tendency to see equilibrium as being the result today of the interaction of numerous input output dynamics and markups and product prices to give you an equilibrium at a point in time and then what they went through is this what they call intertemporal equilibrium. And what took over there were Cobb Douglas production functions and what they call constant elasticity of substitution production functions. And in those, the Cobb Douglas is the pure form of it where there's a high substitute ability. That says that output is technology, which they use the symbol A4, times labor, times capital, where labour and capital are both raised to powers so that if you double all inputs or labor and all

capital, you'll double output, which is in its own way, that's a reasonable, that's a reasonable assumption. But the exponents for labour and capital are derived from marginal productivity theory, which says that the wage of the worker is the marginal product of labour, and the rate of profit on capital is the marginal product of capital, so that your values for those exponents reflect the wage, the income share of workers into the GDP and the income share in capitalists. So the share for labour tends to be 0.7, and the share for capital tends to be 0.7.5%. That's just the arbitrary numbers they've stuck with from what income distribution was roughly in the 60s. Now there's no real for energy there.

So when they tack in energy, what they'll do is added onto another factor and they say, well, all the exponents still have to sum to one. The contribution of energy is about 3 or 4% of GDP, so the exponent of energy is 0.03 or 0.04. And there's a brand new paper actually by Rudy Bachman and a few others. It's a working paper, but what a different paper is about what a does. does is to say, apply neoclassical theory to say what would happen to Germany if the Russian embargo and energy reducing energy input by 10%. Now, according to standard Cobb Douglas production theory, that would 10% fall in the energy input to German industry would reduce German GDP

by 0.4%. When they use a high substitution, they'll say it might reduce it by 2%. But in other was energy is pretty irrelevant. Now in the real world, and this is my contribution on this theory was just the simple insight, labour without energy is a corpse. Capital without energy is a sculpture. So energy is not an independent factor of production that you throw into a factory with labour and capital. Energy is an input to labour and an input to capital without which they can do no work. So when you do that, just at the very simple level, even using the same exponents they do, the exponent for energy is 10 times. The exponent they use rather than being 0.0.0. So when you do, 0.3, it's 0.3, the same of capital.

So energy is much more significant than they realize. And then when you try to look at the empirical data, you find that in fact the relationship between energy and GDP or change in energy and changing GDP is one for one. If there's a 10% fall in energy, there will be a 10% fall in GDP. So their theory trivializes the importance of the major factor of production, which is energy. Excellent. So a few comments to that. Number one, are you familiar with the work of Reiner Kumo? Oh, yes. Yeah, definitely. Because he did a similar paper back in the day. He was an advisor to our organization where he came up with the factor of energy at around 0.6. And you just

said 0.3 for Germany and Japan. I actually think it's higher than that if you include... It's one. Well, it's also not one because we get more energy. energy efficient over time. So it's like .99 is how I like to say it. Look at the global level. It's so close to one that's ridiculous. So you and I think the factor relationship of energy to GDP is .99 or one, whereas a neoclassical economist would think it's .03 or .04. And these are two worldviews with a planet with eight billion people, CO2, 420 parts per million, collapsing ecosystem. no plan for the future other than continued economic growth.

I think it's a pretty major assumption differential between those two worldviews. It's a huge differential. And there's no way to convince them otherwise, as usual. They'll just stick with their convention of 0.7 and 0.3 and ignore energy. But it's such simple mathematics to simply say, if energy is an input to labor and capital, how they then say, what is labor providing to production? Well, it's the number of workers times the energy consumption per worker.

times how much of that energy consumption actually goes into their labour. When you look at the amount of energy you and I consume, it's enormous compared to what a Roman slave would consume. But the amount of our energy we actually put into manufacturing is trivial, whereas, of course, back on the Roman slaves, they virtually all the energy they got in was the output that'd have to provide to the slave owner. So that's about 100 watts per person.

But machinery has gone up radically, and that, of course, is where our productivity has come from, increased amount of energy, you know, harness per machine over its, time. But of course, that means waste. So all these things, if we had that framework, we would never allow the level of energy consumption to reach the level it is because we had the level of waste production. We'd also be acknowledging that. And of course, that's, again, absent from mainstream thinking. Here's one thing that I never quite get. So any sixth grader or ninth grader or 12th

grader or a college student could be listening to this conversation. And they could in five minutes on their own from a credible source find out on the internet that a barrel of oil is 5.7 million British thermal units worth of energy potential. If you translate that to work, 1,160 kilowatt hours of work where you and I digging ditches or hauling manure or building a house generate around 0.6 kilowatt hours. worth of energy in a day. Meaning, without any conversion factors, a barrel of oil is 11 years worth of work potential. And if you handicap it because humans are more efficient at directing their energy, it's four or five years of work. Yet we pay $100 for it. And the average labor

in the United States makes $50,000 a year. Yet we're generating four or five years of that person's physical labor from this barrel of the United States. of oil that all we do is pay for the cost of extraction, not the cost of creation nor the pollution. How does an economist not see and understand what I just said? Because they have a non-physical view of the economy. It's all stuff you can write on a whiteboard with terms of labor and capital, but energy is not one of the terms they even look at.

And it's a mindset that I trace right back to Adam Smith, in fact, because if you go before you'll find you had the physiocrats and the physiocrats, Cannae, Cantalon, there's quite a few others. They argue that all wealth comes from the soil. But what they fundamentally meant was all wealth comes from the sun. And if you imagine you're like at the Agricultural Society of France, which was the main location that developed the physiocratic theory, you plant one corn, one seed corn, you get a thousand pieces of corn back. And you simply sit there and watch it, it'll happen over time, even if you barely do anything with the soil. So this became obvious to them that what was causing the wealth in human society is what they literally called the free gift of nature.

Now, in that sense, the free gift of nature, that predates the understanding we have with the laws of the conservation of energy. And they're aware of it. They're simply exploiting energy we find in the universe, turning it into useful work. that then along come Smith and says, oh, living in Scotland, industrial but hardly agricultural Scotland, he couldn't accept that land was a source of value. He said, Labor is the source of value.

