The Great Simplification with Nate Hagens - Steve Keen: "On the Origins of Energy Blindness"

Episode Date: February 7, 2024

On this episode, economist Steve Keen offers a deep forensic history of why modern economic theory has neglected the role of energy in productivity - and why this "Energy Blindness" is now a major blindspot in how our culture views the present - and the future.  The massive, temporary carbon surplus we've extracted over the last few centuries has resulted in an exponential increase in the standard of living for many. This explosion of global economic growth also happened to coincide with the development of all modern economic theories and formulas, leading to a core misunderstanding in the way our economies are powered. How have technology and innovation been used to cover up the role of a growing energy supply in the last century of rising prosperity? In the midst of discussions between value and labor, where does energy really fit into the equation? Where do we go once we understand the true role of energy in our economy - and will we have the ability to reshape economic policies to be in line with our energy realities? About Steve Keen Steve Keen is an economist, author of Debunking Economics and The New Economics: A Manifesto. His new book, Rebuilding Economics from the Top Down, will be released in 2024. He is a Research Fellow at the Institute for Strategy, Resilience, and Security at University College in London. Steve was one of the handful of economists to realize that a serious economic crisis was imminent, and to publicly warn of it from as early as December 2005. This, and his pioneering work on modeling debt-deflation, resulted in him winning the Revere Award from the Real World Economics Review. Watch on YouTube: https://youtu.be/lrMWSkzrMYg Show notes, and more info: https://www.thegreatsimplification.com/episode/108-steve-keen 

You're listening to The Great Simplification. I'm Nate Higgins. On this show, we describe how energy, the economy, the environment, and human behavior all fit together and what it might mean for our future. By sharing insights from global thinkers, we hope to inform and inspire more humans to play emergent roles in the coming great simplification. I'd like to welcome Professor Steve Keene back to the podcast. Steve is author of debunking economics and the new economics, a manifesto. Steve is, among many other things, a research fellow at the Institute for Strategy, resilience, and security at University College in London.

He is writing a new book. And today we discuss one of the chapters in his book, which is a economic sleuth story on the origins of energy blindness. We go back all the way to Adam Smith and look at a series of wrong turns in the road that classical and that neoclassical economists made on the treatment of land, energy, and things that are not capital and labor. This is a difficult podcast. Steve is an economist. Talks in a lot of economist language. I barely understood what he was saying, but I, I did understand the critical importance of his main message is that our main shaman of our culture today, those that we look to for answers and explanations of what's happening and what will happen in the future, are truly divorced from our biophysical and ecological reality in their formulas. So this ultimately is a really big deal. There's a chapter in Steve's upcoming book on that. but this is a one and a half hour treatment of energy blindness and its origins.

Please welcome back to the show, Steve Keene. Steve Keene, good to see you. Welcome to be back again, Matt. Good to talk. This is a monumental podcast for three reasons. One, it's my last podcast of 2023 recording. Two, it's my first podcast on prep for a colonized. so hopefully we won't have to interrupt it too many times.

And third, I think this is a, you have just finished a detective story about a concept that I often talk about energy blindness. I know the result of why our culture, why our institutions are energy blind, but you have just written a book and a chapter on the energy production function and you've gone back to the original papers from the classical and neoclassical economists and figured out why humanity has over time completely neglected the role of energy in our descriptions of wealth and productivity. So we could talk about climate change. You know a lot about that.

We can talk about money. You know a lot about that. And we probably should. But today, I want to just unpack your story of what you've been working on the last couple months with respect to energy blindness. Okay, let's roll. First question. So take me to the beginning.

We had classical economists back in the day, right? Yeah. And virtually every economist, if you ask them who's the father of economics, going to answer Adam Smith. And in a sense, I was inclined that way, except that I've read previous economists as as well, including the physiocrats. And my attitude was that the physiocrats were more advanced on important issues, both macroeconomics and the role of energy in production than the... Who were the physiocrats?

They were a bunch of 18th century, French, mainly French, but also some Irish economists who worked in French. And this is in France. And this is before we actually had the term of economists in many ways. So there were people who were trying to analyze how the production system works. And they're called physiocrats because the leading personality, the leading intellect in the group was Francois Knais. And Knais was the physician to the King of France. And he was working at the time when we were having the very first autopsies to find out, you know, what was inside a body. Because for a long time in the West there were religious rules against carving open a dead body.

and then we started to do what you, and KNA was involved in this, he found all these tubes running all over the body and had this vision of a system of circulation for the body. And then when it came to looking at the economy, they had the same idea. There's a system of circulation. Goods go from one spot to another. Money goes in the opposite direction.

And there was this sense of saying, we can see the economy as a dynamic system in the same way we're now realizing, the body is because all these tubes flow down and flow back up again. The arteries go through the body. They become veins. Come back up again. There's circulation of blood.

There's mixing of blood with oxygen. All these sorts of things were the vision. And in that sense, the basic paradigm they started from wasn't mechanics, as neoclassical economists have ended up doing. It was biology. And that was a far more sensible starting place. And so instead of calling them bureaucrats, they were physicians. that were advising the king, so they called them physiocrats?

Well, the most dominant personality was Knais. And there's two combinations. He was a physician for the king, literally the king's physician. Now, that did two things, gave him enormous prominence. It also made him, gave him plenty of spare time, because he only got one person to occasionally have to do something medical with. So for the rest of the time, he was working in, to work and the interest was in how the economy functions as a sort of monetary and physical

goods version of a body circulation system. This was in the 18th century in Europe? 1700s, yeah. Right. And they were trying, you know, as people like William Petty was trying to work out how the economy functioned in England at similar times, Sipsmith afterwards, of course. the curious thing about being based in France is that France at the time compared to Scotland, that we're not comparing France to England, but France to Scotland because of Smith,

France was still overwhelmingly agricultural, okay? Agriculture-dominated production in France. You had, you know, some level of manufacturing, but nothing like what was developing in Scotland at the time. Smith's book came out, I think, the same year as the very first James Wattstein, engine was sold. But of course we had the previous models before, which are much less efficient, were still steam engines.

And you had steam power and water power and wind power being used in all the factories in Scotland. But from the point of view of the physiocrats, they said, well, what they was looking at was rural France. And what they saw was the farmer would plant one seed and a thousand seeds would come out of it. And so their orientation was that wealth comes from the land. And it isn't the labor that goes into making something that gives it the value. They didn't even talk about that. Well, they did, but it was a secondary factor. So they said the source of wealth is the land. And the husbandman,

as they call the farmer, is the one who exploits what they call the free gift of nature. and their perspective was first of all to say that the land is the source of all value. That was the opening four or five words of Richard Cantlons, an essay in economic theory, which was published in French 21 years before Smith wrote the wealth of nations. First of all, French, not only did Smith read French, he was in France, taking a young nobleman around for education and met Cannae. So he was quite aware of the literature in French before he wrote the wealth of nations. And we'll never know whether Smith derived his ideas partially from the physiocrats and interactions with them

because he insisted that all his notes were burnt upon his death. So he don't have any long-term record of the influences on Smith. But this school of thought was very strong and had a definitive foundation for explaining where wealth came from, and it wasn't from labor, it was from land. And then there was steam engines, and we were off to the races, and our stories changed, influenced by Adam Smith. Well, that's much right in the wrong direction, because what the physicists also said was, of course, with land, they said, well, the land receives the free gift of nature, and that had many potential meanings, but fundamentally, from our perspective, looking back, it was energy. because the sun's energy lands on the soil, the plants absorb the energy, the plants grow, the husbandman's actual labour is far less important than the productivity of the soil and the exposure

of natural elements, the climate, the sunshine coming in. And that was the source of wealth. And they said the husbandman is the only source of wealth. And if you look at the writings that people like Turgo and Candelon and Caney had, And you look at it from the point of view that you and I have of the role of energy and production, they are fundamentally saying the free gift of energy is what enables us to produce anything. And what we often would be called a surplus by other schools of thought is the gap between the energy put in by the husbandman and the energy retrieved. And there's a wonderful sentence from Turgo where he says the husband and receives the free gift of nature, which he did not pay for on which he sells.

