back to indexSteve Keen: Marxism, Capitalism, and Economics | Lex Fridman Podcast #303
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The real foundation of Marx's political philosophy was the economic argument that there would
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be a tendency for the rate of profit to fall, and that tendency for the rate of profit to
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fall would lead to capitalists battening down on workers harder, paying them less than their
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subsistence, a revolt by workers against this, and then you would get socialism on
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So what he called the tendency for the rate of profit to fall played a critical role in
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his explanation of why socialism would have to come about.
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If you look at Marx's own vision of the revolution, it was going to happen in England.
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The advanced economies would be first to go through the revolution.
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The socialist, the primitive economies would have to go through a capitalist transition,
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and this is the difference between the Mensheviks and the Bolsheviks.
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So the Mensheviks, when Hyman Minsky came out of the Menshevik family, the Mensheviks
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believed you had to go through a capitalist phase.
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Russia had to go through a capitalist period before it becomes socialist.
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The Bolsheviks believed they could get there in one go.
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The following is a conversation with Steve Keen, a brilliant economist that criticizes
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much of modern economics and proposes new theories and models that integrate some ideas
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and ditch others from very thinkers, from Karl Marx to John Maynard Keynes to Hyman
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In fact, a lot of our conversation is about Karl Marx and Marxian economics.
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He has been a scholar of Karl Marx's work for many years, so this was a fascinating
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He has written several books I recommend, including The New Economics and Manifesto
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and Debunking Economics.
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This is the Lex Friedman Podcast.
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To support it, please check out our sponsors in the description.
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And now, dear friends, here's Steve Keen.
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Let's start with a big question.
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What is economics?
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Or maybe what is or should be the goal of economics?
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Well, it should be I understand how human civilization comes about and how it can be
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And that's not what it's been at all.
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So we have a discipline which has the right name and the wrong soul.
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What is the soul of economics?
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The soul of economics really is to explain how do we manage to build a civilization that
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elevates us so far above the energy and consumption and knowledge levels of the base environment
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Because if you think about—and this is actually work I've learned from Tim Garrett, who's
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one of my research colleagues who's an atmospheric physicist—and his idea is that we exploit
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these high grade energy sources from the sun itself to coal, nuclear, et cetera, et cetera,
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which means we can maintain a level of human civilization well above what we'd have if
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we were just still running around with rocks and stones and spears.
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So it's that elevation above the base level of the planet, which is human civilization.
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And if we didn't have this energy we were exploiting, if we didn't use the environment
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to elevate ourselves above what's possible in the background, then you and I wouldn't
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be talking into microphones.
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We might be doing drumbeats and stuff like this, but we wouldn't be having the sort
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of conversation we have.
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So to explain how that came about, that's what the economics should be doing, and it's
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So this is the greatest thing that the Earth has ever created, is what you're saying,
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this conversation?
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Yeah, we're the most elaborate construction on the planet.
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And that's not what we've done, we've denigrated the planet itself.
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We don't have respect for the fact that life itself is an incredible creation.
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And my ultimate—if I had to see how humanity is going to survive what we're putting ourselves
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through, then we'd have to come out of it as a species which sees its role as preserving
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and respecting life.
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I like how you took my silly, incredible statement and made it into a serious one about how amazing
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Life is incredible, and we humans don't respect it enough, we trash it.
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And that's what economics, I think, has played a huge role in that.
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Until I actually regard my discipline, I would never call it a profession, let alone a science.
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My discipline has probably helped bring about the termination potential, the feasible termination
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of human civilization.
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Okay, let's return to the basics of economics.
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So what is the soul and the practice of economics?
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What should be the goal of it?
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Because you're speaking very poetically, but we'll also speak pragmatically about the tools
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of economics, the variables of economics, the metrics, the goals, the models.
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Practically speaking, what are the goals of economics?
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Well, in terms of the tools we use, we should be using the tools that engineers use, frankly.
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And that sounds ridiculously simple, because you would expect that economists are using
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up to date techniques that are common in other sciences, where you're dealing with similar
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ideas of stocks and flows, and interactions between the environment and a system and so
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And that's fundamentally systems engineering.
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And that's what we should be using as the tools of economics.
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Now if you look at what economists actually do, the sophisticated stuff involves difference
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And like difference equations, you know, if you've done enough mathematics as you have,
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you know, difference equations are useful for like individual level processes.
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If you're talking about autonomous, it'll go from state t to t plus one, t plus two,
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But not when you're talking at the aggregate level.