So you then had the classical school of thought coming along. Now Marx then talked over and said, Labor is the only source of value, therefore Labor should get the entire rate of profit, and the near classicals come along and say, no, both Labor and capital contribute to output. So there's a, Labor gets its marginal product, and capital gets its marginal product and that's all just.

We've wasted 250 years arguing about the wrong stuff. The physicists were right. We only have an advanced economy because we exploit free energy and all we're paying is the cost of extraction and therefore those enormous differentials you mentioned earlier come about. So they were right that our wealth comes from the sun or the soil and had we grown very slowly decade by decade and instead of this moonshot that ensued, maybe we would have recognized fossil carbon and hydrocarbons

as an extension of ancient sunlight that were buried under the soil. But I think, and please tell me what happened, I think we grew so fast and so high that there was this tendency or direction to attribute some of this largesse to human creativity and technology because they didn't understand the math of these fossil armies that came out of the ground to support our economies. How did economic models evolve into the biophysically delusional ones we have today? Larger because it became part of the ideology of the contest between workers and capitalists over the distribution of income. When Marx turned the classical school, the labor theory of value, against capitalism, then in the 1870s, that was when neoclassical economic, which came out which said, no, it's the marginal productivity that determines the income.

Both factors of production, labour and capital get what they deserve. So the whole thing was seen, well, productivity is coming out of three elements, labor, capital and technology. Now, when they tried to then quantify that, and this is probably in the 1950s and 60 with Robert Solo, they have what they call the Solo residual, that when they look at how change in GED comes about, it had very little relationship with change in labor or change in capital, all came of change in technology. And so this A term, which was undifferentiated, became the magic source that enabled growth to occur over time. If you asked economists about it,

they say that's human ingenuity. Now, they didn't see that, yes, there is ingenuity there, but if it wasn't fossil fuels to harness, we wouldn't be producing this volume of output. So the standard explanation of the solo residual is they don't really know what created our massive wealth, but it looks like it's in that technology. part of the equation, yet to borrow your phrase, technology without energy is a sculpture. Yeah, exactly. And I must admit, I struggled with this for a long time myself because I was actually working with Bob Ayers as one of Kumil's co-authors, and I thought Bob had done the most advanced work on this area. But if you look at Comel's paper, they still at one point reduce output to an index system.

they have rather have a capital Y, which is the way that the economists proceed. He has lowercase Y and it's K times L times E, at one point lowercase KL and E, where they're index numbers. So even in their work, they still had energy as an independent factor of production. So literally in Bob Baer's house, which is full of sculptures as it happens, that insight occurred to me. And then 10 minutes later, I had it was a, you know, Y equals K bracket C times L bracket C, where the E in that is the energy input about labour and capital. And then what comes out of that is what the economists called the technology component is actually the exigy, the energy useful work done by the representative machine of a particular time.

So if you go back to James Watson's steam engine, then the energy was coal. It was about nine tons a day, was consumed by the average machine, about 30% efficiency. You fast forward to today, it's 10 tons. of kerosene per second, passing through a Falcon 9, and the efficiency is a bit higher, maybe about 0.4.45, but fundamentally, that technology term can be re-seen as the useful energy derived from a machine. And that's where our wealth has come from. I understand that, and I agree with that. And I wonder if everyone in the world understood what you and I do, that technology is a vector.

for more energy use. And we do improve and innovate, but it's all predicated on a growing amount of energy and a cheap amount of energy. Because if we have processes like aluminum smelting or air travel that require lots of units of adding fossil energy to replace things that humans used to do, those processes break down and become unprofitable if energy prices double or triple. at what's happening in Germany right now with lots of firms going out of business because they can't afford this level of energy costs because their whole system was predicated on low

energy prices continuing. But what if everyone in the world understood what you just said, that it's actually energy that is close to, I could argue, as low as 0.6, as high as 0.1 in the economic formulas. What if everyone understood that? What would happen? I think a lot would happen because further ago we had that realization, the more we'd realize that there are limits to how much energy we can consume because when you consume energy, you generate waste,

the second law of thermodynamics fundamentally. So that amount of energy consumption means that amount of waste, more than that amount of waste being dumped in the biosphere. And one of the many manifestations, that is carbon dioxide, of course, but all the other was from everything we can produce and consume, turns up in the biosphere, and the question is how much capacity does the biosphere have to cope with that? So we would be much more reasonable conversations about just how large human civilization

can get. And the answer would be, oh, my God, we're massively overshot. What's sustainable? That's where I was going. And I'm going to come back to climate because that's a separate and very important aspect of this. Where I was going is if you and I and all the listeners and young people and factory workers and small business owners and everyone understood what you're describing, that it's

energy and non-renewable materials at the core. The leaders of the world would still be flanked by PhDs in economics and MBAs, and the power structure wouldn't necessarily adopt this view. The implications are too threatening for the status quo, right? They are, and this is where the role economists play. They're not doing it deliberately to support the status quo, but the status quo is very happy to have this religion. being the underpinning of how people think about capitalism. Yeah. Okay.

Climate. We've talked about how energy is misdiagnosed in the standard core assumption in neoclassical economics. How does neoclassical economics miss the peril and reality of adding CO2 to the biosphere? I must admit, the work that I've read on climate change by neoclassical economists is the worst work I've read in 50 years of reading economics. literally the worst. And yet they win Nobel Prizes on it. Yeah, mainly because they're defending the religion, not because they're doing anything particularly sensible.

Can you give me an example? Yeah. First of all, William and North House played a huge role in dismissing the limits to growth and stopping that particular approach becoming something that might become a part of the toolbox of economists one day. But in 1991, he started providing his own variations

on how we model the economic impact of climate change. And in that he said it's very hard to find any impact of climate change on the vast majority of the economy over the next 50 to 75 years. Manufacturing services, etc., etc. Very hard to find any potential impact of climate change on those sectors. He broke the American economy into three divisions. Severely exposed to climate change, peripherally exposed to climate change, not exposed to climate change. He included 87% of industry in the not exposed to climate change, all of manufacturing, all of wholesale and retail services,

all of the finance sector, except part of real estate, if it goes on the coastal fringe, of course. Even mining, he said we'd be unaffected by climate change. Now, the only things that government, finance, services, manufacturing have in common is a roof. So fundamentally, he's saying a roof will protect you from climate change. And now that is a child's level understanding what climate change actually amounts to. So children, you know, should be spanked for having ideas like that.

