The Great Simplification with Nate Hagens - Unlearning Economics: Jon Erickson, Josh Farley, Steve Keen, & Kate Raworth | Reality Roundtable #03

Episode Date: August 13, 2023

On this Reality Roundtable, Nate is joined by Jon Erickson, Josh Farley, Steve Keen, and Kate Raworth - all of whom are leading thinkers and educators in the field of heterodox economics. In this lively discussion, each guest begins by sharing one fundamental aspect of what conventional economics gets wrong and how it could be improved in our education system. What basic assumptions about humans have led to a misunderstanding of the average person's decision-making? What areas has economics turned a blindspot to as the foundation of our economic systems? Who is finding the models and systems that economists have created useful - and how does economics as a discipline need to change in the face of a lower energy future? In short, what we teach our 18-22 year olds around the world matters - a great deal. About Jon Erickson Jon Erickson is the David Blittersdorf Professor of Sustainability Science & Policy at the University of Vermont. He has published widely on energy and climate change policy, land conservation, watershed planning, environmental public health, and the theory and practice of ecological economics.  He advised presidential candidate Bernie Sanders on economics and energy issues. About Josh Farley Joshua Farley is an ecological economist and Professor in Community Development & Applied Economics and Public Administration at the University of Vermont. He is the President of the International Society for Ecological Economics.  About Steve Keen Steve Keen is an economist, author of Debunking Economics and The New Economics: A Manifesto. He is a Research Fellow at the Institute for Strategy, Resilience, and Security at University College in London. About Kate Raworth Kate Raworth describes herself as a renegade economist focused on making economics fit for 21st century realities. She is the creator of the Doughnut of social and planetary boundaries, and co-founder of Doughnut Economics Action Lab, based on her best-selling book Doughnut Economics: 7 Ways to Think Like a 21st Century Economist. Kate is a Senior Associate at Oxford University's Environmental Change Institute, where she teaches on the Masters in Environmental Change and Management. She is also Professor of Practice at Amsterdam University of Applied Sciences. She is a member of the Club of Rome and currently serves on the World Health Organisation Council on the Economics of Health for All.  For Show Notes and More visit: https://www.thegreatsimplification.com/episode/rr03-erickson-farley-raworth-keen  To watch this video episode on YouTube: https://youtu.be/EC11UQD9q3w  

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, in 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. Welcome to Reality Roundtable number three. We don't think about it too much, but there are approximately 240 million college students in the world. Many of them are exposed to economics 101. It is my belief of study over the last 20 years that what is being taught in economics

is not commensurate with the biophysical one. world, the socioeconomic realities that we face with me to discuss conventional economics as it's being taught and heterodox economics that is trying to apply human behavior, natural sciences, and reality to the field of economics. Our four previous guests, all friends of mine, Josh Farley and John Erickson of the University of Vermont, who were both. both on my PhD committee, Kate Rayworth of Donut Economics in London and Renegade economist Steve Keene currently in Amsterdam, but traveling all over, teaching the reality of money, energy,

and climate and economics. This was a fantastic conversation that I hope can be shown in colleges around the world to get a glimpse into the disparities from what is being taught and our current reality. Please welcome Kate, John, Josh, and Steve. Welcome to Reality Roundtable number three. With me today are four of my colleagues and friends. John Erickson and Josh Farley were my PhD advisors, Steve Keene and Kate Rayworth. Heterodox economists, self-describe both of them as renegade economists.

They've all been on this program before and have great episodes you should listen to. The framing of this conversation is on economics and education. There are currently around 250 million young humans at universities around the world who are learning about how our world works and their future and how things feel. together. It's education. But economic theory has been relatively unchanged in the last century and may not be preparing these young humans for the reality that is our ecological systems connected world. So I have asked each of our four panelists today to highlight one area in economic theory that is being taught in a way that doesn't represent our

biophysical ecological systems reality and how that might be rectified. And we're going to have like six minutes each, then ask questions, and then open up to a broader conversation after all four have gone. I'll just briefly introduce the topics so we know where we're going. John Erickson is going to talk about homo-economics and the microeconomic treatment of human behavior and why that is relevant. Steve Keene is going to talk about the importance of energy that is missed in macroeconomics currently and also what that implies for the treatment of externalities, climate change, etc. Josh Farley is going to explain the assumption that markets are the most efficient mechanism for resource allocation and why that is a flawed view.

And Kate Rayworth is going to wrap up talking about the big picture economy that goes beyond just GDP and measuring the monetary representations of our system. and I'm very excited to be here with you all, and I think let's just get right into it. John Erickson, professor at University of Vermont, please kick us off. All right. Well, thank you, Nate.

Thank you for organizing this, and it's so nice to see you all. Yeah, I'll start with a morbid thought. I think it was Paul Samuelson who said, change does happen in economics, but one funeral at a time. So it's been slow. It's been very slow going.

And economics has held on to some pretty core thoughts that emerged in this so-called neoclassical era of economic theory. Really, it was born in the late 1800s. So it's been a long haul. And what you asked me to talk about really is the core model of behavior that we find in economic theory. So what we did on economics, is we took the tiniest slice of human behavior, self-interest, and then we wrapped it with abstract mathematics in the late 1800s, and big chunks of our economic theory has been there ever since.

This theory of the individual, this theory of the self-interested individual, wrapped in mathematics kind of is built from the sanctity of the person, personhood and it's kind of all set up to guarantee market equilibrium, which our colleagues will get into some more. It's also over the course of the last 100-plus years, a theory that has largely been walled off from other disciplines while growing in influence and in stature and academia, infecting public policy, business administration, infecting the other social sciences, and even in more recent years affecting the natural sciences.

When its assumptions, which I'll get into, are challenged, or when the theory of the rational actor, this self-interested individual, doesn't hold up against other theories or other disciplines, or when the scientific method gets in the way, economists have this very convenient line. It's just a model, right? Or they often quote George Box, the statistician.

All models are wrong, some are useful. I would add one little more piece to that. All models are wrong, some are useful. I agree. Useful for whom? And that's the big question that we need to ask today. So let's unpack this rational actor model. It starts in such a simple, seemingly innocent place, right?

there's this intelligent human, this intelligent individual who makes logical decisions for him or herself. Sounds like a laudable starting place. So, intelligent, individual, logical, it sort of implies that anything else is dumb or illogical or naive and ignoring, you know, the instinct of self-interest. what economists for long times have called any challenges to the starting point, behavioral anomalies, right? So this idea of a rational actor starts with the actor, the individual, an isolated individual at a point in time. And that's the kind of first divergence that we need to consider. And Nate, your work has really highlighted this. the person, like when we start with the isolated individual point in time, we're ignoring the

evolutionary history of our primate species. We're turning homo sapiens, right, Latin for wise man, into homo-economics, this hypothetical person that maximizes utility as a consumer and maximizes profit as a producer. but anybody outside the constraints of an economics 101 class will tell you that homo sapiens is a member of multiple groups with evolved instincts for care, compassion, empathy. Yes, we have an ability to compete, but we also have an ability to cooperate. And that expression of those behaviors compete, cooperate, selfishness versus care, really depends on our environmental cues. depends on our culture, depends on our institutions.

It depends on who's designing the rules that brings out that expression of the human being that ultimately answers useful for whom, right? All models are wrong, some are useful, useful for whom. And if we set up this kind of caricature of the humans so that it's useful for only certain people or only certain classes, we can quickly sort of get to the conclusion why this model, this very narrow model, humanity has hung on for 100 plus years.

Rational actor model, the actor, the rational part, okay, this is a, we need it, this rational agent needs a decision rule. And again, it starts in such a simple place, right? How we make decisions is at the margin,

right? This rational actor model, to be rational, to be logical, we should just consider the next choice. And if the next choice creates more benefits than costs, then do it. Such a simple decision rule, right? And Josh and I went in their PhDs together at Cornell University, and I can't speak for you, Josh, but all I learned throughout my PhD was marginal benefit equals marginal costs over and over and over and over.

Any sort of decision was framed as marginal benefit equals marginal costs, right? So all you've got to do is consider the next unit, count the benefits, The next unit, count the costs, and there's your decision rule. And in fact, through economics education, we're sort of trained to think at the margin, right? We're trained to think like an economist. One of my teachers at Cornell was Robert Frank, and he talked about economic naturalism, right? This idea that, you know, thinking at the margin is sort of the highest logical, rational way to think. but it turns out that people aren't so good at the calculus of variations, right?

People aren't so good at thinking at the margin. We use a lot of cognitive shortcuts because we have information overload. There's a great video by the stand-up economist, this colleague from Washington State or University of Washington, who sort of pokes fun at this idea of thinking at the margin. We have lots of tricks to make meaning out of information overload, like what information we manage to absorb. We have sort of lots of shortcuts and lots of tricks. For example, the normalcy bias. Like, we are terrible at interpreting probability as human beings.

The illusion of asymmetric insights. We are terrible at guessing what others are thinking. There's the hindsight bias. we are terrible at predicting the future because we sort of think back in hindsight. All this kind of makes the rational actor model a terrible predictor outside of the most simple decisions. And when you add other kinds of biases like mental shortcuts to act fast in the face of uncertainty, there's overconfidence bias, egocentric bias, optimism bias, novelty bias, all these biases that economists can conveniently call behavioral anomalies that we assume away and kind of come back to this core model.