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There you use differential equations to measure it all.
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Economists have been using difference equations.
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So there's like a book, I think it's by Sargent and one other, called Advanced Methods in
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Economics Using Python, two volumes set.
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It's about close to 2,000 pages, and four of those pages are on differential equations.
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The rest is all difference equations.
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So they're using entirely the wrong mathematics to start with.
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For people listening, what is difference equations versus differential equations?
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Difference equation is like you can do in a spreadsheet.
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You'll have, this is the value for 1990, this is the value for 1991, 92, 93, 94.
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So you have discrete jumps in time, whereas the differential equation says there's a process
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moving through time.
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And you will have a rate of change of a variable is a function of the state of itself and other
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variables and rates of change of those variables.
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And that is what you use when you're doing an aggregate model.
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So if you're modeling water, for example, or fluid dynamics, you have a set of differential
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equations describing the entire body of fluid moving through time.
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You don't try to model the discrete motion of each molecule of H2O.
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So at the aggregate level, you use differential equations for processes that occur through
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And that's economics.
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It occurs through time.
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You should be using that particular technology.
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But some economists do learn differential equations, but they don't learn stability
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So they simply assume equilibrium is stable, and they work in equilibrium terms all the
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And the technical level, it's an incredibly complicated way of modeling the world using
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entirely the wrong tools.
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OK, we'll talk about that because it's unclear what the right tools are.
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Maybe it's more clear to you, but I've got to make it clear to an audience.
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Well, so this is a very complicated world.
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It's a complex world.
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You talk about there are some of the most complex systems on Earth are the human mind,
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the economy and the biosphere.
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So we'll go, you know, we'll go to that place.
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I'm fascinated by complex systems.
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I'm humbled by them, even at their simplest level of like cellular automata.
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I'm not sure what the right tools are to understand that, especially when part of the complex
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system is like a hierarchy of other complex systems.
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So you said the economy is a fascinating complex system, but it's made up of human minds.
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And those are interesting.
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Those are interesting, perhaps impossible to model, but we can try and we can try to
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figure out how to approximate them.
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And maybe that's the challenge of economics.
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OK, we'll keep returning to the basics.
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Let us try to learn something from history.
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I also see as part of economics is us trying to figure out stuff.
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And there's a few smart folks that write books throughout human history.
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And sometimes they name schools of economics after them.
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So let us take a stroll through history.
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Can you describe at a high level what are the different schools of economics, perhaps
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ones that are interesting to you, perhaps ones that the difference between which reveals
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something useful or insightful for our conversation.
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So you know, you could neoclassical, post Keynesian, Austrian, like the biophysical
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economics and so on, other heterodox economic schools that you find interesting.
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OK, I actually find interesting a school which went extinct about 250 years ago.
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That's where I'd like to start from.
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And they're called the Physiocrats.
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And the name itself implies where the knowledge came from, because if you go back far enough
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in history, we didn't do autopsies.
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But when you started doing autopsies, they found wires, they found tubes, etc., etc.
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And they started seeing the body as a circulation system, and they applied the same sort of
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logic to the economy.
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And they came out of an agricultural economy, which was France, and they saw that the wealth
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came effectively from the sun.
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So their soil wealth comes from, like I said, the soil, but what they really mean is sun.
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The soil absorbs the energy of the sun.
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One seed plants, a thousand flea seeds come back.
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There is no surplus.
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We are simply mining what we can find out of the natural economy.
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That's where we should have stayed and developed from that forward.
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We then went through the classical school of economics, which comes out of Adam Smith.
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And Smith, coming from Scotland, looked at what the Physiocrats said, and what the Physiocrats
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argued was that agriculture is the source of all wealth, and the manufacturing sector
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That's literally the term they used to describe the manufacturing sector.
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What does sterile mean?
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Sterile means you don't extract value.
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You simply change the shape of value.
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So the value comes from the soil.
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Yeah, it comes from the soil.
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That's the free gift of nature.
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That's literally the phrase they used.
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And we then distribute the free gift of nature around, and we need carriages, which was the
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manufacturing term they used at the time, as well as wheat.
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So to make the carriages, we take what's been taken from the soil, and we convert it to
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But there is no value added in manufacturing.
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So Smith looked at that and said, well, I'm from Scotland.
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And we've got these industries, and we make stuff, and it's machinery.
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And he said, no, it's not land that gives us the source of value, it's labor.