Okay. Well, that's a microcosm of our entire economic system today. Exactly, exactly. So in that sense, the physiocrats had it right, the one mistake they made, and this is the thing where the whole thing fell over, and Smith played a role on this, is that they could not see the same thing in manufacturing. So what they saw for manufacturing is that manufacturing receives the output of the agricultural sector and transforms it to some different form, but does not add value.

Now, what we know, of course, is that manufacturing also receives the free gift of nature and the sense that we're exploiting fossil fuel energy, which has been there for millions of years, but it's basically stored solar power. And without that input in manufacturing, there'd be no production for manufacturing either. And at the same point, the manufacturing transformed the free gift of nature, which is raw energy, into useful energy. So the sensible perspective would have been to go from the physiocrat's vision of the role of agriculture to then say, well, it's also in manufacturing. And Smith could have done that because Smith could have thought, well, we don't have much farming in Scotland comparatively compared to France, but we do have manufacturing.

And in manufacturing, we're using the free gift of nature as well, we're putting coal into the early steam engines. We've got water power, which is another gift of nature, wind power to some extent. But predominantly it was steam power and charcoal power, and coal. Coal is becoming very important, becoming dominant, actually, before Smith published the wealth of nations. So he could have said, well, that's also the free gift of nature. But he didn't. What he said and said was, labor is the source of value. What you have out of that is the switch from seeing the,

external, the existing universe being the source of us transforming the inputs we form, find into something useful for us, which is consistent with the laws of thermodynamics, into labor being the source of wealth and division of labor being the source of growth of wealth. And this is all effectively inside the economy. There's no reference to outside the economy. So I see Smith, by simply changing one word, you have Richard Candalon saying that land is the source of wealth, to Smith saying labor is the source of wealth. And that completely pushed the economics off the rails. We can only speculate why that happened, but possibly because Scotland was further along on industrialization.

And all of a sudden we had this wealth and higher goods and services than. a few decades earlier. And there was maybe a human exceptionalism dynamic. Look at how clever we are and how industrious are citizens of Scotland are, we're creating these machines and we're creating this productivity. And so that, that statement, that shift from the focus of free gifts from nature to the husbandman, the farmer or the laborer, that that was the origin of our current energy blindness, you're saying. I think so. And like, I can't criticize Smith for this. I mean, I'm going to say it's a great pity, but I can't criticize him because he had no idea of the consequences. He didn't know the laws of thermodynamics. You can't criticizing for breaching something, which wasn't developed for a century after he actually spoke. But when you look at the, they're not going to look at some of the... And even the word, even the word energy was invented after he wrote wealth of nations, I think.

I learned that in your paper. Either 180 or 809, I think. So the word itself was. you know, it was taken from Greek, but it was made up in the early 18th century by an English 19th century. Early 19th century. It's easy to make that mistake. No, no, no, I always get that confused too. Sorry, I interrupted you. You were saying.

It's quite an 1802. So, you know, we can't blame them for not using post language and we can't blame Smith to not knowing that there's a law of conservation of energy. The story continues, though. It wasn't just Smith. The errors compounded. So what's next? Well, the next stage is once he said, Smith said that labor is a source of all value, and division of labor is the increase in value and wealth.

You then, initially, that was used by Smith and Ricardo, to attack feudalism and argue in favor of capitalism. When you look at the role that the classical theory of economics played, it was to promote trade, it was to promote freedom of movement and freedom of enterprise against all the restrictions of the feudal system. So in that sense it was pro-capitalist, and that was the way in which it was used by Smith and Ricardo. Nobody regarded Smith and Ricardo was calling for the author of capitalism, but along comes Marx. Now, Marx, not only Marx, were plenty of what they call Ricardian socialists before Marx turned up, who took the same idea that if labor is a source of value, why is the wage not equal to the entire product? Why does profit exist? that was the twist that was then taken

of the interpreting the classical argument that labor is the source of wealth say well if we're the source of wealth why don't we get it and you have to go back and think about the state of industry in the 18th and early 19th centuries kind of fall over that 21st century thing

in the 1900s all the damn time but if you think about the state of Scotland at the time if I have any analogy to what it was like It was Calcutta in the 1950s. It was stench everywhere from pigs, from pigs being disemboweled, chemicals pumping out, smoke out of the chimney, stacks, etc., etc.

And I've forgotten who coined the phrase of the dark satanic mills, but that was what Scotland looked like at the time. And you had people who used to work in an agricultural environment with quite a few rights that peasant. had back in that time, who pushed through the enclosures movement, became landless laborers fundamentally, had to work in the industrial systems, then found themselves working 14 hour days, normally six days a week, thank God for the Sabbath, but six days a week, often sleeping inside the factories. It wasn't exactly going to conducive to making you think what a great

system capitalism is. At the other hand, of course, the capitalists themselves were benefiting from all this and, you know, bleeding the industrialization and so on, and the technological change, they thought it was great. So what you had was for the working class and for the urban poor, Ricardian and Smithian economics became a ground for arguing for revolution and for a fairer share of what's being produced. And that political shift was brought to a head by Marx in studying in 1857, well he was prominent well before then, but 8057 with his work on what's called the Grindresa

and arguments for developing Marx's particular version of the classical theory. And Marx was far more eloquent than saying capitalist exploit labor. He actually said capitalist pay workers precisely what they deserve to be paid in the commodity production system. They get their means of subsistence. That's the cost of reproducing the worker. It's a gain for the buyer of labour power, that there's a gap between labor and labor power,

but by no means an injustice to the seller. That's a quote from Marx. But anyway, what you got was Marx being used as the means for saying, let's have a revolution. And now in that setting, the classical school, from being regarded as positive by the capitalist class and the ruling class effectively. The classical school being Adam Smith and the like.

Adam Smith, Ricardo, and through to three, ultimately to Marx. But all the time, there was a subgroup, which was called, had no particular name. But they were what I'd call proto-neoclassical economists. And the most prominent would be Augustine Kornow, who gave us the mathematics. What's called Kornow oligopoly theory and so on comes from Augustin Kornow back in the 1820s. and Jean-Baptiste Se, who was a complete believer in a utility maximizing view of human behavior and equally utility maximizing view of capitalism as a system. And he was vehemently pro-capitalism, which I'm not criticizing here at the moment at all,

but I'm saying he had a subjective theory of value, whereas the classical school was objective. So Ricardo, for example, at one stage said, the price of products are set by the cost of production and not, as has often been said, by supply and demand. So Ricardo was anti-supply and demand. Most people, including their classical economists, don't realize that. But when Marx became the bastion of the classical school, this is in the 1860s and 1870s,

at that stage there was a very rapid turnover in economic teaching at the universities, where the subjective theory of value became dominant. And since the passing on from, say, in Kornow to Marshall and Jevons and Walrard. Can you briefly state what subjective versus objective theory of value would be? Yeah. The objective values of theory says that the price of something is set by cost of production. So they ultimately, the cost of production determines the price something sells for. Whereas the subjective theory says it's a combination of the utility maximizing desires

of the buyer and the profit maximizing desires of the seller, the two together set the price. And as Marshall ultimately says, it is as ridiculous to ask whether supply and demand sets price as to ask which blade of a pair of scissors cuts the paper. So they saw both having to play a role. But they also came down to saying that it isn't just labor that is a source of value. Capital is also a source of value. Now, Marx, when you read Marx properly, and I think there are a source of value, and I think there three people have done that on one of them.

Rostolsky is another, but most Marxists don't realize that Marx actually had an explanation about how capital can add value or be a source of surplus value in his terms. I won't get into that here, but that's saying the Marxists don't read Marx properly.