But in economics, that was accepted as a simplifying assumption. And that article was published in the economic journal. So it was cheered and respected. And his empirical conclusion from that paper was that when he was add up all the various sectors would be affected. It was basically agriculture, but he said, well, some parts, you know, the temperature rise will then productivity in some parts, it'll diminish it in others, forestry and so on. His empirical conclusion that three degrees of global warming would reduce global GDP by 0.25% compared to what it would be in the complete absence of climate change.

And then he threw in a few fudge factors, which he said were just a guess. And he said at most 2% fall in GDP from a 3 degree increase in temperature compared to what it would have been in the complete absence of climate change. And that became the ballpark that most of them make their estimates set. So they are completely ignoring the role of energy, trivializing the dangers and saying, only if you're exposed to the weather, are you exposed to climate change? Well, that's kind of like saying that the people working in the agricultural sector of the United States are only 3% of our economy. So if we had no food, it would only drop GDP by 3%.

Yeah. And even Larry Summers made a joke out of that at one point. And one of the few times I've agreed with Larry Summers. He thought about the financial crisis of being a bit like a power shock, an energy fall. And he said, if you had like the complete collapse in the energy system of the United States, there'd be people in Chicago publishing papers saying, well, that's only 5% of the economy. So it can't reduce any bit more than 5%. And he said, and there'd be people publishing those papers, but they'd be stupid.

Well, he's right. They would be stupid. But that's nonetheless the sort of thing they do. So this recent paper by Rudy Buckman and friends, of course, said that, You know, 10% fallen energy for Germany. At most, 2% of GDP, you know, any people saying anything more, they're just fear-mongering and their research doesn't meet academic standards. Well, this is neoclassical academic standards.

Well, by the time that we actually do drop 10% from peak to trough in global energy use, it might be too late to mitigate some of the impacts of that. So it's like, let's go all in with Jack Six off suit until our bluff is called. I mean, I don't know how else to characterize it. So what would a model that uses a biophysical underpinning look like on the energy and climate aspects from your perspective? The first thing is you have to have energy and matter as an input to the production system. So if you don't have energy and matter going in, you don't have goods coming out the other end. So you therefore have both physical constraints.

The energy has to be available. The energy return and energy investment has to be enough for you to actually get a net energy boost out of your mining of energy. And you necessarily generate waste out of the production. So waste gets put back into the biosphere and then we'll undermine the productivity of the biosphere. So that's the basic starting point. And I've done the mathematics for that with working with Mattias Grosely and Tim Garrett. We've done a set of models of a pure energy economy and then energy. plus matter economy to show those interrelationships.

That's your very starting point. There's no output without biophysical input. Energy is absolutely crucial, is the input without which nothing else happens. So that would be the starting point. And then from that framework, you'd be, you know, you would never have let level of energy usage reach the scale that is today. Right. So there's two ways to look at this.

One is what should we have done 50 or 100 years ago? would have been the models that made sense. But now we're in this overshoot situation and these models are going to be very threatening to people that want to be elected and not say these things. So that's a little bit of a separate proposal. So I almost think there has to be a lot of funding and research put into this that's like a break glass in case of emergency. We are going to hit a crisis this decade.

Here is a biophysical framework that explains our reality with some pathways forward on what to do. What do you think? Well, I actually think there's too late for that, frankly. I think there's two things we need to do. One is to realize that the limits to growth was actually correct. If you've seen the work by Graham Turner, in Australia, two papers that he's put together on how well the model fits time. And there's Gaya Henderson, who's done work working with one of the major consulting firms. And they've both shown that the the business as usual or B.A.E. 2, which is where you had twice as many resources, or the other one with technology, those three frame, those three of the seven runs that they did

for the Limus to Growth Study, we are somewhere in the ballpark of all of those, which means a breakdown driven by either excessive pollution, which is the carbon dioxide sort of things, or running out of raw materials, which is the, you know, the declining energy return and energy investment, which we're also seeing up. That's realistic. And while we're getting out of the climate scientist is saying, lot of the potential tipping points that they saw coming forward are coming forward much more rapidly than they thought so we're losing the Arctic that's fairly accepted we're not going to have a white Arctic in summer by 2030 or 2040 sometime in that range and all the scientists are

saying do not exceed two degrees and whatever you do for God's sake don't let the temperature go past two because at that point the tipping points that we know will cause catastrophic change the climate will be triggered and we have forces far beyond what we can deal with. So we should be saying to economists, okay, tell us how to finance the sort of very, very immediate attenuation, mitigation, change in energy source proposals we need to prevent exceeding 2 degrees Celsius, and then tell us what the resource implications are. If we do want to go from an internal combustion engine world to a electric vehicle world, do we have the resources for it? No mainstream economists can answer either of those questions because mainstream economics

has ignored the how money is created and lived with a toy model of money creation so they're useless on the issue of government finance and because they've got this non-biophysical model that dominates how they think today these in part of all these dynamics general equally models is normally a Cobb Douglas production function not something that includes input out by dynamics and physical inputs and so on so they're useless there too. So we've got to, we've really got to kick him out and ask the heterodox economists and some of the engineers those questions. That's more important than a new economic model. I happen to agree. I've asked you this a couple times. I'll rephrase it because I'm just genuinely

this question bothers me all the time. Why do we listen so, why does the world listen so much to neoclassical economists? Why aren't there people just saying, you know what? This is bullshit. Let's get some real answers here. Why isn't that happening? I think it's got a whole lot of reasons behind it. One is that genuine sciences are aware of the limitations of their own knowledge when applied to another field. So if you have engineers, they're not about to jump in and tell a chemist how to concoct chemicals in the laboratory or biologists and so on. So there's a level of professional respect for another theory, which means that genuine scientists don't go and look at economic theory because they think, well, those things as economists know,

that I don't know, they'll make choices that I can't understand. I'd be an amateur so I keep out of that. Then what it sells to the world is a beautiful vision of capitalism. Now it's a completely inappropriate vision of capitalism because if you, you know, there's a proverbial alien coming in and taking a look at our society, if you had an alien flying past the planet and taking a good look at capitalism, the last word they'd used to describe it is equilibrium. It's far from equilibrium.