And it's sort of the main reason why so much of our economic models are terrible at predicting microeconomic behavior. And then when you add all those things together, they're terrible at predicting macroeconomic phenomena. Maybe I'll just end there. The IMF did a study recently and looked at 153 recessions in 63 countries. between 1992 and 2014 and found that the vast majority of economists missed them altogether, right? Why is this?

Why is economic forecasting so bad? And maybe part of it is that economic forecasters themselves are humans, so we have a difficulty in imagining low-probability, high-impact events. But it's also because this rational actor is built into the very models that were used for these predictions. And in these rational agents in these model, assume that we absorb new information seamlessly, that we predictable response to price signals, that we quickly move back to full equilibrium,

full employment. The list goes on and on of why these models don't add up and why we need what I call a more conciliant economics. And we'll get into that perhaps as we unpack this some more. Thank you so much, John. It's interesting for me to be running the committee of economists as opposed to you back 12 years ago. So I have a question and then we'll kick it off to the panel. You talked about homo-economicus and what is taught with rational actor.

Does what's being taught to young humans end up changing our behavior during this period en masse? Yeah, I mean, when our institutions and our public policy are informed by the self-interest model, right? We craft institutions and cultures and public policy that draw out that selfishness, that draw out the greed is good behavior, right? That draw out this expression of the human animal. So it is a chicken and an egg, right? If you believe we are selfish, we therefore create institutions that draw out our selfishness. In the classroom, there's a lot of evidence. to show that, you know, with enough training, with enough brainwashing, with enough

kind of deprogramming the human animal to think at the margin, to think rationally, think selfishly, to think like what Horst and Veblen called a homogeneous globule of desire, right, that we start to behave that way. And given that economics, business, political science, are the most popular majors in, at least in American universe, universities, and given that economists, political scientists, MBAs go on to lead our institutions, right? Our political institutions, our private institutions, even our nonprofit institutions, then you start to get into this kind of self-fulfilling prophecy, which is what you're referring to. Steve, Josh, Kate, who would like to ask John or interject on this topic?

Josh, you first, then Kate, then Steve. I just want to comment one thing, a lot of people in evolution used to say, well, nature is red and tooth and claw. Everything is competition. And yet evolutionists are recognizing that cooperation has been the secret of human success, but also one of the driving force is in evolution. And based on readings in evolution, I ask all my students to name five characteristics of a good person and five characteristics of an evil person. And inevitably, a good person puts the group ahead of the way. the individual. And some anthropologists actually did a study, a global study of what are the, what elements of morality are the most universal. And it is, first of all, cooperation and putting

the group ahead of the individual. So these are actually universal phenomena. And it seems really weird that economists define humans as basically evil. But it is true. And Robert Frank, you know, your advisor has done a lot of research on this showing that, you know, just being exposed mainstream theory does make economists think far more like, you know, homo-economicus. And the only time when I ever had, I always asked these students, you know, five characters are a good person. I presented to the University of Vermont Econ Club.

Hand shoots up and says selfishness. That was a good person. Yeah. And I mean, as you know, Josh and others that, you know, Charles Darwin was writing at a time of the classical economists, and they were actually trading a lot of ideas back and forth. The big difference is economics got stuck. It got mathematicized. It got marginal.

This marginal revolution took over. And economics sort of stayed rather static throughout the 1900s, while evolutionary biology, the natural sciences more generally, became more conciliate, became more connected, became more interdependent, right? Became more about seeking truth through collaboration instead of through isolation. And so it evolved while economics got stuck. I'll jump in with the devil's advocate. So, so. Please. Okay, you say, you know, this model is wrong.

It's not good enough. Then what? Right. And I think this is one of the big pushbacks. Well, then what? I mean, of course we know this model is a simplification. And so we can relax each of these assumptions and see how this might change. So then what kind of modeling, right?

If it's supposed to not be derived by putting together a set of assumptions that work for maths, then where are you? going to get your model or your representation of humanity from? And how will that change economic modeling? Well, I'd start by aligning economics with science and ethics. And that's where economics started. I mean, economics was a moral philosophy. It's roots for a moral philosophy. And creating what I like to call more conciliant to economics, an economic theory in particular, that test itself against theory of other fields. And I think that's where economics has gone astray.

This litmus test that in my mind comes from the work of E.O. Wilson and his book, Consilience, in 1998, is the test of a good theory is how well does it hold up against all other theory. And his advice to economists was to look at the borderlands, right? look at the borderlands between economics and other fields. And so here, in the borderlands, I think you find a richness, a tapestry to rebuild a study of economics that is scientifically credible and ethically virtuous. So the borderlands between economics and neuroscience, you know, some called neural economics, you know, where we're sort of almost on a daily basis overturning the assumptions of economics

based on empirical database science. The borderland of behavioral economics, really at the individual level. The border land of experimental economics, like testing our ideas with groups of humans interacting with one another. The borderland of institutional economics, groups of groups working together, right,

and sort of testing ideas of competition versus cooperation, and what are the institutional characteristics that draw out those expressions of human behavior? And the borderlands of evolutionary economics. the kind of long view of why is it the humans think and act the way they do. To really build a true decision science, right? I mean, economics builds itself as a decision science, and in my view, it has become anything but. Yeah, I actually have a bit like Kate.

I'm a bit of devil's advocate here, but a different direction. John, the critique you've given a neoclassical economic is the one they're happy with. I've seen plenty of neoclassical economists sit through a presentation by some with the behavioral economics and say, oh, there's this bias and that bias. I'm just going to assume rational behavior. The real weakness for that theory is that it doesn't work internally anyway. If you look at the theory of how they try to derive an individual demand curve, that's quite straightforward.

Students will be dragged through deviving what they call a Hixian compensated demand curve, which necessarily slopes down sometime in their first year, the poor bastards. And they will then gloss over how do you convert that to a market demand curve? Now, the mathematics has been done by decent mathematical economists, Sun and Shine Schaefer, quite a few others. And they proved, not that they wanted to prove, that if you have an entire community of individuals that down would slope, then you kick the in copper demand demand down curves, derived from the assumption of rational behavior, utility maximizing behavior, the resulting market demand curve can have any shape at all that it can be represented by a polynomial.

It doesn't have to slope down. Now, they don't teach that. They end up assuming that the representative agent is a single individual consuming a single commodity. Okay. Most people know it's a single consumer. They don't realize it's a single commodity. If you allow either more than one individual with different preferences or more than one good with different characteristics, you cannot longer derive a down the sloping market demand curve.

That's the real flaw with the theory. So that's, you know, that's the critique the students need to realize. They can go back. I'd actually recommend to go and read a paper by Samuelson. And by the way, it wasn't Samuelson who said science advances one funeral at a time. It was Max Planck. He was quite right about science. Science does advance one funeral at the time because ultimately you have generational change.

New groups come along, knowing the anomaly that the previous physics didn't cope with. They replaced the professors who can't admit the anomaly. Bang, you get change. In economics, you can always find a couple of zealots who love the anarcho-synicalists, libertarian nature of neoclassical theory. You know, we all got we deserve. We've reached maturity maximizing. We're in equilibrium.

What a wonderful society. It's even better than Scientology. I'm going to convert everybody to join my religion. So you don't get generational change in economics, and that's what we desperately need, which is why we're talking to students today. Yeah, yeah. No, absolutely.

I mean, yeah, Samuysud admits that he stole that from Plank, but he was applying to economics. I mean, Plank was talking about science more generally. And then the idea of, another idea of interpersonal utility comparison, like, you know, comparing my utility with yours,

is not allowed at economics, because if it was, the whole edifice of welfare theory falls apart. And so, I mean, there's some real challenges to the core assumptions of economic theory at micro and macro levels. And your idea, I mean, your thought

on the representative agent. So much of our growth models are built on a representative agent. So many of our climate economy models, this is where it gets really dangerous, are built on a representative agent, right? The entire climate system from the perspective of one individual

who's trying to maximize utility. That's the edifice of the entire William Norhouse framework that won a Nobel Prize, that really informed, particularly the U.S. position, way back in the early 90s under Bush 1 of wait and see, right? Because we shouldn't rationally do anything now in order to incur near-term costs with the potential for long-term benefits.

This philosophical view of economics builds the whole edifice, and this is where I have a challenge as an economist. I'm okay with economists in the role of tinkerers, as mechanics, as janitors, You know, applied economics, like twiddling at the economy to make it work better, what I'm not okay with is economists and economic theory as it currently stands as master planners, right? That's the master narrative. And that's where I come at this. Excellent. That was a great 20-minute overview of microeconomics and homo-economics.

Granted, each of these topics we could spend two hours on, but I just want to have a real bird's-eye view. of some core things that we're teaching young people around the world right now that really don't hold water. Next up, I would like to switch to Steve Keene. Steve, what aspect of modern economic theory would you like to debunk today? Mine is going to be energy, the role of energy. So the chart you can see on the left hand side is using it's a new software I've developed called Raval. And if you wanted to find a tighter pair of items that are correlated with each other, you'd be having a pretty hard time to find it.