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Now, that led to the classical school of thought, and that said that all value comes from labor,
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that value is objective, so it's the amount of effort you put in, that the price two things
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will exchange for reflects the relative effort that's involved in the manufacturing.
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So this computer takes two hours to make, and this bottle takes two minutes to make,
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then this is worth 60 times as much as that.
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They didn't talk about marginal cost.
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It was absolute cost, effectively.
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They didn't talk about utility as a subjective thing, they ridiculed subjective utility theory.
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That led to Marx, and Marx is probably the most brilliant mind in the history of economics.
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The only other competitor I'd see is Schumpeter, possibly Keynes, but in my terms of ranking
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of intellects, it would be Marx, Schumpeter, Keynes, in terms of the outstanding capacities
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But Marx then turned that classical school, which was pro capitalism and anti feudal,
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into a critique of capitalism, which led to the neoclassical school coming along as a
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defense of capitalism.
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But they defended it using the ideas of the subjective theory of value, so that value
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does not reflect effort, it's the satisfaction individuals get from different objects that
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determines their value, marginal utility.
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It's the marginal cost that determines how much they sell for.
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Capitalism equilibrates marginal cost and marginal utility, and the concepts of equilibrium
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and marginal this and marginal that became the neoclassical school, and that's still
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the dominant school now 150 years later.
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That's the one that everybody learns.
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When you first learn economics, if you don't have the critical background that I managed
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to acquire, that's what you think is economics, the marginal utility, equilibrium oriented
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analysis of mainstream economics, and for example, they ignore money.
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People think economists, you must be an expert on money because you're an economist.
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Well, in fact, economists learn literally in the first few weeks at university that
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money is irrelevant.
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They say money illusion.
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They represent people's tastes using what they call indifference curves, and they're
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like isoquants on a weather map.
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If you look at an isoquant, it shows you all the points of the same pressure.
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So you can be here or you can be in Denver and the air pressure can be the same if you're
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in the same weather unit, so you just draw a cell that links together.
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Well, they do the same thing with utility and say lots of bananas and very few coconuts
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can give you the same utility as lots of coconuts and very few bananas, and you draw basically
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like a hyperbola running down linking the two, and they'll say, well, that's your utility.
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That describes your tastes, and then we have your income, and given your income, you can
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buy that many bananas completely or that many coconuts or a straight line combination of
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the two, and then if we double the nominal price of coconuts and double the nominal price
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of bananas and double your income, what happens, and the correct answer is, oh, nothing, sir.
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You stay at the same point of tangency between what your budget is and which particular utility
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curve gives you the maximum satisfaction.
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So that gets ingrained into them, and they think anybody who worries about money suffers
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from money illusion.
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You are therefore ignorant of the deep insights of economics if you think money actually matters.
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So you have an entire theory of economics which presumes we exchange through barter.
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Like I'll swap you that Microsoft Surface for, actually, I'll take two of those for
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We do this bartering type arrangement.
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In fact, that only works if money plays no creative role in the economy, and that's where
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you find, reading Schumpeter, the insight that's the school of thought that I come from
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that says money is essential.
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Money actually adds to demand, and we'll talk about that later on.
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So that's the neoclassical school that ends up being subjective theory of value, nonmonetary,
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as though everything happens in barter, and focusing on equilibrium, as though everything
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happens in equilibrium, or if you get disturbed from equilibrium, you return back to it again.
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And that mindset describes capitalism.
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Its most interesting feature is that it reaches equilibrium.
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Now what planet are we on to believe that?
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Because if you look at the real world, the real exciting world of capitalism in which
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we live, change is by far the most obvious characteristic of it.
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There's no equilibrium.
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There's no equilibrium.
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And as a mathematician, it's easy to – you work with stability analysis.
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You work out what the Jacobian is.
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You work out your Lyapunov exponents in a complex system.
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You're used to the idea that equilibrium is unstable.
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But economists get schooled into believing that everything happens in equilibrium, and
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they don't learn stability analysis.
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So all that stuff is missing.
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So onto the schools of thought, treating the economy as an equilibrium system, which was
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what the neoclassical school did, is what Keynes disturbed.
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And he really disturbed it by talking about, fundamentally, that uncertainty determines
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our decisions about the future.
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So when we consume, you know if you like Pfizer or whatever particular drink we want to have,
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you know the current situation.
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But to invest, you must be making guesses about the future.
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But you don't know the future.
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So what do you do?
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You extrapolate what you currently know.