It's changing all the time compared to any other. social system, what we've seen is a radical change in the means of production and a radical change in the nature of social relations over time as well. So far from being an equilibrium dominated society, we're a change dominated society. So it's the wrong picture of how our society functions. But what it implies is a perfect world. If only we can get rid of trade unions, monopolies and government, the free market, get rid of all those non-market and The market system will reach equilibrium where we produce the right amount of everything compared to what people's tastes are, where people maximise their utility subject to their income, and where their income is gained by their worthwhile contributions to society as measured by the marginal product of their social class.

And it's a vision of harmony. And humans seem incredibly biased towards imagining a perfect world. So religions talk about a nirvana. talk about a nirvana or a heaven, et cetera, et cetera. Neoclassical economists talk about equilibrium now. It's heaven on earth. That is an incredibly seductive vision for our crazy species. And they use math to defend it.

Yeah, and I said what looks like math, my term is, and this really annoyed me because so many radical economists said, oh, it's all the mathematics is the problem. When you take a good look, they jump over in absurd errors in their mathematics. So I describe what they do is not mathematics, but mythematics. So are you finding traction? Your email is debunking. You are blogging and doing podcasts, and I wrote my PhD on net energy and a biophysical measuring of our reality. So I understand and deeply appreciate your work. But are you finding traction in the general public about

some of these messages? I'm finding it amongst the young students. So I spoke in Poland two weeks ago to movement organized by a group which is called Rethinking Economics. The same group invited me up in Denmark. So I spoke in Denmark last week. I'll be giving a summer school in Poland later on this year again. So there's young students. There are enough young students who are looking at saying there's something wrong with this and they go looking for an alternative.

And one of the great advantages of our time is, of course, the web. And people, when you search criticisms of neoclassical economics, bang, you'll get a couple of million hits on Google. and any student who's sitting through a lecture theatre thinking, this just doesn't make sense, it's just strange, there's something being left out here. They go searching. They'll find your work, they'll find my work,

and as a result of that, they're aware that they're not crazy. So that's a great advantage of today, and also the financial crisis led to people like George Soros funding, the Institute for New Economic Thinking, and a whole range of progressive charity is also providing finance to these groups, so these students can maintain a support structure over time. So I'm getting traction with them, but you can't get through to the journalists, you can't get through to the politicians, you certainly can't get through to the neoclassical

economists. And the finance sector rolls on, as always. Perhaps someone even listening to this conversation, but what if there was funding to really do it right and do a multi-factor incredible, researched, $10 million project to actually reformulate the Cobb Douglas function using the the premises that you said before, that energy is at the core of it. And it was published in an economics journal. It was co-authored with some orthodox economists who are open-minded, maybe some young 32-year-old, tenured economists. Could that happen and would that be helpful? It wouldn't happen and it wouldn't be helpful in terms of changing their minds because once you have a paradigm in your head, it's incredibly hard for somebody to break away from

it. I see this in Marxists as well. Okay? Marxist, believe, the labor theory of value. I did a philosophical critique of that saying it actually contradicts Marx's own logic. I remember that 30, 40 years ago now. And Marxists continue pumping out the same ideology. And it's simple to show that the labor theory of value contradicts Marx's philosophy. But they'd rather contradict his philosophy or ignore it and go in with that belief system, then change it. Same for neoclassical. So you won't change their minds. I've given up on that. What you have to do is say, yes, it is possible to build an alternative. way of modeling the economy. And that's why I built the software Minsky, which I'm wearing the

t-shirt for. Oh, I thought that your T-shirt was referenced Hyman-Minsky. It's both, but it's actually a Minsky software. So, I'm going to stand up here a bit and I can just show further down the system. So there's my advertisement for Minsky. Okay. And the idea is what we should really be using in economics to model the economy is not equilibrium concepts. It's system dynamics. And we need to have system that I'm actually can handle financial flows because again one thing that the mainstream have convinced itself on is you don't need to have money in your models to model capitalism why because they say this is veil over barter and I'll send you a tweet from a very nice guy David and Al Dau Fato I think his name is he's a research economist at the

Federal Reserve and a very nice bloke I've met him and I like him as a human being but when somebody said how it's important run to the end of the monetary system he said being confused by the veil of money. So what they're concerned, the money is just a veil over barter. And if you get, forget about the money system, what you see is people are training goods for goods. And that's the way you analyze capitalism and finance and money is a confusion that doesn't have any real impact. And so they teach students this in first year with what they call the money illusion, showed that money doesn't change the absolute prices, don't matter, only relative prices, and they leave out the entire financial system in their economics. Right. So it's the

endogenous theory of money. Money doesn't really matter. Two comments that one. That's the exogenous theory of money. That it doesn't matter. Exogenous. Yes. Yeah. Yeah. Two comments there. One, I've met with over the years, over the past 15 years, a federal board governor, the head of the Chicago Fed. I've met and interacted with lots of Federal Reserve people. They're all good. The people I met were wonderful people. They're all good people. This is one of the dangers. They are good people. Yeah. But they, I asked them. What happens if, what's your economic growth forecast? And they have a 2% going forward in the future with quarter percent bands.

And I said, well, what if it's zero or what if it's below zero? And there was this blank stare. And he's like, that would be bad. But the implication of his reaction was, well, that would never happen. Of course. We wouldn't have it below zero. But let's quickly, briefly, move to the money side of things because, as the Bank of England has now very well articulated, which is I'm grateful for because

10 or 15 years ago people didn't believe me when I was talking about that money is not lent out from existing capital. Money is lent into existence or at least 90, 95% of it from commercial banks. But what's not lent into existence is the interest. So there's an imperative in our system to grow because we have to pay back not only the principle but the interest on money. And you have studied Hyman Minsky, who is an expert on credit and debt cycles. What are your one or two key insights from studying Minsky and how worried are you about our widening divergence between our monetary claims on reality and the

energy and materials that support it? The key insight that I've got out of Minsky is that credit is part of aggregate demand and aggregate income. Can you explain what that means? Credit is change in debt, change in private debt. So if you look at debt, that's how many dollars you owe. The credit is how many new dollars you borrow each year. And mainstream economics ignores that on the basis of what they call the loanable funds model, which says that banks are simply intermediaries between savers and borrowers.