But anyway, the convention... Let me ask you a clarifying question because where we're headed, we're going to talk a lot about labor and value. Labor is pretty clear. It's the husbandman. It's It's the worker. Now, how do you define capital back then and is it the same today? That's difficult questions in economics. Capital is finally in machinery. Capital is a word for

machinery, which we also use almost identically as a word for money. Technology. The accumulated value of money. Okay, money. Okay. So, but there is no simple mapping from the physical machines to the monetary value of machines. And we'll talk a bit about how an energy approach makes it easy to understand the role of machinery later in our conversation. So with the old equations, if you substitute the word machinery for capital, and then you say labor and machinery in these 19th century formulas, that would be correct. That would be the same inferences. So the Marx art, the physical machine adds no value to production. This buzzed a distortion of his own philosophy, which is yet an issue for another day.

But if you have the labor theory of value interpretation of Marx, a machine adds nothing. It simply contributes to the output what it cost to make it in the first place. And there's a famous phrase in Volume 1 of Capital, which says no matter how productive a machine is, if it costs 150 pounds to make or three weeks of late, then it adds to the product 150 pounds or three weeks of labor. So it simply transfers its value, whereas the increase in value comes from labor. That was Marx's labor theory of value argument. Now that contributes to the whole political battle between workers and capitalists

over who should get profit, should the capitalists deserve a profit, et cetera, et cetera. And that was where the classical school suddenly became on the nose for most, capitalists. So the subjective arguments of Say and Kourne, and then ultimately, Valarge Evans and Menga, became much preferred. And I really don't know the politics of the switch in the 1870s, but in 1850s and mid-1860s, the classical school was still dominant at universities and dominant in public discourse. By the 1870s, it was the neoclassical school, which was completely dominant and classicals were effectively marginalized, pardon the pun.

So the marginal school takes over and the argument is both labor and capital contribute to production and contribute to output. So Marx actually directly or indirectly influenced the birth of what we refer to as neoclassical takeover of economics. Yep. Now when that happened, of course the real thing I'm interested in not Marx in particular,

It's a piece of particular. He's an actor in causing this, but he's not the main stage. What started with, the physiocrats had the proto version of energy as the source of value. And that's correct. We know from the point of the theory of thermodynamics, we know that there is a set amount of energy in the universe. And what humanity does in its manufacturing process is take significant concentrations of energy. and use those to either convert energy something more useful or to do motive force with that energy. And that is work, and that is what enables us to produce goods and services.

But we cannot create energy. We take energy in one form, we put it, transfer it into another. We actually degraded according to the second law of thermodynamics. So there's no surplus in that sense. What there is is a gap between the energy input needed to harness this free energy and the energy contained by that free source as well, the coal mine or et cetera, et cetera. And that is what we're taking advantage of.

So we should have an energy theory of production. And if we had the physiocrats, we would have got there because once the physicists in that sense caught up with the economists and developed the laws of thermodynamics, Economical said, ah, that's what we're talking about, and we can simply integrate perfectly with that. Instead, we got the wars between labor and capital, workers and capitalists over who's the source of value, and that completely ignored the role of energy. And so the neoclassical economist, starting in the 1870s,

continued to build on this separation from a biophysical, physiocrat, explanation of our wealth and productivity, kind of at the same time that coal started to expand, we had just found oil, and we started the industrial revolution in earnest. Then what happened in the field of economics and the description of our productivity and bring us gradually up to the present moment? Well, you had Kanae having a theory of production, which was fundamentally a a multiplier version of investment and being multiplied by transfer between different sectors and so on. The first mathematical models came out with both Marx and the classical school and the neoclassical school. But there was still no, as we're used to today, no models in those theories of production,

which is the mathematical equations saying here are your inputs, there's your GDP as output. So until that point, it was just stories and rhetoric. Yeah. And all of a sudden, then, at the late 19th century, we started to put math to it and equations. Marshall and Valrave and Jevons being the main three that did that, Marshall lighting into the 1920s. But the first attempt to have an actual, it's called aggregate production function. So trying to relate the aggregate level of output to the aggregate level of inputs,

at the level of a macroeconomy, the first attempt to do that in the neoclassical school was the Cobb Douglas production function. And in both Marshall's work and in Jevon's work, you can find this idea of inputs having marginal productivity. So you put a certain amount of labour in and you get a certain level of output, you add more labour,

you get not as much increase in output as the previous level, but still some positive return. So there's idea of marginal productivity of labor and margin productivity of machinery, which turned up in the neoclassical theory. And I think in 1898, well, in the 1890s, J.B. Clark developed the marginal productivity theory of income distribution, which said that workers receive the marginal product and capitalists receive their marginal product. and so that concept became built into neoclassical theory.

So the wage is supposed to reflect the contribution to output of the last worker hired, and the rate of profit is supposed to reflect the contribution to output of the last meat machine turned on. But how did they know what percentage of the value of the product that was created was from the worker and from the machine? Well, they didn't actually know in that sense. and they're wrong with the answers they gave. But the basic concept with the marginal productivity theory of income distribution was that the marginal products would be based upon the share of income,

the share of income going to different what economists call factors of production. So if Labor gets 75% of GDP, and that was roughly the term that applied in the 1920s, and capitalists get 25%, then the marginal product of Labor is 0.75, and the marginal product of capital is 0.25. So that was the general expectation, but nobody put a mathematical number on it, until Cobb and Douglas,

one being a mathematician, the other being an economist, Douglas being the economist. And this was 1920s, 1930s? 1928, I think it was. Cobb and Douglas? Yeah, yeah. So they had to send painstakingly assembled

a set of index numbers. Again, this is why it's important to know your history because as well as knowing how things happen, you also know the context in which they happen. And today we're used to getting, you know, GDP figures off the Bureau of Economic Analysis every three months. Okay. And then we get a breakdown of the contributions from different sectors, and there's huge tables and statisticians, groups of statisticians involved in making this all look consistent.

Back then, there were no numbers. There was one person maintaining, an index series for GDP, but there were no numbers on the amount of labour and no numbers on the amount of machinery. So Douglas made up fairly carefully, but put together a number of different series that he could find, to produce an index of labour, an index of capital, and had this index of the output of machinery, not the entire GDP, that was pre-existing at the time, and put together the data, annual data, between 1899 and 1922. and then fitted that data,

the mathematician Cobb doing the work there. Again, of course, this is on paper. We probably had manual calculators back then, I imagine. It would be extremely expensive. They would have existed. Maybe it was done by hand. But the calculations were much, much more painstaking.

They were used to today by pumping numbers into a computer program and almost instantly getting the result. So just 23 numbers, all in the number, index numbers all starting at 18099, and then going through to different values in 1922. And when they did a regression against that, they used what's called a homogenous of degree one production function. And what that means is that you had output being some constant, and it was a constant, not a variable, a constant multiplied by capital raised to one power times labor raised to one minus that power. And so the question of,

was what is the term. I'll call it alpha here because they use K and one minus K, and that's getting too confusing. Most economists use alpha for the share of machinery in GDP, a share of capitalist and GDP. Now, back at the time, roughly speaking, the share of capitalist in GDP is 25%. So the value for alpha is 0.25, and therefore the value for 1 minus alpha is 0.75. And the value. And the value for 1 minus alpha is 0.75. and the reason it's homogenous of degree one, if you multiply all labor and all capital, you double it, you get twice as much output

because the exponent's summed to one. So that's the term they found. And lo and behold, the regression came back with the eyes of 0.76 and 0.24. And they said, hey, this is so close to what we expected. That's pretty close to 0.75 and 0.25.

Yeah. So they got a number which, and in fact, I've redone it just using a modern program, of course, and I get exactly 0.25. So you get a very strong apparent confirmation of their data. And the correlation, the, they gave this the correlation coefficient. The R squared is the square of that, of course.