The black line there is GDP, and the red, the colored line is energy, and the fit between the two is ridiculous. There's obviously some correlation of two factors going in the same direction, that it reach a correlation coefficient of 0.997. But if you take look at the one below, which is looking at changing energy and change in GDP, so no longer any problem about spurious correlation

from both going in the same direction, the correlation there is 0.86. And energy goes up, GDP goes up. When GDP goes down, energy goes down. And if you're trying to derive an empirical model of production from this data, your first pass would be that at a first level of approximation, GDP is energy converted into useful work. That's what you draw from looking at the data like that.

Now, if you then say, well, what economic theory currently suits that, It's actually what's called the Leontyev model, shown in a different fashion, showing a fixed numerical relationship between capital, however it's defined, however it's defined, using what's called a capital output ratio. But I've actually shown in my research that is, in fact, the efficiency with which machine returns energy into useful work. So that's the post-Cansian theory, and it fits the data like a glove, and you wouldn't bother doing anything else. So that's what you knew. And neoclassicals reject this empirical fact because it conflicts with neoclassical theory. And there's a recent paper that I'm going to have a bit of fun with here, which is if the elasticity of substitution between drown energy and other inputs is literally zero,

then production falls one for one within an issue supply. And as you can see from the previous data that I showed, that's the truth. That's what actually happens. Now, they then continue to trash the model that post-Kanzians used a model production called to the onti of production. And they say it makes nonsensical predictions with regard to the evolution of marginal products, prices and expenditure shares.

Yeah, but it's true. So there's got to be something with the wrong with the idea of marginal products, prices and expenditure shares. And that's what turns up. So this paper, they go on to say, the de facto prices equal marginal products. And that's the neoclassical theory of income distribution.

The wage equals the marginal product of labor. The rate of profit equals the marginal product of capital. Therefore, in both cases, you get what you deserve, which is why there's this meritocratic side to neoclassical theory that I think is a major reason why people get seduced by. Now, he says if that's the case, if the substitution is one for one, which it is, then you get nonsensical predictions about these ideas. What that implies is that it's not the predictions that are nonsensical because the prediction is actually true,

a one-for-one match between energy and GDP. It's the theory that's nonsensical. So this is actually what a classic own goal. They used it to trash the idea that there was a one-for-one relationship between energy and GDP. But you find there actually is a one-for-one relationship between energy and GDP. So the only way to make sense of this is that this is a disproof of the neoclassical theories of both production and distribution. And that's one of the danger that John alluded to a moment ago, that those models have then blinded us to the dangers the importance of climate change.

So if you take a look at how they model, well, the name of the model, you'll learn it's in enough you poor victims of a neoclassical education, the Cobb Douglas production function. And that shows production is involving technology, which they label A, L for Labor and K for Capital. But there's exponents of Labor and Capital, which I've already shown in the previous slide,

must be wrong empirically. But that's what they use, and they have no energy input. Now, that's one reason, Nordhaus, back in 1991, could write a sentence like this and not realize that he was being a blithering idiot, which is what, unfortunately, an economics degree

turned you into. He says, for the bulk of the economy, manufacturing, mining, utilities, finance, trade, by which he means wholesale and retail trade, and most service industries, it is difficult to find major direct impacts of the projected climate changes over the next 50 to 75 years.

And that ignorance is what set our climate policy ever since. And you've got the Nobel Prize, which I hope you'll soon check and see why I've got Nobel Prize in inverted commas there. It's not a Nobel Prize. So when you look at the neoclassical consensus that's been formed starting from ideas like Nordhauses 30 years ago. Here's a paper that surveyed the over 2,000 economists who've worked on climate change. By the way, it's about 2 to 3% of the total population of economists. So it's not the entire body of economists who produce this nonsense. But of that group, they surveyed 2,200 roughly, 750 roughly replied, and they answered that they thought if you were going to head towards 5 degrees warming by 2130, so another 4 degrees

in the next century, and another 6 degrees in the next 2 centuries, 7 degrees Celsius by 2220, that would reduce economic growth by 0.2% per annum. Now that's less than 1 5th, the current measurement level for recorded GDP growth today. We'd never report GDP growth as anything other than X. point Y percent. We're point Y is a point one, the reunits of 0.1 of a percent. And here with this lot, trying to predict that global warming would have an impact on GDP growth, which was one fifth level of measurement error for recorded GDP to go.

In other words, it doesn't matter. Now, the reality of energy is something that I realized when working with Bob Ayers some time ago, and that is that labor without energy is a corpse. Capital without energy is a sculpture. Neither labor and capital can do anything unless you put energy inputs into them, and when you do, energy is by far the dominant factor of production. And the ignorance about this is critical in the case of global warming, because this is what causes the belief that damages from global warming are going to be so minor. Now, you talk to scientists, if you tell them the levels that economists are blithely discussing seven degrees by 22, 20, 20,

This is from a paper in 2017, the range of science papers you can find like, describing more than five degrees of warming as unknown, implying beyond catastrophic, including existential threats. And here are economists saying it's going to cause a 0.02% fall in the rate of economic growth. This nonsense has dominated how it formed following policy on climate change. This is closer to reality. Reality is about to trump theory at our monumental expense. Thanks so much, Steve.

So if there was a standard economist watching this program, what do you imagine their rebuttal to what you just said would be? They're most likely to throw that there are national exceptions to that data I showed you a moment ago. And you can find them. So if I actually share my software this time, I can actually illustrate that. Let's see if I can just do that. Hang on a second, go back to share again. And I'll share this screen. Okay.

So can you see my raveled out of there? Okay. Okay. There's the world. If I move to United States, you find the GDP's increasing energy consumption has been going down since 2000. You find the same, India, on the other hand, accelerating use of both energy. and GDP growth. Great Britain, dramatic delinking. Look at that, decline there. China, rising use of both. So what they focus on is country exceptions. But the thing is, that's using

globalization to obscure reality. When you look at the overall globalized economy, you get the result I can show you there. Virtually a one-for-one fit between the two. So I'm sorry, there's something wrong with your theory. And there really is no comeback to that. Staying with that picture, I just want to double check, so I'm going to do the pushback from the economist. But were you showing us national production energy consumed within the nation, or are you showing consumption-based energy? It's primary energy. The data source is the OECD. So it's primary data source of using the OECD.

So it's not consumption. It's the overall use of energy to produce GDP globally. If you did those calculations on a consumption basis, then you wouldn't see anything like that scale of decoupling. You might still see, in fact, there are some countries that appear to have decoupled on a consumption basis, but you wouldn't see that. That's right.

And so what you've really got is that, you know, again, the theory is rather than illuminating reality, it's obscuring reality. And that's the real danger of a neoclassical education. Can I ask a question, though? And I don't know if it's of Steve. And I'm going to ask you to lean into your least sin. of the economists who you've spent your career surrounded by.

How is it that economists could conclude that up to five degrees of global heating over a century could have a minimal disruption? I mean, where is the disconnect in the science, in the respect for other science, the lack of conciliance, as John would say? how do you believe they've actually come to that conclusion? If you get inculcated in neoclassical way of thinking, and I can say from my own experience up to the halfway through first year of microeconomics at Sydney University when I was 18, I swallowed all this stuff. And what it gives you was a paradigm, as Kuhn put it,

that lets you see the world. And a paradigm doesn't just, paradigm does several things. It tells you what's worth looking at, it also tells you what's worth ignoring. So when you're wearing that paradigm, you get a very coherent view of the world because it's the paradigm you're seeing, not the real world.

Now, if any elements of the real world conflict with that paradigm, and I'm not blaming economists for this, is very much human nature. And it comes back to the facts that John was talking about earlier and Josh as well that we are a sharing

and collective belief-sharing species. If you find stuff which conflicts with your beliefs, you shut a blind eye to it. And the classic there comes from Galileo. Galileo wrote to Kepler, of my favorite pieces of correspondence ever, saying, what are we the same, my dear Kepler,

about these learned gentlemen at the university, who with the capacity of an asp, refused to look through the telescope. Now, what Galileo done is invent the device that enabled us to see objects at great distances much closer up. You would think that scientists would like to see the spheres. You could finally see the spheres, only they knew that if they looked through that telescope,

they wouldn't see the spheres. They would instead see moons orbiting Jupiter and Saturn, which completely destroyed their paradigm. They refused to look down it. Neoclassical economists are no better than tolake astronomers at the time of Galileo, refusing to look through the telescope. So if, I mean, anyone in five minutes can on the internet look and see that a barrel of oil has 1,700 kilowatt hours of work potential, which is years of human labor. So an economist is not going to want to look through that telescope because obviously that implies a much larger value addition than its cost share to the economic function. Yeah. I've had a lifetime of experiencing this in the sense that like since I predicted the global financial crisis, one of about a dozen economists who did. And of course, many more people who hadn't been blinded by economics did see it coming.

So it's a peculiar economic failing not to be able to see that a financial crisis is. coming away in 2008. But I've been showing ever since then data showing credit the change in annual, annual change in private debt against unemployment with outrageously high correlation coefficients, again, about the point nine minus point nine level between change in credit and change in unemployment, the level of unemployment. And I'm just given up. They will not look at it. It's outrageously different to what their theory predicts. I've shown it at numerous conferences. It's on thousands of websites and not a single economist. has attempted to fit that data and see what's gone wrong with their theory.