So if Nate is a saver and Steve is a borrower, then Nate learns to Steve, Nate spending power goes down, Steve's spending power goes up, one cancels out the other unless I'm a much more profit-a-spender than you are. So it all comes down to differing marginal propensities to consume. And that is the model that they stick with, despite the Bank of England saying back in 2014, that's not how banks work. Banks are not intermediaries, they're money originators. They create money by creating debt at the same time. So, Nate is out of the picture. Steve goes to the bank as he wants to buy a house in Bangkok. borrow is a million dollars from the bank, the bank says,

here's a million dollars to hand over to the owner. You also owe us a million dollars on which we're going to charge your interest. But that million dollars is spent by the borrower and becomes part of aggregate demand and aggregate income. Now, I'm using an example of buying a property, but if I shouted you coffee when you were in Amsterdam and I swipe my credit card, then what happens is, so seven euro, I'll say 10 euro, money is created, which is spent,

So it becomes its expenditure by me, it's income by the coffee shop owner. And the level of debt goes up by 10 euro, which is the increase in my credit card debt. So the change in debt is literally a one-for-one contribution to demand right now. And of course, credit can be positive or negative. So if you have rising debt, credit is positive and adding to demand. But if you have falling debt, credit is negative and subtracting from demand. That's what caused the financial crisis. So that's number one.

It will be what causes the next financial crisis. Yeah. Every time there's negative credit, we have a downturn. So America actually, when you look at the rate of change of private debt between 1945, pretty much 46 and 2007, there was never a period of negative credit. But when the financial crisis hit, it went from plus 15 to minus 5 over a two-year period. And that was what caused the severity of the downturn. So in the animated movie I sent you, I say that credit allows us. to consume things we otherwise wouldn't have been able to afford to consume and produce

things we couldn't have afforded to produce. So we will continue to grow our economy as long as we issue credit in sufficient amounts that we grow our energy. But at some point, this decade, in my opinion, either the financial markets themselves will say no moss and we won't be able to grow credit. Q, what's happening in Japan right now with JGB's. At some point, the financial markets are going to pull a George Soros versus the Bank of England and say interest rates are going to go up.

We can't continue to borrow. This is untenable. But so far, they have taken the neoclassical economist route of, you know, All's Good. Let's continue. And it's a belief system. It could last another decade. I don't know. But the other side of it is the oil depletion side.

And if we have, you know, Russia, Saudi Arabia, the United States, if that whole thing, A, geopolitically changes, or B, the underlying decline rate of oil in the world is 7%. And we're offsetting that by infill drilling and drilling tertiary wells and drilling new wells. But eventually, depletion will win. We're still going to have plenty of oil. And from a climate perspective, we could argue we'll have too much oil. But we won't have a hundred million barrels a day at $50, $60 the way that our system has been built on. So I see this divergence growing, and I'm obviously very worried about it. All of my work is trying to meet the future halfway of when this recalibration happens. So that was a lot. What do you have to say to that? A similar attitude. We're running out of easily available energy.

The cost of getting energy out of the ground is rising in energy terms. So the energy return and energy invest is becoming a serious issue. At the same time, and this is work that's been done by another Australian, an engineer called Simon Michau. So what we've had is a declining energy return and increasing need for energy to process minerals, which are lower grade than they were back in the days of cheap oil. That's one of cheap coal. It's one of Simon's main points. So putting that all together, we only can produce output if we have this, if we've got free energy to exploit and easy minerals to mine.

And because we're running out of both, we could read a crunch point where suddenly that just is not available anymore. And then it will not be profitable. The cost of production are going to rise radically. That will turn up as inflation in the real world. And that's what's happening right now to some large degree. But it's not inflation driven by wage demands or by profit markups. It's driven by the simply it's costing more and more to actually turn those raw materials and energy into finished goods. And that's going to squeeze all the margins which enable us to have. the surplus we live on, workers and capitalists, is that gap between the energy input we need to get put in and what we get back out of it. But that squeezes so to living standards. So that

could happen. I agree in the next 10 years. I'm also thinking it's going to be a brutal experience and we have to find some way of preparing for it because that will mean a decline in living standards quite radically. Of what magnitude roughly would you speculate? I would say if we are going to get to a point of being. within planetary boundaries, 70 or 80% fall in consumption levels. And what if it's just based on energy and society still doesn't care about planetary boundaries? What would just be the physical side of it if we still didn't include externalities? The trouble is like in terms of energy, we're going to run out of oil, as you're aware, but we're not going to add a coal.

So if we don't take it seriously, then we can have people restarting coal-fired power stations everywhere. Which is already happening, by the way, in France and Germany right now. And Australia's putting another 80, even though we've gone from a reactionary government to a progressive one, what they have in common is they're still supporting opening more coal mines. So about another 80 coal mines, I think, are being opened up. License have been opened up for them in Australia. So we could have an acceleration in our carbon dioxide factor, and then it's basically which wildcard is going to hit us first from the climate.