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And as you said, this is a terrible basis on which to plan for the future.
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But this is the only thing you can do where there is no possibility of solid calculation.
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So investment is therefore subject to uncertainty, and therefore you will get volatility out
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You will get fads, of course, booms and slumps coming out of that, because people extrapolate
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for the current conditions.
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And that's the normal state of a capitalist economy.
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And Schumpeter argued that that's what gives it its creativity as well, the fact that you
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can perceive a potential demand, but first of all, you don't know whether that demand
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Secondly, you don't know who your competitor is going to be, whether somebody is going
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to be ahead of you or behind.
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If there's a fad, you'll overinvest.
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All this stuff is the real nature of capitalism, and that's what we're trying to capture,
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the dynamic nonequilibrium monetary violence and creativity of capitalism.
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That's what we should be analyzing.
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And the post Keynesian school has gone in that orientation.
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They've been, in my opinion, inhibited by learning their mathematics from neoclassical
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economists, so they don't have enough of the technology of complex systems.
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There's only a really tiny handful of people working in complex systems analysis in post
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Keynesian economics, but that is, to me, the most interesting area.
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So their tools may be lacking, but they fundamentally accept the instability of things.
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That's interesting.
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So let me try to summarize what you said, and then you say how stupid I am.
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So then there was the physiocrats that thought value came from the land.
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Then there's Adam Smith, who said, nah, value comes from human labor.
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That was the classical school.
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And then neoclassical is value comes from bananas and coconuts, human preferences, like
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human happiness, how happy a banana makes you.
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And then the Keynesian and the post Keynesian were like, yeah, well, you can't, you can
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never, the moment you try to put value to a banana and a coconut, you're already working
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It's always going to be chaos and stability.
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And then you just, you're fishing in uncertain waters, and that's why we have to embrace
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that and come up with tools that model that well.
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And also Joseph Schumpeter, what school would you put him under?
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Is he a Keynesian or is he Austrian economics?
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The Austrians deny.
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That's the intriguing.
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He's from Austria, but he's not an Austrian economist.
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There are elements of the Austrian school of thought, which are worthwhile.
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What is Austrian economics in this beautiful whirlwind picture that you painted?
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Austrian economics grew out of the rebellion against the classical school.
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So you had three intellects who mainly led the growth of the neoclassical school back
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It was William Jevons from England, Menger, who's from Austria, and Vollras from France.
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And Vollras tried to work out a set of equations to describe a multiproduct economy where there's
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numerous producers and numerous consumers.
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Everybody's both a producer and a consumer, and you try to work out a vector of prices
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that will give you equilibrium in all markets instantaneously.
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And that's his equilibrium orientation.
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Jevons is also one about equilibrium, but he worked more at the aggregate level.
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So there's a supply curve and a demand curve, and that's what Marshall ultimately codified.
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Menger was pretty much saying that, well, yes, there might be an equilibrium, but you're
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going to get disturbed from it all the time.
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You'll be above or below the equilibrium.
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And what came out of the Austrian school was an acceptance of that sort of vision that
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a market should reach equilibrium, but then said, well, you'll get disturbed away from
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And that's what gives you the vitality of capitalism, because an entrepreneur will see
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an arbitrage advantage and try to close that gap, and that will give you innovation over
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And Schumpeter went beyond that and saw the role of money and said that an entrepreneur
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is somebody with a great idea and no money.
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So to become a capitalist, you've got to get money.
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And therefore, you've got to approach the finance sector to get the money, and the finance
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sector creates money and also creates a debt for the entrepreneur.
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And so you get this financial engine turning up as well, and you will get movements away
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from equilibrium out of that.
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You won't necessarily head back towards the equilibrium.
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So Schumpeter has a rich vision of capitalism in which money plays an essential role, in
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which you will be disturbed from equilibrium all the time.
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And that is really, I think, a much closer vision of actual capitalism than anything
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by even the leading Austrians, Hayek, et cetera, et cetera, and certainly Rombardo, I find
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totally like reading a cardboard cutout version of The Wealth of Nations.
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I find his work trivial.
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But Schumpeter was rich, but with the same foundations as the Austrians.
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But because he talked about the importance of money that took him away from the Austrian
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vision, which is very much based on a hard money idea of capitalism, Schumpeter said
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you needed the capacity of the financial sector to create money to empower entrepreneurs.
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And that's a very important vision.
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So Schumpeter's argument is the deviation from equilibrium, that's where all the fun
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That's where all the magic happens.