And the R squared for doing it now is 0.94. The correlation coefficient is 0.97. The response to all, it looks fabulously high correlation coefficient. And it fits exactly what we expected from neoclassical theory. Now, they got a lot of pushback initially, but that was a major reason for why it became so popular because the results look very strong and they supported neoclassical theory. But the entire formula was based on a data set from 1890 to 1920. Yep. And what Cobb and Douglas did they showed the numbers of the regression for regressing GDP again.

against the index for capital and the index for labor. But they said that their change data also gave the same correlation coefficient at 0.97. And what they used was not what we'd use today, which is the annual change in the indices. We'd take the log and the log difference. Or they'd look at percentage rate of change and say, what's the percentage rate of change? that when you do it and this is where I started finding a bit of you know there's a hole in the bucket

derealizer deeralizer the correlation coefficient of that they claimed was point was 0.97 for exactly the same value of alpha so you got a you know confirming you didn't just get the high correlation with

GDP and out labor and capital which are all growing okay so there's a coverage the fact they're all rising at the one time will give you higher correlation. They said same correlation coefficient, same value for alpha. Uh-uh. When I do it over the value of aph alpha of minus 0.15. And why is that?

Because they didn't use the annual, the percentage change. They used the three-year moving average. And I don't know. I wouldn't be able to find the original notes. But it wasn't the same result that they got for the data, which was all rising at one time. And any statistician will tell you that if you have data, which is all rising, you're going to get a high correlation coefficient

just because they're all growing, not because they're related to each other. So we should be looking for the differences and try to get something where the trend should be around zero. And even that doesn't apply to the first differences here. But in other words, they didn't get the results, the people accepted that they did, and the confidence people had in the results wasn't justified.

But people were confident. Like in the 1930s and 1940s, this was considered a valid and profound explanation of the inputs and outputs of an economic system describing our wealth and productivity. Yeah. Now, we had all sorts of other approaches to how you model production in the meantime. And there was a long time, and this actually still applied when I was doing my PhD back in the 1980s or 1990s, that, the neoclassical economists were doing what they call computable general equilibrium models. And these models had an input output table as part of their production system. Now, there's all sorts of issues for them, which would dig in that's tangential to what we're talking about.

But at the same time, you had the rise of what they call themselves the new classical economists. And these were neoclassical economists who wanted to revive the idea of the market economy being perfectly flexible, get rid of this nasty Keynesian stuff. And they started using much more commonly the Cobb Douglas production function because they replaced an input-outboard model for the production today with the idea of production over time and they went back to a single commodity idea. This is the aggregate production function. Of course they use the Cobb Douglas production function. Now we had 30 or 40 years of that and typical neoclassicals, they don't know their own history. They've forgotten they ever used anything different to that. and all of them use of Doclis production function,

and they've all done what Solo brought in in the 1950s, and that's bringing in what they call technological change as part of the system. So they have output as a product of state of technology, which they use the capital letter A for, multiplied by labor to 1 minus alpha times capital to alpha. And that's where I think everything went wrong. There was already going wrong with Cobb and Douglas, but this is where you still, you got...

Well, it was already going on with Adam Smith. Yeah. It's error after error. Economics is, I can define economics as compound error. All right. And we're going to eventually translate all this because I'm mostly tracking with, I mean, you're an economist and you're a friend and you care about the system of humans and our planet, but you're also here, you're functioning as a historian, which is as a,

a totally separate skill that you have. And I've talked to you offline on what you've all been working on. And it's quite the detective story. So keep going and bring us up to the presence. So what did Solo do? Well, you started with the Cobb & Douglas, having their function was a constant multiplied by Lva the 1-1-alpha times K to the alpha, to K to the alpha, as the production function.

Now, then one of the criticisms that was made, of Cobb Douglas by other neoclassicals, there's always technological change here. And Solos said, well, we can bring technological change in. This is in 1956 and says 57, we can bring it in. And the way we have to do it, there's a cost. I'll actually read him here. The new wrinkle I want to describe is an elementary way

of segregating variations in output per head due to technical change. Then those due to changes in the availability of capital per head. Naturally, every additional bit information has its price. In this case, the price consists of one new required time series, which is the share of labour in total income, and one new assumption. And here we go, that factors are paid their marginal products.

In other words, rather than being a mathematical derivation by Cobb and Douglas, that alpha is 0.25 and 1 minus alpha is 0.75, let's just assume that what the current values of the share of labor and capital and output are. Alpha is 0.3, which means capitalists get 30% of output, and labor gets 0.7. So we just assume that, and then we fit the data to the, we have a data series for labor, a data series for capital, a data series for GDP. We don't have technology. So the gap between the result we get for GDP and the sum of labor and capital is what they call the growth of technological change.

And that ended up being 0.85. So 85% of the variation in output was explained not by the proportions of labor and capital to each other, but by this technological component. And that became known as a solar residual. So hold on a second. So from 1928 onwards, they had 75% was described by labor and 25% by capital of our productivity. Productivity is basically could be said our wealth change year over year. Then 30 years later, they changed it and said that 85% is is unexplained, but it's by some change in technology. Yeah.

And how does technology, how does technology in Solo's definition versus your definition, how does technology differ from capital? Well, this is the problem. Technology, in my opinion, is embodied in capital. In that sense, when we have technological change, what we get is new machines that have a higher capacity to process energy and produce more complex goods than the previous ones had. So, Cobb and Douglas were in that sense right. not to differentiate out technology and capital.

But by solar bringing in this idea of a residual, first of all, he assumed that the exponents for labor and capital were given by income distribution data. By that stage, it was 30% going to capitalists rather than 25%. So he did do data from the 1920s to the 1950s, and the 0.25.75 shifted to 0.3 and 0.7. That's what he found. When he's in his paper, he does include,

the national distribution of income, and it's pretty much 30%, 70%, we're capitalists and workers. But he found, he looked at the numbers and said, wait a minute, there's something not right here. And when you find a residual of something, a residual effect, sometimes it's 5% or 10%, but in its case, it was 85%. The vast majority of the productivity was not, could not be described by capital and labor.

Well, actually 87.5% national paper. And that's okay in one sense. You can say, well, most of our improvement isn't in a case of adding more labor or more capital or getting the ratio between labor and capital correct. It's technological change. But fundamentally, that was because technological change turns up on the machines, and the labor component, when we're talking about unskilled workers, you basically have people working on a process line.

I've actually done that at some stage in my youth. But you just get told, press this button, pull this lever, press that, put that, thick that hanging a jig and that watchermer call it, and that's your role, okay? So where the technological change actually turns up as the machine itself.

So if you go back before I've worked as a manual, a hand inside a factory at one stage, you would have used rivets to weld aluminum together, and now you're using spot welding machines. And so the technology is actually embodied in the machinery. And this is where the confusion of machines with money becomes a reason why your mind gets clouded if you don't distinguish the two. But the terms we use, capital for machinery and capital for money and capitalists for the social class, does confuse the matters. And what I'm talking about is progressive confusion.

Yeah, I'm a little confused myself. now, but I know you're telling a really important story, which you outlined to me on the phone. I mean, on our call earlier this week. So keep going. And by the way, from Marx onward,

Marx and Cobb and Douglas and Solo in the 1950s, they're all using terms like land and capital and technology, and the word energy is found nowhere in these papers, correct? The only one who really does, I mean, for example, Marshall talks about energy. I think he uses the word 79 times in his principles of economics every last time talking about the innovative spirit of humans, not energy.