So we could be, I mean, this is actually my default scenario, is that the world economy drops 30 to 50% in the next 10 to 15 years because of the financial overshoot. We lose some complexity. But if things hold together and our cultural consciousness and our aspirations of what defines the human entity don't change, we're going to have a glide path to coal. And we're going to have environmental, we're going to spend energy on getting the dirty coal and we're going to spend energy on trying to clean up the mess from the coal. And so a much larger percentage of society 20, 30 years from now, will be the energy sector and the environmental mitigation sector, which will leave less energy for hospitals and movies and theater and

leisure and education and other things because we're going to be kind of a miniature mortar economy. I hope that doesn't happen, but I could see that happening. And so can I. And And this is one of the great fears I have because if you impose the cost of that on the poor, then you're going to have the Gilles-Jones times 10 happening globally because poor people are already finding they can't afford to heap their houses. And they've got a choice, do I heat the house, or do I send my kid to school? And when you start facing those sorts of choices and then make it even worse than that, you're going to get a revolt of the poor.

and I pour up the bottom 60 or 70% of population quite feasibly. So the only way this is sustainable is if the cost of adjustment are put on the rich. And that is not exactly how capitalism has functioned. So what would a more sustainable system look like? How would we get there either before or more likely during what I refer to as a great simplification, which is this kind of cascade downward? I think we have to find ourselves rationing resources. Effectly, we're in a war.

We don't realize that we're in a war we're losing because we're fighting an unbeatable foe, which is the climate of the planet itself. So the only way to adjust to say we've got to radically pull ourselves back and stop put pressuring on the climate, and therefore the only way that that can be done without causing complete social breakdown

is most of the money that enables that as government created, not private debt, because there's no way to profit out of this. overall. So the government money creation has to take over. And we have to see it as effectively we were rationing resources so that the poor get enough to survive, the rich get enough to be slightly more affluent than the poor. But the wealth levels and consumption levels they're used to just have to be the thing of the past. So would that happen via just government decree or would that, could that happen? One of the projects that I'm involved in and I can send you some

information on this is called untax.org, where we try to, over time, put a tax not only on carbon, but on all non-renewable inputs, and remove a tax on humans. And the implications is this phone might cost $2,500 because it has a lot of non-renewable inputs. But if I make $50,000 a year, I would keep all $50,000 a year. And 95% of current taxes are on humans or course. corporations and those would go away and the tax would go on anything that's non-renewable on human timescales. What do you think about that idea? Something of that nature is necessary. I mean, I'm working on a proposal for a parallel currency system. So the idea would be that you would have the normal monetary economy you have

right now, but everything would have two prices, a money price and a carbon price. The carbon price reflecting the actual carbon content of the good you're purchasing. And we'd all get a tradable carbon credit on a daily basis from the Treasury or central bank. And that would be, we'd have to spend both amounts. Now, of course, because of the skewed nature of the distribution of income, if you gave it out of the average for an economy right now, I wouldn't even bother trying to the global level, but that's how you, global agreements are the way you've managed to prevent things

are being done. They don't actually occur. But do it at the national level. So each economy gets, each person in, say, America gets the average carbon credit for America, 95% of Americans would not reach that level of consumption, but the top 5% would, they would need to buy carbon credits off the poor to be into need to buy what they're buying.

So that would be a way of putting enormous pressure to reduce carbon content and a redistribution for the poor in that sense through a market mechanism. But something, whatever we do, it has to provide more of a level of saying we have to provide a minimum level of income, a standard of living,

for the vast majority of people. And then the rich have to drop radically. So your idea, taxing everything else, not taxing labor, that ends up meaning the worker gets to keep 100% of what their wages. That gives them more buying power, anybody buying more extravagant goods faces a larger cost. Overall, we have to find something where the burden is put on the rich, not the poor. Is that possible? And if it happens in the UK or the US, doesn't it have to be accepted by a large number of nations to actually be effective? Or what are your thoughts on that? Our political system of work at the national level. We, as an American, you take part in the American political scene. When I was in Australia, I'd take part of the Australian political scene.

And we have institutions we can actually vote on an effect. So national level is where things actually get done. So I would prefer to say, let's work in within when the realms of where we can actually have an impact. Because one of the reasons that, I know that a lot of the fossil fuel companies are happy to see things like COP 26 and COP 27 and COP 28 because they're all cop outs. Nothing ever gets done. No agreement ever has made. You know, at the national level, you've got a chance of bringing something in as a law or a change in behavior. I just think it's feasible to work at the international level until we realize how serious this threat is.

Well, we both are friends with Tim Garrett and the relationship between GDP and CO2 is, so much that I say that trying to argue that we need to reduce our emissions is like arguing with a forest fire because the momentum of economic growth is pulling all energy and materials into the consumption and waste CO2 into the biosphere on the other end. So you mentioned students in Poland and in Amsterdam. Are you still currently teaching? Are you an active professor? No, I'm retired from straight academic classes, but I do my work on Patreon and whenever students ask me to give a course, I volunteer my time until I'm as they cover my expenses. So I'm doing a lot of teaching on a sort of one-off basis.

I'd like to be doing a workshop in Poland for about five days on how to model money, how to model energy for young students that way. So I've taught the last eight years at the University of Minnesota a class called Reality 101. and it's always difficult. Teaching about energy, teaching about the environment, teaching about the human brain is the easy part until you get to the end of the semester where the kids want to know, what is the answers?

What do we do? So what recommendations do you give specifically for young people who become aware of the flaws in economic theory, the debt, energy, and environmental situation of our current world? Pretty much I tell them to learn system dynamics, not economics.

Don't waste your time doing any economics degree. Go and do systems dynamics. instead. Apply that to economics if you want to work in economics itself, but do not learn economic theory directly. It's a waste of your time. And it reorganizes your brain cells in a very unhealthy way. In terms of what to do, basically it's Greta Thunberg levels of activism. I have to accept the humanity never responds to a threat until after the threats manifest itself. There are exceptions like the effort over the ozone layer, for example, which was something we did because it was moderately peripheral. The Y2K bug. We managed to get enough programs organized to rewrite all that

cobal code and we didn't have databases crashing on the year 2000. So we can do it when it's a small thing. But when it's as large as global warming and the sustainability of a lifestyle built on massive overconsumption of energy, people don't want to know. So you only get a change when holy shit, where did that city go becomes people's realization. So for example, in Australia, last federal election. The state of Queensland is regarded as like a redneck state in this country, but like it's our Alabama, okay? Well, that our Alabama voted for three green members of parliament in the city of Brisbane and they turfed out the previous liberal, the conservative party. We've got Greens, radical Greens. Why? Because Brisbane was hit by four or five major

environmental crises in one year. And you had the river flooding and destroying large parts of the property, you had serious bushfires, and people were thinking, Jesus, something might really be happening here. We've maybe got to take this seriously. And so people switch from voting conservative to voting green. Only when you see real catastrophes, like, for example, California's drought and the fires that are coming out of that, are you likely to see a shift in mentality? And then we're going to be reacting after the event. We're not going to be preparing before it. Yeah, so we need a smoking gun, but really when enough people to change their the voting on what our aspirations are and what we're willing to sacrifice on the climate

front, once we see enough of that, it's going to be too late to change. There's that. But what about the other side, which is that we're burning through our natural resource and energy inheritance 10 million times faster than it was sequestered? And maybe we should conserve it. And what about that side of it? Are we also going to wait until it's too late to do that? I think we're in overshoot.