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That's the magic of capitalism.
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And like the Austrians, because they focus on the deviation from equilibrium, they're
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better than their classicals, but they still have this belief in the, you'll reach equilibrium
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ultimately or you'll head back towards it, whereas they don't have an explanation of
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capitalism that gives you cycles apart from having the wrong rate of interest.
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So there's no role for an accumulation of debt over time.
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So what Schumpeter gave us was a vision of the creativity of capitalism being driven
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by entrepreneurs who are funded by money creation by the finance sector.
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And that's fundamentally the world in which we live.
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So there's also the kids these days are all into modern monetary theory, what's that
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Modern monetary theory is accounting.
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I want to summarize it bluntly.
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It's simply saying let's do the accounting because what money is, is a creature of double
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entry bookkeeping.
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What's double entry bookkeeping?
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This was invented back in the 1500s in Italy.
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I've forgotten the particular merchant who did it based on some Arabic ideas as well.
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But the thing is, if you want to keep track of your financial flows, then you divide all
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the financial claims on you.
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You divide into claims you have on somebody else, which are your assets, claims somebody
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else has on you, which are your liabilities, and the gap between the two is your equity.
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So you record every transaction twice on one row.
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So for example, if you and I do a financial transfer, you have a bank account, I have
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a bank account, your bank account will go down, mine goes up.
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And that's the sum of the operation is zero.
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But on the other hand, if I go to a bank and borrow money, then my account goes up, they
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put money in my deposit account, the bank's assets go up.
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And there's still the same sum applies, assets minus liabilities minus equity equals zero.
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Now that's simply saying money is an accounting, a creature of accounting.
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It's not a creature of a commodity.
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So if you think about how Austrians think about money, and how gold bugs think about
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money and Bitcoin enthusiasts, if there are any left, think about money, what they see
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is money is an object.
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And you and I can both have more gold, if we're both willing to go to this mine somewhere
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and dig a few holes and get a few specks of gold out.
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So there's no competition or no interaction between you and me if money is gold.
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And they think money should be an object, a commodity.
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But money fundamentally is not a commodity.
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It's a claim on somebody else.
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That's money's essence.
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So when you do it, you must use double entry bookkeeping to do it.
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And then when you do, you find all the answers that come out of thinking of money as a commodity
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So for example, and I've got Elon on this one.
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So I want to get this with Elon because I saw him making a comment about this a few
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weeks ago on Twitter.
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He said that it's wrong for the government, effectively it seems wrong for the government
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to always be in deficit.
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Now, when you look at it and say, well, how is money created?
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How does money come about when it's not a commodity like gold, which you dig up out
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of the ground, when it's actually social relations between people that create money?
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Well, money is the fundamentally the liabilities of the banking sector.
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If we make a transfer between us, your deposit account goes down, my deposit account goes
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Deposit exchange is on the liability side of the banking sector.
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But if we have a transaction with a bank, then if the bank lends us money, as its loans
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go up, its deposits go up, again, that same balance.
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So you've got to look and say, money therefore is fundamentally the liabilities of the banking
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So how do you create additional liabilities?
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You must have an operation which occurs both on the liability side and the asset side of
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the banking sector.
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So if you and I make a new transaction, no money is created.
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Existing money is redistributed.
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But if you go to a bank and take out a bank loan, then money is created by the bank loan.
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So the liabilities of the banking sector rise, the assets rise, they're balanced, but more
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liabilities of the banking sector means more money.
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So that's how private banks create money.
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And that's what I first started working on when I became an academic about 35 years ago,
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the actual dynamics of private money creation.
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But the government has the same sort of story.
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If the government runs a deficit, it spends more money on the individuals in the economy
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than it taxes them, which means their bank accounts increase.
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So a government deficit creates money for the private sector.
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So that's where money creation occurs from the government.
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So it puts more money into people's bank accounts by spending, by welfare payments than it takes
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So that's creating new money.
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And then on the other side on the bank, the money turns up in the reserve accounts of
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the banks, which are basically the private bank's bank accounts at the central bank.
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So rather than the asset of private money creation being loans, the asset of government
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money creation is reserves.
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It's a good thing.
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So you mentioned a bunch of stuff like private money creation with the liabilities in the
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banks and then how the government is doing, the reserves, blah, blah, blah.
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At the end of the day, there's a bunch of printers that are printing money.
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And then you also said something interesting, which is social relations between humans is
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what creates money.