Right. Energy is our, is our, yeah, not fossil energy, but a human spirit. Yeah, human spirit. So he actually talked about, you know, energy as various raw materials, which of course contain energy, coal and oil, as input. but when it came to talking about energy itself, there was no awareness of the theories of thermodynamics or the role of energy as a production force, whereas in Marx, Marx was actually reading the early thermodynamic workers and going to lectures in London and so on. So there's more awareness of the role of energy in Marx

than there is in the neoclassicals. But what's happened is energy has dropped completely out of the picture at this stage. So first of all, Cobb and Douglas give you a theory of production which fits the marginal productivity theory of income distribution. They give you coefficients which are what neoclassicals expect them to do, but they're derived from the data. And then along comes to a soul and said, let's assume those coefficients are correct.

So the Marshall Product of Labor is 0.7, and it is equal to their contribution, their share of GDP. And then let's work out the residual. I know, I got 87.5, but that's okay. We're talking about technological change. but it was an unnecessary fudge, and it then shielded neoclassical economists from looking at the data again to see whether the share of workers in GDP is equivalent to the contribution that Labor makes to output

and capital makes to output. And that's where it goes all ory, because when you take a look at the data that Solo was looking at and data subsequent to that, and you do a regression, based on the change in white GDP, the change in labor and change in capital, rather than getting a coefficient for labor of a capital of 0.3, which is close to the income distribution, you get a coefficient for capital of 0.85. And that suddenly means, hang on a sec.

We've got a contradiction between an empirically derived term for the contribution of capital to output and the theory of income distribution. The return to capital is actually much higher. So the exponent for capital is much higher than capital share in GDP. And suddenly, we would have seen this if solar hadn't jumped in with the idea of separating our technological change from capital itself. Oh, so that was like red herring that took us down a different flawed pathway on. understanding the production function. So what happened after?

Go ahead. We're leaving energy out all the way through. So what we have is in the neoclassical camp, the idea that labor and capital get the payment of the labor and capital reflects their marginal product becomes just ingrained in the mindset of neoclassicals. And they stick with the coefficients that Sallow first worked down in 1957 and half a century. Still today. still today. They haven't changed them. So if you look in almost any neoclassical paper,

it will assume the exponent for capital is 0.3 and the exponent for Labor is 0.7. Using data that's that's solo used from 1928 to 1950s. Yeah. If anybody's smart, they might go and take a look at the income distribution and find that capital no gets 40%, and labor gets 60%, so they change to the 0.4 and 0.6. But they simply assume they can use the income distribution data to choose what the exponents are on the production function. When you're getting a PhD in economics today or when you were in school, was it a requirement to read these fundamental papers of Marshall and Cobb Douglas and Marx? No?

No. I mean, this is one of the reasons why Neoclassical economics has gone so totally off the rails. They don't even know their own history. So if you go to a, like when I went through, you had to sit through master's courses on advanced micro and advanced macro and so on. They were part of, there's now what's called in America, ABD, all but dissertation. So you do, and the American system has enormous coursework load. And I'm not sure. Thankfully, they didn't go through the American system. But I think something like two-thirds of your time is spent doing courses rather than writing a thesis.

And you don't go back, the oldest paper you might read is one with the one with, the Lucas critique was developed in the 1970s. So they just don't know their own history. What's the Lucas critique? That's another rabbit hole, but arguing that microeconomic, macro should be based on micro. That's the fundamental idea behind the Lucas critique. Okay, so from Adam Smith to Marx to Marshall to Cobb and Douglas to Solo, we've had a progression away from the physiocrats of something physical back in France.

It was land and the free energy from the earth. And then we had a bonanza of fossil carbon added to our economic system. What happened next? Solo all the way to the present day or was there another wrong term? In terms of production function that neoclassicals use. and then of course energy we've got to bring out people back to energy all the time because the thing thing is

what happened to energy. We know energy is absolutely critical for production but it's left out of these theories and you then had a group of non-orthodox economists Bob Ayers being the main one of a physicist who became fascinated with economics and then realized

the economics didn't include the role of energy and thought we've got to bring energy into production working with Kuhmall and quite a range other non-orthodox economists. I know both Bob and Reiner. And so did I. And you. Yeah.

So poor old Bob parting, what about three, four weeks ago? I know. I know. Maybe two months ago. Now, I'm glad I got to see him. It would have been only two months before he died in Holland at a conference that we caught up. So working with Bob, I thought we've got to bring energy in.

There simply has to be a way of bringing energy into production. And what Kumil and Bob were doing was a, at some point they went from using total numbers to index numbers in what they call the Linux production function. This was an attempt to bring energy in, but through the legs of the Cobb Douglas production function. So at some point they had the idea of index number values for output, labor, energy, and capital being part of the way they derive the Linux function. And my discomfort was that, was that fundamentally what they were doing, and this is what neoclassivis themselves have also done is add energy and is an additional factor of production. So you see, the way you produce output is you combine labor and capital and energy. Now, there's two problems

with that. One is that if you combine labor independently and machinery independently and energy productive, you don't have output. You've got an explosion. Energy has to be an input to labor and capital. And so what had finally occurred to me, literally while being in Bob Ayers' flat in France, which was full of statues, but walking through it one day on a trip from the bathroom, the little thought pop in my brain, labor without energy is a corpse, capital without energy as a sculpture. And bang, that's it. And I sat down at a table, five minutes, you know, typing in a program called MathCat as it happens,

and feed that into the Cobb Duckus production function. So the basic idea was that energy, is not an independent factor. It's a factor you have to input to labor in one form and input into machinery in a different form. Otherwise, they can't produce anything. So said differently, the laborers need food and housing and shelter and such. And the machines capital need to be turned on and powered by electricity or heat or movement.

Exactly. Absolutely requires energy. Without energy, the machines are worthless. Yeah. Now, what then happened out of that? was that in the Cobdark's production function, if I fed energy as an import to labor, the basic point was that the number of work as you've got times how much energy they consume multiplied by how much of that energy is used in production.

Now, if we go back to the days of the Roman slaves, most of the energy they consumed went into production, or fed of pittance, worked to the bone, and therefore if they got given a like 200 watts equivalent of energy input, they could put out 100 watts output, and so their factor is 50%. But if you fast forward today, you and I are surrounded by energy. We're consuming tens of thousands of watts of energy in our houses with our devices, the heating, hot water, etc., etc. But only a tiny amount of our energy actually now goes into production. And fundamentally, the amount of physical work we can do runs out at about 100 watts. And I'm terrible on the terms, by the way, being an economist

that haven't been properly trained on the, you know, in terms of energy and watts and jewels and so on and so, and make all sorts of mistakes there. But the basic point is the energy input of a work out to production is in terms of actual measures of energy is no greater than it was 2,000 years ago because we haven't evolved in any sense to be able to consume more energy and output more energy.

On the other hand, machinery has had an incredible increase in the energy input that a machine can, take. My favorite instance, I mean, I like what Musk is doing with SpaceX, so I'm a bit of a space junkie. And a friend of mine was being abusive about this last rocket blowing up. And I finally, I worked out what were the energy equivalent of the energy inside that rocket. It was one-third of a Hiroshima bomb. Now, for that to actually not lead to an explosion, the devastated Boca Chica, but led to a rocket taking off and reaching 100 kilometers above the surface in a few minutes. That is the amount of energy that the ultimate machine of our day can consume.

If you go back to James what steam engine, it was about 30 tons of coal a day. Now, that's a dam site less than one-third of a peroration of a Shuroshima bomb. So most of what we've seen as a growth in our wealth, our growth in the consumption levels we have, has come from that increase in energy. And now we're cooking with gas in that sense because we're finally acknowledging the role of energy in production. But that's not what neoclassical is doing, of course. So this was a story of kind of false turns at intersections all the way. And now what would a neoclassical economist listening to this last 45 minutes of, say,

you in rebuttal or defense or contradiction or alarm? I've got a bit of fun here. Rudy, if you're listening, Rudy Buckman solved me the case of saying what an a classical economist would say by actually saying what he said in a paper because now I'm going to come down to how economists on the very few occasions they've tried to include energy in a conductless production function, what they've done and what they've therefore deduced about the role of energy in production. and I really think I haven't got a sense of humor

but I laugh at him all the time so I want to show what I do that so Bachman and Co about three or four authors wrote a paper for a German language working paper with an English translation on the issue of what's going to happen to output in the GDP of Germany if we're caught off from Russian energy during the Ukraine war

and the argument they made was that was done by saying we're going to include energy and the Cobdocus production function. Now what they did, and this is where the mistakes compound upon mistakes, is they took the standard coefficients of 0.7 and 0.3, and then said, let's allocate 0.04 of capital's coefficient to energy. So you still got the same homogenous production function. Because energy is 4% of...