We've already gone past that point. And this is the problem that our sustainable level of consumption in terms of fitting within the biosphere's capacity to handle the waste we generate out of having an industrial civilization, probably one-fifth of what we're consuming now. Now that's back to like 1970s level of consumption. Now, in the West wasn't a period of poverty. We didn't have the same toys we have now,

but nobody was starving on a mass scale on the Western world. that level of consumption was potentially sustainable. So maybe say one third of what we're consuming right now. People aren't going to willing to do that. We won't do it until the climate makes it inevitable to happen. So for those people listening to this that understand what you're saying and agree that we are at some point, to use your number, headed down to a third of our current material consumption, I would argue maybe two thirds on route to one third in the future,

Do you have suggestions for people living in advanced economies on how they could prepare themselves or their communities for this trajectory? They have to be as capable as possible of generating their own energy locally. The food sources have to be as close as you can to food sources. This is one reason that I've moved both to Thailand and Amsterdam as it happens, by the way. There's family reasons as well, but both those countries are very, very food sufficient, self-sufficient. As long as the ocean doesn't rise a meter.

So that's the danger about here because if we lose the AMOC, then things could really go a mock in the ocean off the Netherlands. Yes, that's true. So we do face enormous challenges. It is hard for individuals to do anything. It really is something where our society has to make those decisions and make it possible, for example, to catch a train rather than, or a light rail rather than driving a car to get from point A to point B.

That's much easier in Europe than it is in America, as you'd be aware. So it's very difficult to say what individuals can do, but fundamentally it's a lot of be close to food sources, be able to produce some of the energy you need in your own environment. Solar is not going to solve our problems, but having some solar is going to be necessary. So various ways to be able to be closer. Don't be so far up the complexity scale that you'll be crushed by part of the system falling out below you. It really does get back to governance, does it? We need new ways of governing, yet there are large barriers to changing.

the current momentum of the current political structure. Yeah, and we have people making decisions who are fools. We have scientists trying to tell fools how to manage an economy. Now, the fools I'm thinking of are people I personally know, Labor Party and Liberal Party politicians in Australia, and quite a few that I've met in the UK as well. And you have people who are not experts. Our political system chooses people on the basis of personality

more than anything else, which means we're sexists for narcissists and sociopaths. Could we eventually select for physiocrats again instead of narcissists and sociopaths? I think we could, but we have to realize we need effectively a community of elders, a society of experts, making these decisions guided by a system of software that enables their views to be brought together. That's the vision that I have that would be functional. You don't want people getting there because they're narcissists and they can say, I can lead you to the promised land.

We need people who are aware of the complexity of the world in which we live. I like that idea. I don't know how to get there, but I do like that Council of Elders conceptually. A few more questions, Professor Keene, what do you care most about in the world? Human knowledge. I think the extent to which we have learnt in the last quarter of a millennium is absolutely stunning. And I expect to see an enormous number of deaths in the next 80 years, both of humans and other life forms. And I said that basically is pretty much inevitable.

What I want to have is some capacity to sustain what we've learned through the fossil fuel period. And if there's some way that that knowledge can be hung on to, then there's a chance for us to build a sustainable life-respecting civilization on the other side of the catastrophe that I expect us to go through. So it would be the greatest tragedy of all to have learned as much as we know about the universe and then destroy our own society which enables us to put that knowledge into interpramination. practice. So I care about maintaining that knowledge more than anything else. I love that answer. That's awesome. I agree with you. You're the first person that has said it that way. But in addition to helping propel things of value through the bottlenecks of the 21st century,

like ecosystems, other species, cultural ethics, it's knowledge. The knowledge that we've accumulated is a gift. I mean, it's taken us 300,000 years to get to this point. And once we we're figuring it out. At the moment we're figuring it out, we're destroying it simultaneously. Absolutely. And that is such a tragedy. Yeah. So what are you specifically most personally concerned about in the coming 10 years or so in the world? Climate breakdown causing social breakdown. Because if we have climate catastrophes, meaning food production collapses, for example, which is potentially, the Ukraine wars accelerated that in Europe right now, the drought in the Western United States. If that extends

of course also to the wheat belt, then we could have a collapse in food output and therefore we get a choice of high prices causing starvation or we go into rationing. Now that could lead and particularly as a divisive of a society as America, that could lead to just social conflict and the law of the gun comes out as to who gets to eat or attempts to and of course that would destroy your production and distribution system as well. So I'm worried about the climate breakdown leading to a social breakdown and ending up in a mad max world. And in that case, I actually think the most sustainable societies are ones with a more cohesive social system, but also more acceptance of authoritarian control. Because if the Chinese tell the Chinese people

who've got to ration food and it applies to everybody and it seems to apply to everybody, they'll accept it. You tell Americans to ration food, they reach for their revolver. Yeah, I'm worried about that too. We're polarized, we're addicted, and we're entitled. We're smart and hardworking and have resources and we produce 85% of our own energy, but those three things are a nasty cocktail. Let me just ask you those specifically. So you're more worried about the climate impacts on food production in the coming decade than you are about energy decline and financial impacts on food? I think we're going to have some financial crises as well.

I mean, because the interest rate rises, which are going to cause credit to collapse, and the government's going back into austerity after the spending they did during the COVID pandemic, which was necessary spending, those two factors are going to cause a financial decline. So I'm seeing we're going through that right now. But that is in so ways transit. If governments decide to go back to large government spending and realize they can't put interest rates up as much as they've done, then you could sort of rewrite that ship to some extent. But the thing you can't rewrite is the climate.