So the classic, this is the paradigm blindness of humanity. On that front, if you want to choose any rationality, John, that's the ultimate of all time. Economists are irrational. I'm just going to make a couple of quick comments really kind of adding to what Steve said. And answering Kate's question a little bit too, like, why are the economists blind to these things? How can they not see the problems of climate change? So Schelling, another Nobel laureate, and Nordhaus has actually said the same thing. Shelling was more explicit.

He said, climate change will only affect GDP. GDP is only like one percent. I'm sorry, climate change will only affect agriculture. Agriculture is only about 1% of GDP. So if we lose 30% of agricultural output, no harm done, which is completely insane. And then this idea about the importance of energy, you know, I challenge anybody in this audience to, what have they interacted with today, anything they purchased or any human made product that did not require oil,

everything we interact with require oil. And to give an idea of how valuable oil is relative to what we pay for it, think about how far you could push your, how long it would take you to push your car as far as you can drive it on a dollar's worth of gasoline. And right now, you'd have to multiply our, that work by 16,000.

billion per day to see how much work we do with gasoline. And then so we treat it as even these models, we get rid of oil, no harm done. The economy will continue to grow at 2% forever. So these are just kind of crazy ideas and very easy in our to visualize the issues. I spent some time thinking in the first section about marginal change, right? And I think economists who are trained in marginal benefits, marginal cost, over and over and over and over and over again. I mean, that's how we've built our climate economy models.

And we take the future and bring it into sort of near-term marginal calculus through the discount rate. So all future costs, all future benefits brought back to a near-term decision at the margin. What's the marginal benefit? What's the marginal cost? And that's what's infected these kinds of models. But, Steve, I would add, it's infected the scientific understanding and modeling of climate change. The intergovernmental panel on climate change. age, right?

Something like 113 of the 116 scenarios that give us a 50, 50% chance of staying within 2 degrees Celsius, assume 2 to 3% annual GDP growth, right? At 3%, that's a doubling of the world economy in 27 years. And they do this through magical thinking, right? Through efficiency, through decoupling, through all of the stuff that empirically we can't show has happened or empirically will happen. So my biggest fear is that economic thinking really has, it's infected other social sciences like business and psychology and political science,

but it's really starting to infect climate science. To be a climate scientist, you have to show the economic cost and benefits of your models. You know, the IPS is just too big to read as a consortium, but I've read over a thousand papers, I'd say, behind the research about the science and the economics. And I've read the economic sections of the IPCC in great detail. And they will say things like this is the 2022 report saying that a four degree increase in temperature by 2100 will cause a 10 to 23, 23% fall in GDP rather than what it would have been in the complete absence of climate change. And what that means is rather than being five times bigger, it'll be four times bigger.

It's still positive growth. And if you look at how they do what they call the, shared socio-economic pathways. They are made using the components of the Cobb-Douglas production function. Technology is going to improve. There'll be going to be more people. There'll be more machines. Therefore, GDP is going to continue growing. So every one of the SSP scenarios, whether that's from the 2.5 to the 8.4, whatever they call them, they all, not one of them, predicts any period of negative growth anywhere in the world for the next century. Now, they are completely and absolutely wrong, and we're going to find that out very, very quickly. This all makes complete sense to me because I've studied this and I know the four of you and we've talked about these things and, you know, been dismayed and shocked about it.

I wonder, though, what people who haven't spent this amount of time on these issues thinks of this conversation. Like, it is so apparent to me these deep, dangerous chasms in the logic of economic theory, which is, leading our culture forward. I just wonder what the general person listening to this would think. Maybe we'll find out. But, yeah, like, they just, I think that's what I, I mean, when I first read the neoclassical stuff, I was in shock. My wife actually came in, I was looking at some of it, and shocked and broke me out of it with very Thai Buddhist comments upon, you know, whether we can survive or not. And I was in shock. I mean, it was so bad, because they are literally assuming that you're going to, only agriculture is exposed to climate change. The rest of the rest of, you know,

of us working carefully controlled environments that will be negligibly affected by climate change. That's 87% of the economy won't be affected because it's under a roof. And there's such ludicrous assumptions like this. I was just in total shock. And it took me, even though I know that anybody who believes that can't understand climate change, it took for me while, realize that's actually the way that economists think about it. So once they just think, only stuff exposed to the weather is going to be affected, they're going to get fertilizer effect off-sitting some of the bad weather.

So overall, ACDCs, whether it increases or decreases GDP. And that's what the 2,000 of them continue bullshitting each other about. And in that climate-controlled future, that air conditioning is going to need things to power it for more people, et cetera. Josh, you had a comment, then John, and then we're going to move on to the next piece. Yeah, and just super quickly, what are the scariest things I think about this assumption of exponential growth going on forever? You know, as John pointed out, the economy doubles in size every 24 years at 3% growth. That means anything we do today to mitigate climate change in the future is sacrificing our well-being for a richer future. And that would be stupid.

Why should we sacrifice for people who will be richer and better off than us? We should do nothing. I would just add briefly that economics has become the language of the ruling class. So your question, Nate, about the everyday person, right? If you're not part of the ruling class, then you're not speaking the language. it's become i mean as the language of the ruling class it really has um has been written in such a way to align with the ruling class for a hundred plus years and that's why we continue to hang on to these kind of myths of economics um and that's why economics of all disciplines on most campuses

has become the most amoral and a scientific and a historical um so it's it's our job to kind of abandoned these beliefs, rebuild and economics, and lean into other values. And I really think that's where, I think that's where the vast majority of the public is at, to take back things, words like rational.

What does it to be, what does it mean to be irrational? Think of the margin or to think about the health of the planet, for example. Thank you. Let's move on to our next panelist, Josh Farley. Take it away, sir.

All right. So, you know, what they always teach in economics classes is that markets are this amazingly efficient mechanism for generating these optimal utility maximizing equilibriums. So it's really, you know, it's, it'd be idiots to challenge this. And I want to make the case. So first to explain what they, why they believe this. So they say in the production side, markets are allocating labor, energy, raw materials, all those factors of production.

They allocate them to the same. sectors that can add the most value. And because those sectors can add the most value, they can pay the most. So the market allocates the resources to them. So this maximizes value on the production side. Then on the consumption side, markets allocate all the commodities to those who value them the most is measured by how much they're willing to pay. So it's maximizing value on the consumption side. And then in terms of equilibrium, let's say there's some, you know, war on Ukraine or that disrupts oil supplies or food supplies. So economists say if a resource or commodity becomes scarce, prices increase.

So producers supply more and consumers consume less. So we get the self-regulating equilibrium. And then we measure our success using GDP. So a GDP grows shows we're doing better. And what I would argue is that as economists, what we should pay most attention to is those essential resources, the things that we're dead if we don't have. And these are things like, you know, energy and food and healthy ecosystem.

So this is what economists have to get right, is how we allocate essential resources. And I want to just show very quickly that markets are actually terrible at achieving any of these goals with essential resources. So I'm going to use the example of the market of essential resources of food and energy. And the idea is that if food becomes scarce, price goes up, so we demand less. But my physiological requirements, my nutritional needs are, completely unaffected by the price of food. And so I don't demand less when the price goes up.

So what happens, if a resource becomes scarcer, we all compete to get it because we need it, which sends prices skyrocketing upwards. And this is why we just saw the food companies getting record profits last year. So the big problem with this demand is demand is actually preferences weighted by purchasing power. I don't have demand if I don't have money to back it up. So the only people, when prices rise, when food becomes scarce or energy becomes scarce and prices rise, the only people who reduce consumption are those who don't have enough money. So I did an empirical study looking at all the countries in the world, how they responded

to food price shocks. And what actually happens is in rich countries, the price of food goes up. We don't notice at all. The price of wheat triples. We don't eat a single slice of bread less. We continue to throw 40% of our food into the garbage. Whereas in poor countries, they're slashing consumption because it's such a large share of their budget, they can't afford it. So markets are actually allocating the most important resources to those who need them least.

So rather than utility maximizing in some ways in an unequal economy where we have huge differences in purchasing power, we allocate resources to those who need them least. on the supply side, we tell this story that as the price of oil goes up, we'll just suppliers will produce more. But they forget to point out that for producing oil, there's about a two-year time lag between the time it takes to decide to produce more oil and then to find the fields, drill the well, start producing oil. And for food, it's at least a year. So when prices go up, we'll get these huge investments. So, you know, when prices were very high for oil, there was hundreds of billions of, of dollars flowing into the fracking sector, which actually, when output came online, it crashed prices. So it generated less revenue than was invested, which meant that the financial sector was

essentially subsidizing the production of oil at the stupidest possible time. And what you have then is this prices today or supply today is really determined by prices in previous periods, which leads to this wild disequilibrium, up and down of, you know, ups and downs of prices, which destabilized the economy, really a, you know, a problematic thing. We then measure our success based on GDP, and GDP is the price times quantity of final goods and services, but when there was a small decrease in oil supply, you know, in the 70s this happened and with the Ukraine war, we saw prices skyrocket. Small decrease in food prices leads prices to skyrocket,

meaning for essential resources, the less we produce, the more they contribute to GDP, which is about as perverse a measure of welfare as you could possibly have. So mainstream economists claim there's this tradeoff between efficiency and equity, that if we try for greater equity, we remove the incentives, the selfish incentives to produce more, and therefore we end up producing less and that's inefficient.