4% of GDP. Therefore, okay, the coefficient is 0.04. and this is where you get the total, this is where the twist comes in. Because the coefficient is 0.04, the mathematics of the Cobdolus production function that it tells you that the contribution of energy to change in output is also 0.04. But all of the labor and all of the machinery is fully dependent on the energy. Far more important. Now, here, I'm going to get some quotes out of Rudy here.

Okay. So they compared their work to the, what's called the Leontia production function, which we haven't even mentioned yet, but I'll bring that in now. And Leontia, Vassal-Leylonov, is one of the few winners of the Nobel Prize that I absolutely applaud. He were Russian mathematician, stroke economist, and he gave us input-output analysis and a whole range of other positive contributions. But when looking at the ratio, a level of capital, a level of output in most economies, doing whatever, however than the numbers were developed, what he realized was the ratio of labor

of capital to output was roughly constant. Different between different countries, very different between developing and developed countries, but generally speaking, the ratio, whichever your way, was roughly constant. And he then said you could use that as an aggregate production function. So rather than saying the aggregate level of output is laboured to one power times capital one minus that power, you said output is capital divided by a capital output ratio. and it was just an empirical regularity. And the post-Kanesian school, which I'm part of,

basically said that'll be our production function. So rather than the complicated neoclassical with exponents and marginal products, et cetera, et cetera, we just say output is k divided by v. And v normally in terms of the conventional figure, people normally used about three for the value of V. So output each year is one third the value of capital that same year. And that's what, and there we get ridiculed for that. And because they say, oh, you don't enable the possibility of substitution between labor and capital as inputs.

So you must be less sophisticated than we are with the production function that can enable for substitution of labor for capital. So Rudy then dived in, and Richard, I've dived in this and took a look and compared the Cobb Douglas production function to the Yontyf using a form which is called constant elasticity of substitution. won't go into that, basically in regard the Cobb Douglas at one extreme of that and the the Leonty of the other. And they said that if you have the standard CobbDogis production function, then it tells you if you have a 10% fall in energy inputs, you will have a 0.4% fall in GDP. So we lose 10% of our energy and GDP goes down by 0.4%. Yeah. Yeah. Now that's ridiculous. I know. You and I both know that's ridiculous, but he didn't know that because they don't look at the data. So what they then said was that, and this is the quote from Rudy's paper,

it's entertaining as extreme scenarios with low elasticity subsubption and why Leonty F production at the macro level is nonsensical. So they had the blue dash line and the figure shows that output falls one for one within each of the clienteuf case. The marginal product of energy jumps to one over alpha, which is the exponent they use for it, so one over 0.04, while the marginal products of the other factors falls to 0, and then here's an assumption. If factor prices equal marginal products, this then implies the price of energy jumps to 1 over alpha and prices of others fall to 0. This also implies expenditure and energy jumps to 100%, blah, blah, blah.

We consider these predictions to be economically nonsensical. They are, but not because the Leontief case is wrong. The anti-fac actually fits the data. It's because the assumption that wage is equal, a marginal product of labor is wrong. So it's an empirical contradiction of the neophasical theory of production. And the basic argument is that they think that production is quite insensitive to energy. That's also a quote from the paper.

So because the expenditure of 0.04, that means that it's 10% change in the energy. energy causes 0.4% change in output. So labor is far more significant than capital second and energy a far distant third. When you look on the data, energy is 100% of the answer. Explain that. I mean, what is the truth based on all your work with Bob Ayers and Reiner Kumal and others? What is the actual equation of labor and capital and whatever other variables? The basic truth is that the output is fundamentally energy transformed into a useful form. If you take a look at the rate of growth of energy, the rate of change of energy and the rate of change of GDP at the global level,

you find a correlation coefficient for them, and I was looking for this now, of 0.7, roughly, and the relationship between change in GDP and change in energy is change in GDP is change in GDP is, 0.97 times changing energy. Yeah. So in other words, fundamentally what GDP is, is energy transformed to the useful work? And so the core flawed assumption, which is taken built upon some basic flawed assumptions

and changed over centuries, is that we can describe our well, I mean, it's almost like there's been a supernova, the last two centuries of energy use and wealth and productivity. And people are just trying to scramble in real time putting math equations on that. And increasingly divorced from the truth because the supernova keeps growing. And so the energy blindness is that adding more energy, particularly energy dense fossil energy to the whole thing. every year, that itself, that little addition of more energy is a big explainer of our productivity.

It's the fundamental explainer. And therefore, what we've really done over time is develop machines which can handle more and more energy, more and more precisely. That's where our wealth has come from. And we're, again, economists have been blind to that by having this, first of all, injersion by Adam Smith to throw out the physiocrats and say, Labor is the source of value. and then you have the neoclassical saying it's labor and capital. Then you had Cobb and Douglas saying, it's 0.7 and 0.3, which means that the contribution of labour to change in output is 70%,

and the contribution of capital is 30%. That then gets locked in by Solo, turning their empirical non-discovery into an assumption and then putting it all in technological change, which becomes disembodied from capital itself, but also hides. from the fact that the relationship doesn't hold up on the data anymore anyway. And now when they come bringing energy, they just tack it on as a third factor and give it a

coefficient based on the percentage of energy in GDP, which is trivially low, and therefore say energy has almost no role in production, which is complete bollocks. And part of the reason is that the energy input into our machines and into our economy is only the cost of energy, that it is. It is to extract, press a little profit for the oil company or whatever. It's not the value that it provides, which is for five years of my physical labor and all that. And each barrel of oil. Yeah.

I mean, this is, seriously, this is Nobel Prize sort of observation, I think, because it's so decoupled from what people say at high. positions of authority in our world. Again, I'll ask you, what is just a standard economist, not Rudy, someone you know, but, but just anyone listening to this who has a PhD in economics, or maybe someone who's in grad school getting a master's or a PhD in economics listening to this program.

Is their initial reaction going to be one of critical rejection? Steve doesn't know what he's talking about? Or is it like, yeah? Absolutely. I mean, because it affects their identity or because they know otherwise in their research? I mean, the younger one might actually go, oh, hang on, that's surprising. You'll get a few who might react that way and change, but the old ones are locked in their ways. Okay, so speak to the young ones right now.

Okay. If they're curious about this and something doesn't sit right with what they've been told and what they've just heard, what would you recommend that they do? to get clarity on the truth. The main thing is to realize that economics can't be derived from the laws of thermodynamics, but it can't be inconsistent with them either. And what you're being taught within your production functions and so on is leaving out the role of energy in an absolutely critical way. Now, if you go and want to do it empirically,

you're going to take a look at what is the relationship between energy and production, derive it empirically, and you'll find that it's somewhere between like a point, GDP is 0.7 to say 0.95, 9.7, as I've got in that particular Excel regression, of the value of change in GDP. So the fundamental insight from a thermodynamic point of view within economics is that at the first or first approximation, GDP is energy turned into useful work. And then that means that the whole argument you were taught in neoclassical economics, that the wage reflects the margin of product of labor. is completely wrong. The wage and the return to capital for that matter have nothing to do with their contribution to production. What labor and capital do is harness energy successfully in

factories to produce output. And that will normally be done with machines. The machines have very fixed ratios of workers per machine and energy throughput per machine. So fundamentally, you get a fixed ratio, and that sense the Leontief is an empirical observation we now have an explanation for. That explanation is that the Leontia production function is actually output is equal to machinery, multiplied by the efficiency with which machines turn energy into useful work. Neoclassical economists, I mean, back when I was in school, are among the smartest people in my class, And smart people can be fooled, but they're not dumb.