I expect climate results to hit us fast than energy shortage as well. I could be wrong. I mean, those two, you know, you know the declining energy return in oil better than I do. So I could be wrong on that front. But I have a feeling climate dynamics, like the worst of which are the ones that Philip Anderson, the chemistry, professor of chemistry at Harvard University who discovered the whole in the ozone layer, his anticipation, they were the scariest I've ever seen. So if things like that start happening, then advanced civilization in the northern hemisphere will start to fall apart.

How do you articulate these things so clearly and maintain equanimity about the severity of the sentences you've just uttered and been doing it for a long time? I've had to fight with depression in the last five years because when I realized just how badly a neoclassical economist that underestimated the dangers of climate change, It was one of these, you bastards, you're going to kill us all, realisations. And it was seriously depressing thought to wake up and imagine that as many people as I think could die out of this are going to die, as many other life forms are going to die. And that's a very, very bleak vision. But I've got a fundamentally positive human nature. And my wife actually intervened in a funny way. She's Buddhist.

She has no interest in the work that I do. But she walked, I'll give you, sitting literally at this desk, I read a paper by Richard. toll in which you said that one of the ways they developed their numbers for estimating the impact of global climate change is to imagine that the relationship between temperature and GDP that applies across space will apply through time as well. And I thought you absolute morons, that's so effing stupid. No wonder you're underestimating the dangers. And I had my hands like this in and my head and my wife walked in, ring me in a drink or something or else. And she said, why are you like that? And I said, I'm just reading this stuff on climate change.

She said, oh, why you read that stuff? Nobody's interested in that. People don't want to know. You can't change anything. If we die, we die. I said to say, there's a certain realism to that, you know. So basically you just go on regardless. There's no point stopping and just being paralyzed.

You have to continue doing something. And at least I'm going to go down fighting. That's my attitude. Well, good for you. Your wife is Thai, right? Yeah. Yeah, I spent some time in Thailand. I'll never forget, we went scuba diving because you can get Insta certified there, like,

with three hours, and then you go scuba diving. And we showed up, and the guy who was going to bring us out was late. And an hour later, he showed up. He's like, I'm sorry, I'm late. And my brother died yesterday last night unexpectedly in an accident. And he was smiling and happy and took us scuba diving. And I was like, what? And it's just a bizarre way of looking at the world.

Life continues. The builders have an idea of a cycle of life. And that in its own way is highly preferable to the linear perspective we have in the West about progress all the time. So death is part of life. Yeah. I think we do have a deep phobia about death, personal death and death of a culture and death of ideas.

So in contrast to that, what are you most hopeful about in the coming decade or so? I have to admit, I'm an Elon Musk van boy. My great worry is that we are on the wrong side of the great filter. You know, the idea that why are there no civilizations in the solar system for us? Have they all collapsed at some point under their own momentum? I think we face their potential for collapse. And the one possibility of avoiding it is if we get a self-sustaining civilization on another planet where that only exists if we maintain all that human knowledge

and we apply it to the nth degree because if you make one strong step on Mars, you're dead. and you cannot allow a breakdown to occur. You cannot allow the type of excesses. The beneficence of the Earth's fire fear has allowed us to do. So I'm just hoping we get enough time to build a self-sustaining civilization there. And then whatever catastrophes occur on Earth, there will still be an outpost that can bring our knowledge back after we go through what I expect to be a dark ages.

I agree with you on the Great Filter, but in the worst post-nuclear Holocaust, 5 degrees Celsius, runaway situation on Earth, Earth will still be a paradise next to Mars. Of course it will be, but that's part of the reason. If it's absolutely impossible to survive there without the highest level of possible technology, then you cannot let your technology levels fall. You cannot let social conflicts get out of control. There are incredible limits that being in such a poverty-stricken environment put on you,

which we have not had to experience here because there's been the beneficence of this a biosphere, we've just taken it for granted and we've trashed it. Because what I'm worried about, if we do have the breakdown on the planet and we try to maintain the knowledge here, then the knowledge will be destroyed in various ways, firstly by outright destruction by the climate, and secondly, probably by an Adelaide movement which will develop saying this is all due to technology and blame technology and human knowledge for the situation we're in, say we've got to go back to a Stone Age mentality. That's a possible outcome of a post-industrial society.

Have you seen a, I think it's on Netflix or it might be Amazon, a show called Raised by Wolves? No, I haven't. You might check it out. It's about a Luddite, anti-Luddite war on Earth. And then the descendants are in outer space. And it's very interesting. The first season was excellent. The second one, less so.

So one last question, Professor Keene. If you were benevolent dictator and there was no personal recourse to your decision. decisions, what is the one thing you would do to improve human and planetary futures? I'd bring in ration immediately, and I'd reduce consumption levels drastically, so that we have a potential to reduce the damage we're doing to the planet. And I would also, part of that, I'd be targeting a controlled reduction in human numbers and ultimately reserving at least half the planet for non-human life forms to enable life to continue a without our intervention, without our damage.

Thank you so much, Steve. We should talk more. I agree with almost all of what you've discussed today. Do you have any closing thoughts for our listeners? Just realize you've been, unfortunately, if you're swallowing the sort of nonsense that neoclassical economists are pumping out about the sustainability of modern society,

as that Stuart Kirk from HSBC was recently. If you saw his speech saying, we don't need to worry about it, it's 80 years in the future. It's real. It's a very, very immediate. You have to take this serious. And that means getting behind, accepting movements like extension of rebellion, accepting with overshot and getting prepared for it.

Because if you're not psychologically prepared, you're certainly not going to be physically prepared. Thank you for your speaking truth to power and all your work on this. And hopefully more people will start to realize the flaws in the underpinning neoclassical models that are steering our society. Thank you, Nate. Thanks, Steve. If you enjoyed or learned from this episode of the the Great Simplification, please subscribe to us on your favorite podcast platform, and visit

thegreatsimplification.com for more information on future releases.