But it's total nonsense. The more unequitably distributed resources are, the less efficient our economy becomes. Inequality is probably the worst market failure out there, you know, systematically allocating resources to those who need them least. And I haven't talked about, you know, the other obvious really essential resources are nature's life support functions, which we are watching in real time. being disrupted every day. I'm in Vermont. We've just had massive floods. We're having massive heat waves, breaking all sorts of records around the world. And markets either entirely ignore,

you know, ecological impacts of our activities or treat it as questions of efficiency. You know, what's the cost-benefit analysis? All these things John talked about, discounting values to present and, you know, assuming this growth. So we mostly ignore or miscategorize loss of ecological functions as questions of efficiency when it really should be treated purely as moral obligations to future generations and other species. So those are just my main points. For essential resources, markets absolutely fail in all of, you know, in this welfare maximizing equilibrium system. And that is what we have to get right, is essential resources. How could we get it right? And then we'll go to Kate. So some of these things, what we do is every, you know,

When there's a war, we actually decide, you know, essential resources have to be rationed. And I can give a really quick example when California, we had Enron and these other big players. So this is the other huge thing. I forgot to mention that when you have essential resources, the amount of money you can make you going more money by producing less, leading to huge amounts of collusions. We have OPEC. We have the food sectors. We had record profits and energy and food last year because the producers can huge incentive to keep some. supply down to keep prices up. But Enron, some years back, colluded with a bunch of other producers

to withdraw power from the California system, leading to a tenfold increase in prices, massive economic disruption, political disruption led to overthrow the governor and the election of Arnold Schwarzenegger and, you know, brownout, terrible outcomes. At the same time, Brazil had a larger energy shortage caused by drought in a hydroelectric power economy. And Brazil said, you know what? We are going to charge you the same price for energy as last year, but we have a 10% shortfall. You're going to consume 10% less. We have your energy bills. We know how much you consumed. Everybody had to make this kind of minor effort to be a little bit more efficient, totally non-disrupting. Nobody even knows about this because it was such a non-event. When we rely on

markets, we're going to allocate resources to those who can afford them, leaving the poor to suffer miserably. When we rely on rationing as we do in World War II or other wartime, We ensure that people get what they need and it keeps prices stable and it ensures that people get enough. But rationing is a taboo subject in economics. We rely on price rationing without ever saying so. Instead, if we ration based on physiological need for essential resources, I think it would be a far more efficient system in terms of creating human welfare. That's a great point. Rationing is a bad word, but we use rationing when we say the,

word price. It's just not said out loud. Kate, did you have a comment or question? I am going to play devil's advocate. Please do. Look, Josh, markets are clearly the worst way of running an economy other than every other way that's ever been tried. You want rationing? Look at the black markets that develop around rationing, right? Rationing doesn't match what people actually want. It squashes people's different preferences. And so you get black markets, you get all. all sorts of people cheating. Look in the Second World War. Yes, you had rationing in the US.

We had it in the UK, but there's only so long that people will tolerate it because there's Mr. Hitler over there, and people actually can't wait to get back out of rationing. So rationing has all sorts of problems. Look at the Soviet Union and the central planning that went into people believing they could determine what that rationing should be. Surely we need to use the feedback mechanisms of markets, right?

Adam Smith was on to something. There's something amazing about the market mechanism. the price mechanism, it conveys signals between billions of people demanding and supplying. It conveys a signal that actually means they can supply and demand exchange without ever meeting. So surely we need a system that does use the feedback loops of the price signal. So surely instead of rations, what we actually need is tax and redistribution. We need, and I totally agree with you, by the way, that wasn't me talking, but I'm playing devil's advocate. Yes, we need a far more equitable society because in a deeply inequitable society, prices won't work, right?

You try and change the price, the rich don't notice, the poor can't cope. So you need a relative balance, but let's use markets, let's bring in a more equitable tax distribution, and why not introduce a universal basic income? So if everybody has the right of access to the market, let's fix this with the universal basic income. Wouldn't that be better than rationing? Great questions, great points. First of all, I would like to say that I'm not opposed to markets in all cases. I think they work particularly poorly for essential resources. And that's where I think rationing should take place. Let's say we do a universal agreed upon income, but we have this problem with essential resources when the supply of food falls by a little bit, or the supply of energy falls by a little bit, the prices skyrocket. So they can assume a huge amount more of the universal basic income. So we would need the incomes to fluctuate up and down all the time. with the prices of essential resources, wouldn't it be much simpler to have, you know, and already in most of the civilized world, we've agreed that health care should not be in the

hands of the market. So we have like, you know, universal health care, you know, the U.S. is an outlier. We're doing a terrible job on this. But we've decided that in the U.S., it's almost 20% of our GDP goes to health care. So I look at things instead of having universal basic income, why don't we have universal access to basic needs, decommodify survival? So right now in the U.S., we spend 6.7% of our income on food for home consumption. We could have, you know, we have this supplemental nutrition program, which is food stamps, typically. We could have food stamps for all, snap for all. And it would be guarantee everybody an ecologically and physiologically healthy diet,

which be mostly plant-based. And 6.7% of our income is spent on food for home consumption for all food take out the expensive animal-based products. I'm guessing you could feed all Americans an ecologically physiological healthy diet for, say, 2% of GDP probably would reduce our health care costs by about 2% of GDP, so it would essentially be free. And what it would then mean is the biggest threat to global ecosystems actually is agriculture. It's the source of the nitrogen, the phosphorus, you know, the source of the nitrogen, the phosphorus,

the toxic chemicals. If you look at the planetary boundaries in your work, agriculture is the biggest threat to all of those. So super important to have physiologically, ecologically healthy food. And as soon as you make sure people can meet their basic needs, then you can start saying incorporating all the ecological costs into the price of meat, 150 bucks a pound,

or without any concern of the poor not being able to get enough. So that's why, you know, I think rather than a universal basic income, I'm in favor of guaranteed access to the essential resources. I mean, my favorite approach, actually, the rationing would be to give everybody in the world or everybody in the U.S. the same right to emit CO2, in which case Elon Musk and Jeff Bezos could not really consume much more than me. What you could do then is make those rates tradable. Many people think this is too free market. But what would happen is what we need is something everybody will buy into that is going to ratchewing.

down the amount of energy we consume every year. And it's the nature of these essential resources that the less you have, the more revenue they generate. So as we ratchet down, the equally distributed rate to emit, the value of that will go up, meaning that everybody will be clamoring to ratchet that down, and that will be a massive redistribution of wealth from the billionaires to everybody else. And it will, one, it's one of the few things I can think of as political support. So rationing, I think, especially for essential resource, and I'm not opposed to markets in general. I am opposed to individual choice when it's things like climate change or private property rights. You know, can I privately own my share of the climate? There's all sorts of things that

don't fit into the market model at all. So let's leave them the hell out. So that's not saying, let's try to force everything into the market model. No, let's use markets where they work. And let's choose other economic institutions where markets don't work. Can I jump in with a quick follow-up question? Kate, then Steve. Great answer. With education, public provision, and we see it's provided in a public institution because it is in some way a collectively provided good.

Healthcare is provided in a public institution. If you're saying, let's just stick with food and you're saying food stamps, I'm just curious, would having food stamps as a form of rationing of that ecologically healthy availability. Does that change the provision on the other side of the equation? So does that, do we still have private producers? Who determines the price? I'm just curious what it looks like on the other side of that exchange.

Great question. So I'm actually an advocate. I mean, what I would argue is that we need to invest huge amounts of money in sustainable food production. And it has to be like a national initiative like, you know, the Manhattan Project or the, you know, Moon thing. I actually, so this gets a little, perhaps slightly off-top of it, but I really think we need a civilian corps where you need two years where you have to actually work to address these big problems we face. And one of those would be agriculture.

And we would produce, we'd have young people learning the techniques to produce food sustainably. And one thing about this, it would actually do a intermixing of our populations. People from the big cities and everybody, they'd be going to Kansas. They'd be going. So you'd be intermixing blue and red. and, you know, right and left. And what you find is as soon as you start interacting with the people who you think are your enemies, you realize, oh, gosh, we're all remarkably similar.

So I think that could actually help with reducing our political polarization. But I also firmly believe that all knowledge in general, but especially knowledge for sustainable food production, should be freely available to all. Instead, we have these corporations, you know, Mexico, 3,500 years transforming Taylor's Sinti into corn. Monsanto steps in, spends six months making a new genetically modified type, and then they say, this is ours, you can't use it. I mean, that's just insane. And the idea with knowledge, and so they say that when you have public investment in agricultural R&D, which can be freely used by everybody, you get like an 80% return on your investment. When it's the private

sector doing it and the restricting access, you get much lower returns to your investment because you're not letting people use it. And so all the knowledge for food production should be absolutely open access, totally non-market. And then I think a lot of the actual production itself could be done collectively. But also, it's less harmful in my view to have, okay, we'll pay the producers for the food and have things like when there's too much food we stockpile so that we can control. Then we can put it out when there's too little foods so we keep prices stable. There's a bunch of different things we can do. I think long-term viewers of this program can now visualize what my five years of PhD

conversations were kind of like with some of these guys. Steve, did you have something to follow up with Josh? Okay, two things. Is that the right way around? Can you read the text there? Good. Okay. This is a friend of mine and supporter, I have an author.