So, like, really, it still today boggles my mind how neoclassical economists can totally neglect energy, given anyone with three minutes on the internet, can find that a barrel of oil has 5.7 million BTUs in it, which is, you know, a lot of energy relative to the 0.6 kilowatt hours that I do per day. So what do they, do they really think this? They really do. And the trouble is this is where your mind gets set by your training. So if you get trained on the idea that production is a combination of technology, labor and capital, and energy doesn't even turn up there, you don't even think about energy. And you can be completely energy blind in the sense that I, you know, lead that book with. That we're like, we know, humans know better much about energy as fish do about water.

They simply take it for granted. And then you see this when neoclassibles actually come to, themselves the question of what is the role of energy in production. So this is again, this is from the paper by Bachmann and Co. about the impact of the loss of Russian energy on German output. And they, to take the Cobdorke's production function and differentiate it with respect to the inputs and then say that the role of, we can say what's going to happen to GDP from a change in energy.

And here's a quote from the paper. Therefore, for example, a drop in energy supply of minus 10% reduces production. by 0.4%, which shows that production is quite insensitive to energy as expected. This is expected. Production is quite insensitive to energy. ...as expected by neoclassical economists.

Right, it's a tautology of sorts. It's a tautology. They think that energy has a trivial role because it has no role in their production function. But when you were advised... Why aren't there people calling them on this? Like a... Well, I am.

Prime Minister or a Senator or a CEO. They all do one unit of economics. They all get the idea of labor and capital producing output and a production function if they go that detailed in first year. But fundamentally, they get taught the whole idea that people, that we get paid our factor products. And that actually ideologically is very reinforcing for a CEO because it says, my enormous weight per salary is because of my huge contribution to production. So it ends up having an ideological role, and that blinds them to the physical reality

that you simply don't have that impact on production. If you come down to the nuts and bolts of it, it's energy which is producing the output, and you are getting a share of it, and that overblown share, given your system and the power structure of capitalism. So if we truly defined energy correctly in the production function, that giant gift from nature might not all be funneled to the top the way it is now. And that, of course, leads to one of the reasons why people continue being energy blind because it enables them to be blind to their outside share of the wealth of the civilization that goes their way. And also continues to indicate why we're blind to the waste component as well, because that, if you include that, that reduces. Yeah.

The other side of the production function is waste. And when I do the Leontya function, which makes sense, so with the empirical reinterpretation, or the logical reinterpretation of the empirical regularity of Leonty, if that output is capital divided by capital output ratio, becoming output. is capital times the efficiency with which machines turn energy to use for work, that coefficient is going to be less than 0.5, substantial less than 0.5. So it means most of what we've used is waste, waste energy. They can quantify it and say if the efficiency with which machines turn energy useful work is about roughly 0.20 or 0.25, then 0.8 to 0.75 of energy import produces waste. and that's what we dump into the environment.

And that, of course, feeds back and damages our capacity to produce output. If we had that insight 50 or 60 years ago, we would never have got to the conundrum where our now of relying so much upon fossil fuel energy for our production today. Okay. I'm going to ask you an easier question, but it might be a harder question for you, specifically, Steve. what would you tell to a graduate student learning about the world in another discipline like philosophy or French or chemistry or biology who will never take a class in economics? Why is it important?

Can you, to those people, why is it important that energy underpins the production function and that our economists and that our economists and, therefore our politicians and such have been misled about the core driver of our wealth the last century plus. Fundamentally, human civilization only exists because we exploit energy. If we didn't have energy in the form of the coal and oil deposits we found, we would still be sitting around fireplaces, starting fires with flints. we might have moderately sophisticated culture to the stage that you got with your animal power and slave power under Romans and the medieval period and serfs and so on

but there wouldn't be the philosophy there wouldn't be the art there wouldn't be the computers that we take for granted today so if we don't understand the role of energy we don't understand where our civilization came from and how does your view and that of Bob Ayers and Reiner Cumul and other what we might call biophysical economists, or in your case, post-Kanesian economists, how does your current understanding of energy and the production function differ from the biophysical economists that started to gain traction in the 1970s? you know, Howard Odom and George Escu Rogan and Charlie Hall and such.

Is it nuance? Is it different? Okay. It's just basically finding a better way to put it together. For example, Bob, of course, was in the house when I made that discovery. It was staying in his flat. And it took me 10 minutes or less to work out the mathematics. It's ridiculously simple. But he then just said, that solves it. That rings in the role of energy.

So because he and or Kummel had ever thought making energy and input into labor and capital. They had energy as a third factor. And once you just say it's got to be an input, it all falls apart, falls together, pardon me. I totally agree with that. But here's what I don't understand. If we don't have energy, all technologies are sculptures. And I added to your statement and said cities are museums. but we do have energy and we're probably going to have less energy in the future.

But how we use that energy, how we combine that energy with materials and human imagination and creativity, that does add something to just the raw value of the energy. So it's really a, yeah. So it's the combination of machines, raw materials, like copper and silicon and um phosphorus you know neodymium and what and phosphorus and the fire uh some some electrons or flame either kinetic or potential energy and that comes with up with a product that humans value and so that how do you distinguish the the contribution of actually the flame or the electrons versus the machine and the new invention. I'm actually going to go right back to 1774

and give you an explanation for there, and I quote this in my new book, because I think Turgow wrote one of the most brilliant paragraphs in the history of economics, and I just wish this had been where economics came from rather than 1776 two years later with Adam Smith. So, pardon me, reading out a substantial slaper and looking above the camera to do it. The husband, and the mistakes are seeing this as being with agriculture. It's any production system, including manufacturing, obviously. The husbandman is the only person whose labour produces something over and above the wages of labour. He is therefore the sole source of all wealth.

The land pays him directly the price of his labour independently of any other man or agreement. Nature does not bargain with him to oblige him to content himself with what is absolutely necessary. What she grants is proportional neither to his wants, nor would of contractual valuation of the price of his days of labour. And this is one of the punchlines. it is the physical result of the fertility of the soil and of the wisdom far more than of the laboriousness of the means with which he is employed to render it fertile. So that's the role of humans involving concepts

changing how we bring out the energy. As soon as the labour of the husband produces more than his wants, he can, with this superfluity that nature records him as a pure gift over and above the wages of his toil, there's energy return and energy invested, by the labors of the other members of society. This latter in selling to him gain only their livelihood, but the husband gathers, beyond his subsistence,

a wealth which is independent and disposable, which he has not bought and which he sells. Now, all the ideas we're talking about a tied up on that one paragraph. Earlier you said you had a quote that you start with a seed and you planted in nature gives you back a thousand seeds. But what if the husbandman was really clever and found out a way to plant a seed and get back 2,000 seats?

The gift would still be from nature, but it was doubled because of his creativity and intelligence. And that's the line in the middle. It is a physical result of the fertility of the soil and of the wisdom, far more so than the laboriousness. So in the terms of wisdom, what he's saying is we devise new ways of doing different things, and that wisdom is far more important than the effort we put in physically to do it. So again, our ideas play an essential role. And we wouldn't be able to exploit this free energy without our minds that can devise new ways of harnessing the energy far more rapidly and far more effectively. So the wisdom is definitely in there.

And the wisdom itself turns up on the machines. So it is embodied in the machines. So all this stuff, it said right back in 7-74, that paragraph has far more wisdom than the whole wealth of nations. So this is all kind of testable, although we're on a roller coaster ride. So I think there's a possibility, and I know this is a totally separate conversation that we could lose 20% of our energy in coming decades for various reasons. Or more, or more. But let's just say 20%. So I would think that would cause a 20% or more drop in GDP.