Just for I'm a few weeks ago, actually, at a conference with Richard Vague and other close friend of mine working on debt. And what Avna has done here is to answer one of the questions of being posed by Josh's comments, how do you make the divide between public and private provision? And the answer that Avna came up with, and I'm very pleased by this, is it's the payback period.

If the investment needed to sustain a particular productive system is outside the payback period that is conventional for capitalists, that's the sort of thing you need the state for. And the idea there, since we're doing this for students, I'd highly recommend students to get a copy of a book by a man called John Blatt, BLA-T-T, called Dynamic Economic Systems, and he actually makes the case about the payback period that Avinner is using there, as well as a lot of very, other very sensible stuff based on energy and decent mathematics rather than the nonsense that I'll learn from our classical students.

So that's number one. Number two, the idea of having tradable carbon credits is something I've been working on for about four or five years, badly because they have to have so many other. There's so much neoclassical nonsense ticket we don't have, I haven't had a chance to do it properly. But there's a website called EcoCore.org. So, www.ecore.org

that's promoting that idea, developed by another friend of mine, Adam Hardy. And the idea would be that every day you would get issued a carbon credit equivalent to the average for the country you're in. And then you would be, you have to pay two prices, not just one, a money price and a carbon credit price.

Given the inequality of distribution of income we have, 95% of the population would probably not exhaust the average, but the top 5% would, and they'd be needing to buy off us straight away. So the idea is there'd be an income and wealth redistribution from the rich to the poor, an immense pressure on everybody to reduce carbon consumption, except the poor, actually, they'd be doing pretty good out of it for a short while. So it's probably politically popular as well. Now, that's the sort of thing economists would resist to the cows come home, of course.

But it's what we need. And equally on rationing, the point about Germany in the Second World War that Kate made earlier is completely valid. And I think we'll need rationing to get through the catastrophic consequences of climate change that the economists have persuaded aren't going to happen. When they do start happening, rationing would be about the honor way to hold together a cohesive society. And, you know, they'll be seen as global conspiracy nonsense by the world of economic forum twerps who believe that those idiots are actually in control and know what they're doing. Having met fair few of them, I know that they can't even order lunch, let alone the global economy. So that sort of stuff is going to be necessary.

But of course, it has to be transitory. John has a comment. And then we're going to move on to our final panelist. Yeah, just some closing thoughts here before Kate takes it home for us. Well, first, Steve, the very first paper I ever published, I was a master's student, 1992, I think, was called the inefficiency and unfairness of carbon permits. I won't go there, but there's a lot to unpack there.

And one of the things I was reflecting on, as Josh was talking, was as a graduate student, sitting in the office of Henry Shoe, who was an ethicist, myself coming from an econ theory class and trying to defend the sacred organizing concept of economics of praetal optimality to an ethicist, right? And prado optimality is this idea that, you know, you can't make any moves.

You know, the only prado optimal moves allowed is when you can make someone better off without making someone worse off. And he just sat there and said, okay, you're doing climate economics for your thesis, right? I'm like, yeah. So tell me the difference between, necessity emissions and luxury emissions.

And immediately kind of burst my bubble on the whole idea of freightal optimality, right? And in fact, early economists like Pagot talked about, you know, the other sort of sacred principle of economics is the law of diminishing returns, right? That kind of more you have of something the less is worth to you.

And he made the case through the law of marginal returns, diminishing marginal returns, that, you know, we should be reallocating from the wealthy to the rich. or to the poor, or from the luxury emissions to the necessity emissions, right? Because it's welfare improving. It's welfare improving.

And so I'm not convinced that tradable permits would actually do that, but that's for a whole other podcast, perhaps. So at the end, rationing has become taboo in economics, but so has human rights. So it has sufficiency instead of efficiency, right? So has the idea of necessity over luxury. And it all comes back to, in economics, we're not allowed to compare utility. We're not allowed to compare consumption. We're not allowed to compare what gives us pleasure and pain.

As long as you keep the individual isolated from everybody else, then none of this nonsense that you all are talking about matters in economic theory. Josh, did you have a closing comment there? Yeah, and I'll make a closing comment, kind of in response to what John just said, too, and I went and looked through a whole bunch of introductory textbooks, and they all say there is no difference between luxuries and necessities or between needs and wants. They said there's no difference. So right away, they just sweep that under the table.

And then the other idea about Paretoefficiency, you can't do, you know, everything should be, we only do things that make somebody better off without making anybody else worse off. In a fossil fuel powered economy, everything you do makes somebody worse off. Right away, we should say if there is such thing as climate change, then Pareto efficiency is this, stupidest measure you can come up with. Let's not even mention that. All the stuff neoclassical economics has done has proved ways in which the classical and the physiocratic school, let's see it, the classicles

were correct. So in fact, one thing I slowly work at the level of the isolated individual. They can't even derive demand curve. Okay, Mark, they bullshit over that. Okay, they do not do it. Check your textbook kids. You'll say they do not show how you go from an individual curve to a demand

curve without making some sort of bullshit assumption. So they can't even do that. And what that actually proves, and this is the case that Alan Kerman made in the Emperor's New Clothes, I said, that forces is to we have to work at the aggregation substantially higher than the individual. That's to meet the failings of neoclassical economics, which means class-based analysis is correct. We're back in a classical world when they look at workers, capitalist income distribution, etc., etc. Taboo topics in mainstream economics, which mainstream economics has proved unnecessary. Professor Rayworth, please tell us about the big picture that is being taught in economic theory and what some changes to that might be required.

Okay, so I want to talk about the biggest picture of the economy that we ever encounter, right? If you say, show me everything you've got, show me the whole cabool, what shows up. And I'm going to talk about Ecoan 101, because I think it's the most important course. It's where we begin. Paul Samuelson knew it, right? The first textbook you pick up the first diagrams we see, they shape what we forever see and don't see afterwards.

So in mainstream economics, the biggest picture is going to look something like this. It's called the circular flow of goods and money. And what we've got is households and businesses in the essential market relationship. Households provide labor and they can provide capital. In return, they get wages. Some get wages and some get profit. It depends whether you gave that labor or capital. And they can use that for consumer spending.

and in return they get goods and services. So you've got the goods going round and round, the resources going round around and the money going round around. And yes, not everything goes on consumer spending. There can be some leakages. The diagram shows that some of it goes into savings, which get put into banks and get turned into investment. Keep your heat on. Keep your shirt on Steve Keen. I know that's not true.

That's right. That's not the way banks actually work, but it's very nice for a fundamental 101 diagram. We've got some of the money goes into taxes for government and they can turn that in. spending actually in countries with the sovereign currency. That's not how governments work either, but it's very handy for one-on-one diagram. And some of the money goes on imports, but other money comes back in through exports. The point here is everything is circular, it's contained, it's enclosed. And these arrows tracking money-to-reep flows. So I want to start by recognizing what's useful, right? Because all models are wrong and some are useful. Why was this ever seen as

useful? And I really like leaning into what could have been useful about it. It's really useful for measuring GDP and showing that it can be picked up in different places. It's useful for tracking flows of money, even though some of them are completely fictionalised. But what it misses is really what matters, because it's never even pointed out and it never comes in anywhere. So, one, it has labour getting fresh and ready for work every day. It completely misses the unpaid caring economy of the household, cooking, washing, cleaning, sweeping. Just labour is just ready to go to work every day. It misses the commons. It misses all of goods and services that are produced without money changing hands because it's only showing us market-based. And it misses, of course, the living world. There is

nothing coming in and there's nothing going out. It's missing energy and it's missing resources. They're somehow within circulating in some sort of, you know, perpetual motion machine. These are fatal flaws. If we, if the biggest diagram that we're teaching students, does not have energy and materials from the living world. It does not have unpaid care of the household. It does not have the commons. Through the most fundamental sources of our well-being, they're absent. This does not serve us.

So I want to replace it because I always love to reproposition and replace. So here we are in Technicolor. I call this the embedded economy diagram. It draws on ecological economics, feminist theory and commons theory. So what we've got? We've got the economy is a subset of society, which is a subset of the living world. That's the first move of ecological. economics. It means that we recognize that the economy is drawing on materials and matter. It's

putting out waste and pollution and it's bathed in a river of solar energy. Welcome to the second law of thermodynamics. So we're always asking, is our economy compatible, is its through flow compatible with conditions conducive to life? But then let's look inside the economy. Yes, we've got the market, which is where 101 always begins. And we've got the state. And these two, of course, what show up in GDP. This is what's measured monetary output. But what's missing is on this vertical, which is the household of unpaid caring work. That's the feminist economics coming in. And then here's Eleanor Ostrom saying, don't forget the Commons. They may well not be tragic. They're a triumph. When they're organized according to principles that she revealed, the Commons can actually be a

fantastic source of providing for our needs and wants, which are different from each other. So that's the second move. The third one, there's a this is a, this is a, is like a pop-up book, isn't it? Third one is the different roles that we play within the economy. And I'm going right back to where John Erickson, how does begin? Because mainstream economics depicts us as that rational economic man. Are you consumer or producer? Karl Marx reminded us to always ask,

in the sphere of production, are you labor or capital? It's going to make a difference, guys. We may be in that market space, but we're also in the state relation. We may be a resident or a public servant, a protester or a voter, all essential roles we play in relation to the state. In the household, parent, child, guardian, carer, in the commons, a co-creator, sharer, and preparer and steward,

what kinds of values and collaborations and skills and behaviours are required of humanity to operate well across all of these ways of provisioning for our needs and wants? Because I know I don't want to live in a society that lacks any one of them. I think markets and states and households and commons all bring really interesting, unique, different qualities that can work for providing different kinds of goods. services, just as Josh was describing. So we need to be able to recognize we move between these every day and we need the skills to collaborate in them. And it turns out that even rational economic man isn't the useful guy we want for the market space. We actually want cooperation and use the best of human intelligence and pro-social skills in the market spaces too. So for me, this is a fundamental move and should be a diagram that we begin with. Of course,

it doesn't give you the flows, right? It's not about flows. It's about relations. So it's focusing on on relation, economy contained within society, within the living world. It's looking at the relation between market, state, household and commons, inviting us to explore the power relationships that exist between them. In fact, across every line in this diagram, there's a power relationship between the humanity and the rest of the living world, between the market and the state, between the market and society. So we should bring that power conversation into the first economics class. So I'll stop here and also invite any of you to say, is there something you change in this diagram? Is there something else you think should be added to it that really should

be there on day one? Thank you, Kate. I'm going to ask a clarifying question and then, John, you have your hand up. Could you show me the first graph that you had of the other one? So there are 240 million college students in the world. And John just told us earlier that economics and political science are among the most popular majors in the United States, at least. Is that diagram that you're holding? Is that actually taught worldwide today in economics 101 classes? I'm going to say a variant of it, right? So if you look through the textbooks, they'll all, that all have a diagram that's called something like the circle flow of goods and income. And it'll all be some version of this. Wow. Wow. Maybe only 99%.

Well, you're talking about your textbook, Josh. Okay, thank you. Comments. Well, even that, even that diagram is in our ecological economics textbooks because we're always sort of in this defensive posture, right? Yeah. So we just have to throw it out and start anew. Just that more of a comment, Kay, thank you for like bringing it full circle because

that first model, right, asking the question, what is useful and what is it missed? what's missing, I think answers my question, right, which George Box didn't ask, useful for whom? Right? We've built a model that has been very useful for white male capitalists. And if you look at the stats on who we're graduating as Ph.D. in economics. Economics continues to be woefully behind in terms of gender diversity, ethnic diversity, diversity of thought from around the world.

And it's another one of these sort of reinforcing feedbacks. And then if you look at the new model, and again, ask the question, useful for whom? Because it's a model, right? You see that it empowers a whole new class of people. It empowers anyone who doesn't probably identify as a white male capitalist. And so this is our challenge to build a new model that empowers the status quo and rebuild. something that is truly built for humans and for resilience and for long-term viability of our place on planet Earth.

So I was going to say I actually start out my class, you know, very, very similar to what Kate's saying. But I asked my students, I said, what kind of economy were you raised in? And they all say capitalism. And I say, oh, your parents charge you room and board? And I said, you were actually raised in a reciprocity-based economy where, you know, people, you get things, you know, you get things because people love you. You're expected to return those things. And I actually think that when right now, and we're looking at solving all

these, you know, global climate change, we're always drawing from the market, the market. Why don't we draw from the reciprocity and gifting part of the economy? Why don't we look at everything we receive from nature as a gift for which we are morally obliged to reciprocate, meaning we have to see our species as part of the collective species that sustains all the life support functions. And right now we're total freeloaders. You know, we're getting, getting, getting, giving nothing in return. So we're the worst case. And one other comment I wanted to make is that another way you really draw, you connect back to John.

John was talking about homo-economics. A lot of evolutionists are now recognizing that humans evolved to be so successful based on our ability to cooperate. And Eleanor Ostrom's work on the Common, she has these eight, you know, principles for successful management of the commons, the evolutionists have come up with eight principles for successful cooperation, arguing that these are the principles that drove humans to our current success or risk of catastrophic failure, but that, you know, that human nature was actually, we were capable of solving these social dilemmas. Things where if I act in my self-interest is better for me, but worse for society.

And we figured out ways to solve that through cooperation. And that, I think, is still the basis of the core economy, the household. And that's where we should be looking for solution to the bigger challenges we now face. So I do like the connection between the start and finish in this. Yeah. And actually, can I jump in there? So Ellen Ostrom's core design principles that she, as you're saying, she drew them out through studying the commons. But actually, as you just said, I mean, they're, they're.

every every every every every every each one of these markets their house and common commons is about human relations and these are different forms of relations and I love your saying to your students oh race and capitalism really so you you paid room and board to remind us that actually we move every day almost without noticing it between different forms of relation you know if if I don't know if you if you came over to my house for dinner and we had lovely meal and then and then you offered to pay me at the end I would be offended because you would have placed that interaction in the market.

And I'm like, no, Josh, this is a gift. So there's a lot of taboo around getting it wrong. Should I pay or not? So what if what Eleanor Ostrom tapped into there about the core design principles for the commons, what if they're actually valuable also in the state? Can we redesign state services to be much more like forms of cooperation? and there's a nursing cooperative in the Netherlands

where they work in groups of everything around 12 nurses. It's totally distributed. It's much, much more efficient and much lower cost than a very centralized, bureaucratically run nursing system. So I'm just fascinated of what happens if we take these core design principles into our homes and actually think about, well, who does all the washing up around here? Can we redistribute household work, right?

There's a gender politics to that. And what happens if we do take it into? business, well, that might be a cooperative. That's a business. It might be an employee-owned company, a steward-run company. So we can bring these design principles and say they don't just belong in the commons. We may have discovered them through the commons, but maybe they infuse the way we relate through all of these different forms of organizing. I like the fact that Kate's diagrammers takes us actually back to where we should have started, which is the physiocrats. Because if you look at the tablo-economic and the arguments, the physiocrats, they said,

all wealth comes from nature. They didn't realize it because they were saying, it before we invented the word energy. But fundamentally the saying we have benefited from the free gift of nature, which is energy. So that gives you the whole external to internal. Waste is inevitable. So we end up with a framework which is correct with the second law of thermodynamics. And as I've forgotten the actual author, Eddington said almost a century ago, if your theory is conflicted with the second law of thermodynamics,

there is nothing for you to do but quite an absolute humiliation. That's economic theory as it stands at the moment. So bring us back in there. And then a huge part of what Neoclassical is saying, we've got this perfect system getting marginal cost and marginal benefits right. Let's infuse that in the rest of society. You're making the opposite case and say, maybe we should infuse concepts from other forms of interpersonal and physical relations,

which occur inside the family as well to the rest and see how that benefits. And if you look at the foundations of the argument of marginal cost and marginal benefit, they're all shot full of holes, including empirical ones, because for 95% of firms, they have constant or falling marginal cost. So the whole idea that you have rising marginal cost, cutting off the rising marginal benefits, is simply empirically false. If you don't believe me, students,

go and have a copy of Alan Blinder's textbook in which you will not find anything about this whatsoever and go and find a paper by Alan Blinder in 1998, a book called asking about prices, where you found he found that's what happens, and he doesn't teach it to his own students. He's literally lying to you. because he couldn't cope with the truth.

Okay? We're back in the, you know, the honorable mean, whatever that Tom Hanks, that movie is called, not Tom Hanks, obviously. But yeah, you can't handle the truth. That defines now classical economics. That's what we're trying to bring into you here, is the truth. So this has been fantastic. I'm going to ask a question for each of you to opine on.

Can reality of the sort that, we've been discussing these last 90 minutes actually start to be taught in modern universities around the world at scale or as inferred in the early part of this conversation, does economic theory just mirror the stage of our cultural moment in time based on energy surplus and large gaps in inequality? And it's the people at the top that are using economic theory as kind of a crutch to rationalize and describe our economic system. Can these things really at scale be taught in our university? What do you guys think? I don't think they can because the neoclassical hegemony is so complete. And the funerals, we can't rely upon funerals. That

works in physics. It doesn't work in economics because the crisis in economics are transient. So you have the Great Depression. Who talks about the Great Depression today? and Minsky got created by it in a sense, but mainstream ignores it. The Great Recession, even that's disappeared. Now we're talking about the great inflation. Now that's disappeared. The crises aren't permanent. Therefore, you don't have a permanent confrontation between a failed paradigm and the anomaly that proves that it failed. So they can accumulate all these failed elements over centuries and do nothing about it. They don't change. That's one reason. there's two potential non-mainstream universities teaching on orthodox economics.