What would economists say? I'd say to course a 0.8% drop in GDP. If they use the C. 0.8. Yeah, yeah. That's a strict time. And you think most economists actually believe that? Yep, I do.

I've worked with them for long enough to know they swallow this stuff. So if you look at, when you look at the data, like changing in GDP, and change any. That's figure 57 at the moment in my in my book. It may change. But it's such a one-for-one relationship is ridiculous. And yet they don't even look at it. And when Rudy Bergman and friends made that comment about the, you know, 0.10% fallen energy, 0.4% fallen GDP, obviously they didn't look at the data and they ridiculed Leontief when Leonti of actually reproduces the data. That would be like the opposite of a Nobel Prize.

We should develop something like that. Well, the Nobel Prize is the opposite of a Nobel Prize. Do you know, you are aware of that way of that way? No, I don't know. So there's, so there's that. In economics, yeah, the synergy. All right, big, big picture. Let's move to the stratosphere here.

What are the implications of everything that you've said for our modern society and for our future and for our decisions and planning for that moment? The fundamental grounding is that without energy, there is no GDP. And we have been getting our energy out of fossil fuel forms. And of course, with fossil fuels, we generate carbon dioxide. That is causing global warming. And that is destabilizing the climate on which our production systems depend. Now, I've been blind of that, particularly the economist who so-called specialists in climate change,

William Nordhaus and friends, have no idea of this either. Right. So that's another. in the production function is there's not the waste capacity that feeds back in to the biosphere that is our only source of wealth because without oxygen and viable ecosystems we all die. Yeah. Now that's not concluded in the way the neoclassicals think about climate change. And that's why you've got nonsense statements like by Northouse, for example, saying that it's really, really difficult to find any direct impacts of the expected climate change on the bulk

of the economy in the next 50 to 75 years. Now, by the bulk of the economy, meant all of manufacturing, he even included all of mining, services, industries, government, etc., etc. He could see no way in which climate change will affect that. Well, if we have energy is, if we get like a blanket ban on using fossil fuels because of totally destructive change for the climate in the next five years or so, or 10 years, there'll be an incredible plunge in GDP and we're not prepared for it at all. And I think if James has, and his colleagues are right. We're going to have a spike in climate warming temperatures in 2024

because we're shifting from the PDO from La Nina to El Nino on the backs of the sulfur aerosols being reduced as a masking of the thermal inertia. So we're going to see, and if we go up a half a degree Celsius next year, as they're suggesting, that's going to have massive, impacts around the world. And then, yes, you're right. People are going to be like, oh, my God, this is like real and our emissions are rising and fossil energy is to blame. But I think most people still don't understand the deep linkage between fossil energy and the size and scope of our economy because they're energy blind. Yeah, and economists have contributed to this blindness rather

than clarifying that are absolutely essential. And on your previous, podcast here, this is your third appearance on this show, you predicted that economists, because of their identities and status and built personal situation, they will not change until there's a crisis. So can we anticipate what's going to happen with the environment, with oil depletion, though that's going to happen gradually, with what's coming and create some blueprints and breakgrass and case of emergency plans that are actually based on what a physiocrat might advise the French king, the modern equivalent of that? Can we do that? I think it's incredibly late-timing to be doing that, but as you know, we depend on fossil fuels

for about 85% over energy. And that hasn't changed much in the last 20 years. has gone down to some extent for some time because growth in fossil fuel production decline in hydroelectric, which is the main form, that's the main form of renewables even now is hydroelectric. It's not wind and solar. So we have potentially,

we're going to see a quite serious climate catastrophe is coming our way. The ones with most of the climate scientists, I'm in touch with, are scared about are a global famine caused by a collapse in, food output from one of the wheat belts or corn belts of the world, and that then really leading to a social breakdown because suddenly we haven't got the food we need.

Or, you know, wet-bold catastrophe is the other one, which would hit third world countries more than it would hit Westerns, probably. But something which is catastrophic, which causes a massive collapse in population, and then leads to probably rogue behavior by governments around the world then, because we haven't managed to even reach an agreement to phase our fossil fuels at the last cop-out meeting. It'll be every country for itself in what could be a very chaotic environment,

will be a very chaotic environment if we see something like a global famine. So you're saying that we shouldn't look to the neoclassical economists who are the current economic shaman and cheerleaders of our cultural narrative of the, the early 21st century, we shouldn't look to them to change their minds and chart a different course. They will be the most shocked and most confused what happens completely. They're useless. They've led us astray. It's just been a cascade of errors right back to Smith as I've said that led us to the situation. But the last people have any understanding of the physical role of production on the planet are economists. And the last ones who realize the dangers of climate change are also economists. So I would just like kick them out of the room. They don't belong here.

I tend to agree, but let me play devil's advocate. There are a lot of bright pro-future young people in college, in graduate school, in postgraduate. Couldn't some of them take the kernels of truth bombs that you've been laying out here and contribute to the science and understanding and translate between what you're saying and what the traditional neoclassical economics department? around the world. I suspect your answer is going to be no because their boss and the people that gets the funding are the tenured economists and they're not going to fund this sort of a research or what do you think? No, it's the west of time. I mean, the young ones are worth, some of the young ones are worth reaching to say, look, you know, for Codd's sake, join rethinking economics, you know, fight against your curriculum. But fundamentally, if you want people to give you a

guidance right now, it's going to be the engineers. And they're the ones we should be You get the engineers to look at it. The first thing an engineer is going to look at is the energy supply. That's the nature of training of engineers. It's all about how you use energy and how you're directed to produce useful outcomes rather than blowing things up. So the engineers are the ones we need to rely upon. And we should have been getting them to build the alternative technologies

in the last 40 or 50 years rather than getting a lot of them to go out as financial engineers instead and give us speculative bubbles in real estate. state and shares. So we've had a huge misdirection of our intelligence for the last 40 or 50 years, and again, economists, it'll blame for that. When does your book come out and what's it called? Hopefully it'll be coming out. It depends upon the publishers process, of course, but hopefully by March, I would say, and the title is going to be rebuilding economics from the top down. Well, I've read the energy chapter, and it is quite compelling. Steve, this is, I mean, you and I talk about what's going on now in the world, but I didn't know a lot of the things that you have dug up by reading these original papers.

You also told me that most people in economics don't even read these original papers. So, thank you. Yeah, originals. It's just terrible. Yeah. So this was a little bit of a Sherlock Holmes treatment of the history of the production function. and the complete absence of energy in describing our wealth and productivity, and yet energy is embedded in everything, including the labor and capital functions.

Do you have any closing words for listeners who might be a little shell-shocked by this conversation? Just the main thing comes down to how economists, by not understanding energy, have trivialized the dangers of climate change. So we are likely to see that striking this decade. I mean, we both know the potential 0.5 degree increase in global temperatures out of the both LNino plus the hypothetical role of losing the sulfur emissions as we've been masking some increase in global temperatures. That should cause absolutely chaotic weather probably starting in the next northern summer. so it's going to be brutally certain that this starts happening

and we have to prepare as soon as possible so all the ex-ar activists dial it up engineers start realizing we have to as soon as possible start producing whatever alternative systems we can work out to reduce the amount of carbon we're putting into the atmosphere as soon as possible that's the most important thing

to have some potential to hang on to human civilization over the next two decades. If we don't do it, it's back to the Stone Age. Thank you, Steve, as always. To be continued, my friend, and good luck with your book and all your future sleuthing. Indeed. If you enjoyed or learned from this episode of The Great Simplification,

please follow us on your favorite podcast platform and visit The Great Simplification.com for more information on future releases. This show is hosted by Nate Hayes, Edited by No Troublemakers Media and curated by Leslie Batlutes and Lizzie Siriani.