Stephen Hale has started a program down in Australia in Adelaide with a private university. And as much as I think in education should be public, because it's public, the neoclassicals dominate the quality control. Because they don't have any quality, we get shit economics taught. Pardon me, kids, that's what you're going to face. Which convincing is plausible, convincing and wrong. So the only revolutions are being done outside the mainstream with Stephen Howell's course, and I'm now teaching a commercial course as well, distributed by some absolutely appalling marketing on occasions,

but it's at least the way to get non-Orthodox economics in, and I'm hoping to get a discounted version for students soon out through the marketing company. But yeah, the mainstream will dominate economics, and they'll kill it, and that's because we're treated as a public resource, and they've got control of it. Yeah, I mean, I, you know, sadly I agree a little bit with Steve and it's so hard to change the neoclassical. When I first studied ecological economics, I thought, oh, this is the future. Neoclassical economics will be gone within a decade. Interestingly, here, one of the professors in environmental economics at my university actually told his students that he would give extra credit to anybody who beat up my TAs because he was so sick of their questions. and it was obviously tongue and cheek, but it was, you know, but the students in the econ department

are clamoring for alternative views, and they have tried repeatedly to get ecological economics courses cross-listed. And at one point, they got kind of close to doing it, and the professor who said he would get them cross-listed actually died, the students then said, I had promised I would submit my courses for cross-listing again, and I said, it's going to be pointless. They're not going to do it, but I'll do it. And their answer was, they said, well, we're not going to cross-listing again. list your introductory course because we already teach that, which is totally wrong.

And they said, we're not going to cross list your upper level course because we don't teach that. So if you're not going to cross list what is or isn't taught, that's pretty all-inclusive. But I do see enormous, you know, every few years, students in econ programs are, you know, writing these manifestos, complaining what they are taught doesn't make any sense. And so the way I have to say, every class I teach, I tell the students, if what I teach you doesn't help you understand reality, it's useless. And if it's contradicted by reality, it's wrong. And it's your job to test what I teach against reality.

And I do think students respond very positively to that approach. And they tell me in the Econ program, it's, you know, they're basically told, if you disagree with anything, we teach, you're wrong. You know, there's, so I think if change is going to come, it's going to come from the student body forcing the other professors to, you know, to change their views. But to get back, I started this before we started, I mentioned that one of my colleagues had sent me a podcast by Steve on your, you know, on the great simplification. And that professor was fired for teaching heterodox economics. And literally at his trial, they had a thing that one of his lecture notes that showed

general equilibrium in quotes, is though it was not, you know, robust scientific. foundations. So they, it's very, very difficult to change the system. They have a lot of control over what is taught. Wow. Kate and then John. Well, I really like your question at the beginning actually, Nate, just saying, is it while we're in this carbon bubble, we just, you know, that's the water we swim in and we, we have no capacity to see beyond that. And if that's the case, what will it look like, what will the sudden swing be and what will economics, as we know, change and suddenly energy will suddenly be discovered and how will it enter? And it probably won't enter in the ways that any of us are wanting to, right? When an issue is neglected until there's a

crisis, the real risk is it won't get picked up in the way you hoped. It'll get picked up in frames of models that work for those who want it to continue to work for them. How will that go? So that's a new question for me. But I am going to lean into possibility. if economics only changes one funeral at a time, it also changes one eighth grader at the time, right? It changes the way we teach it anew. So I'm thrilled that this International Baccalaure edition of economics, without my knowing it or anything, they decided to stick the donut in right up front. Now, it does immediately the next chapter switch into supply and demand.

So there's some way to go yet, right? But it's starting to get into the textbooks. And what I hear back from high school teachers is, now that it's in the same. the textbook, I can teach it. It's in the curriculum. It's legitimate and it's, and we're working with a group of teachers who want to write, rather than trying to reform economics, and I think this is where this question comes down. Do we try and reform economics or do we just say, will this leave you sitting there? We're going to go and do something new. So I'm working with a group of teachers writing a GCSE, which is around for 15, 16 year olds in regenerative economics.

What would it look like if you started economics? Just like, it's going to be regenerative economics working with the lovely principle Josh just offered if it tested against the real world. And we are putting this diagram as the first diagram. And you can imagine lots of chapters from regenerative economics. Now we've seen the whole now let's talk about markets and let's talk about the very different ways. Let's talk about markets and states and what what necessary goods and what luxury goods and how they should be provided and the relations between. So I'm leaning into possibility. I'm not certainly not going to give up. Yeah, there's movement.

Yeah, I mean, I take your question. The answer to it is larger than reforming just economics education. It's really reforming education, reforming higher education in particular. I start most of my classes with that question. What's the purpose of a university education? And, you know, I often get the answer as well, you know, get me a job to train me in skills, to teach me something useful where I can, you know,

build an income. And I say, none of that is in our university charter. Let's read it. Right? I mean, it really is, you know, education is foundational to a democratic society. Education is foundational to hire human aspirations. Educational is foundational

to long-term viability of the human animal. And my greatest fear is that we've designed, designed our education systems to inoculate consumers instead of trained citizens. And citizens at scale, right? Citizens who can make impact in their local communities are right up through the global community. So I'm increasingly drawn to Next Systems Thinking. I recently used a book in my class called The Next Systems Reader that was edited by Gus Beth and colleagues. to really open up the conversation of alternative systems,

alternative ways of organizing the economy, alternative ways of organizing human assets and knowledge and ways of thinking. And the students were just blown away because it challenged their basic idea of living in a capitalistic society. There's that parable right of, you know, fish, someone asks a fish, like, you know, do you like swimming in water? I'm getting this all wrong, and the fish is like, what is water? Right?

Like, we are inside the system we're trying to change, and we don't even know the right questions to ask. And so I'm part of an initiative building a nexus of studies program across the U.S. to really kind of think of this at this sort of deep root causes of the problems of the current system and to imagine the next system. And I'm finding actually that the next system's ideas are all around us. They just don't often exist in national governance. They're at community scale.

They're at local skills. They're in farmers markets. They're in reciprocal economies. They're in gift economies. They're in neighbor's backyards. The next system is everywhere. And so I'm increasingly working with my students to really elevate those stories and to scale them up and out.

This has been really, really great. And information and insight packed, since we're all friends, I hope I can count on you either as individuals or as a group to come back because we've really just scratched the surface here. This is our world. This is our future. And I think especially for young humans,

I wish I would have been 18, 21, learning what I learned today. Should we go around with any 30 seconds, 60 second closing thoughts by everyone? Okay. I'll quickly say one thing in the outclass was like to say, oh, if you take all that stuff seriously can't do modeling anymore, garbage. There's been an alternative technology for 50 or 60 years called System Dynamics. If you want to give a trial of that, download a search for Minsky on SourceForge,

which is my open source contribution to system dynamics modeling. you can do much better modeling if you throw away the neoclassical handicaps. We'll put that in the show notes. Josh? Yeah, I just would be remiss to say that John actually started a big effort to change the way we teach economics. Was economics of Anthropocene, which has now become leadership for the Echoic? I've now taken over from him here, although he's still obviously contributing. So we really do have a concerted effort.

We have a very good PhD program. We're producing a new generation of whom we believe we're. will be the leaders in economics and they are getting good university jobs and they are making an impact. And so, you know, despite my pessimism at changing econ departments, I think we can step around econ departments and really introduce these ideas. And our program is with McGill. So if there's any, you know, potential PhDs and ecological economics are interested in these ideas, you can find us under leadership for the Ecozoic. And one of your former students has a system synthesis podcast as well. Yes, yes.

One of my former students prior to these things, Nate, is exactly what we aspire to, is to get people who will be more influential and effective than we are. Thanks, Josh. John? Yeah, I mean, I started this by saying that economics starts with a really simple starting point. And I think the reform starts in equally simple starting points. we need to re-embed the person in family and community and re-embed the economy and society in the earth.

I think Kate's image of the donut economy is a great place to start. Sorry, Kate, this is not an insult. It's not rocket science. It's really simple, and it's really intuitive. And when we start there and treat people as humans and not, you know, these kind of foreign things that we try to shape them into, like homo-economics, it's quite easy and quite intuitive. Then I'll follow on.

I'm so thrilled that you think the donut is not rocket science, because that means it repoliticizes the economic conversation. I never intended to call donut economics donut. I didn't make that word up. Somebody else said, oh, that diagram you've joined, it's a donut, and it was given that name. And it's playful and often silly and people say, why did you call it that? But what I've learned is that, and as we all know, many people are intimidated by economics, right? It's expert, it's technical, it's fast, it's alienating to many, many people.

But if you stick doughnut in front of it, people already know there's something. Bring your humor, bring your mischief. And that's what I think what we need to do with so much of the. economics we're talking about bringing, you know, the way you're talking about teaching it, bring it into the classroom. Is this, does this fit with your experience? Does this fit with what you know of reality? So let's bring it back to something that people connect with. The route I've taken is to step away from academic economics and say, I think a lot of 21st century economics is going to get practice first and theorized later because the vast majority of the

economists are still working on the old style. So let's work with the practitioners. And that's what I did in setting up done at economic action lab, okay, let's start working with the cities that want to do this. How then will they make decisions, if not through cost-benefit analysis? Let's work with the companies

that want to be purpose-led and actually design themselves to become regenerative and distributed by design. How then will they marry the requirement of making a profit in order to stay in business with actually putting value of ecology

and society first? So we're working with the practitioners and as you just said, you know, it's all around anyway. It's already popping up. And if only we find ourselves and put it in our models and make it visible and we see it. Thank you. Thank all of you for your insights and time today and for your dedication to this work, this story, which is the story of our times.

To be continued. And thank you all very much. If you enjoyed or learned from this episode of The Great Simplification, please subscribe to us on your favorite podcast platform and visit the great simplification.com for more information on future releases.