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I think my mind was blown several times over the past minute.
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So it's difficult for me to reconstruct the pieces of my mind back together.
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But basic question, is money creation a good thing or a bad thing?
link |
Money creation is a good thing because money creation is what allows commerce to happen.
link |
Isn't there a conservation of...
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I had to have arguments with physicists over this and it took me a long time to answer
link |
So the sum total of all money is zero.
link |
It's the sum total of all assets and liabilities is zero.
link |
So if you imagine your assets minus your liabilities is your equity and your asset is somebody
link |
else's liability and your liability is somebody else's asset.
link |
When we're talking about financial assets, and this is another mind blowing thing that
link |
I've just recently solved myself.
link |
So the sum total of all financial assets and liabilities is zero.
link |
I'm sorry to interrupt you rudely.
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What are liabilities?
link |
Assets are your claims on somebody else.
link |
Give me an example of an asset.
link |
Do you have a mortgage for this house?
link |
Well, if you had a mortgage, that'd be your liability.
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That would be my liability.
link |
The mortgage with the bank's asset.
link |
If you add the two together, you get zero.
link |
So money is the liabilities side of the banking sector.
link |
The assets on the other side can be either created by the banking sector, which is where
link |
you get bank loans, or created by the government, where you get reserves.
link |
But money is the liabilities.
link |
If you think about protons and anti protons, in that sense, money is like the anti proton.
link |
It's the negative, the liability.
link |
But wait, wait, wait.
link |
The liability is the negative.
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I thought money is the positive.
link |
What is the liability for the banking sector is an asset for you and me.
link |
And assets includes money?
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If you have a bank account, you'd have a bank account, and you'd have some cash.
link |
Those are your assets.
link |
But the bank account is a liability of the banking sector, and the cash is a liability
link |
of the Federal Reserve.
link |
Well, money is the promise of a third party that we both accept to close our transaction.
link |
And that's a bank with a liability?
link |
One of the most important works I've ever read is a work by a wonderful, now unfortunately
link |
deceased, Italian economist called Augusto Graziani.
link |
And he's the most wonderful personality.
link |
Augusto, I met him on a few occasions, is one of the few human beings who can speak
link |
in perfectly formed paragraphs, okay, superbly eloquent.
link |
And what he did was write a paper called The Monetary Theory of Production.
link |
You can find it, download it on the web, it's pretty much open source now.
link |
And what he said is, what distinguishes a monetary economy from a barter economy?
link |
So he said, in a barter economy, what we do is, you know, I'll give you two of these for
link |
So we've got a relative price, there are two of us involved, and there are two commodities.
link |
So with money, money is a triangular transaction, okay?
link |
There is one commodity, I want to buy that can of drink off you, two people, and the
link |
price that's worked out ends up being in a transfer from the promises to pay the bank
link |
that the buyer has to the promises to pay the bank that the seller has.
link |
So if I, so what you have is a monetary transaction in a capitalist economy involves three agents,
link |
the buyer, the seller, and the bank.
link |
So the bank always has to be part of it.
link |
Well, the bank has to be part of it.
link |
When I hand you the money, you accept that as you've now got, rather than it's the bank
link |
promising to pay me something, it's now the bank promising to pay you something.
link |
And we exchange the promises of banks, and that's fundamentally money.
link |
So money is fundamentally a threesome, and everybody gets fucked.
link |
Is that a good way to put it?
link |
No, I'm just kidding.
link |
It leaves it, it leaves it for the guy to be like, oh no, I can use French in this conversation,
link |
That's not French, that's a different language, I'll explain it to you one day.
link |
You Australians will never understand.
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Okay, if I can return to, we'll jump around if it's okay.
link |
So you mentioned Karl Marx as one of the great intellects, economic thinkers ever.
link |
He might be number one.
link |
You study him quite a bit, you disagree with him quite a bit, but you still think he's
link |
a powerful thinker.
link |
So first of all, let's just explore the human.
link |
Why do you say so?
link |
What's interesting in that mind?
link |
In the way he saw the world, what are the insights that you find brilliant?
link |
Marx once described his major work as, towards a critical examination of everything existing.
link |
So he's a modest bastard.
link |
So he wanted to understand and criticize everything.
link |
And even, he wasn't trained directly by Hegel, but his teachers were Hegelian philosophers.
link |
And what Hegel developed was a concept called dialectics.
link |
And dialectics is the philosophy of change.
link |
And when most people hear the word dialectics, they come up with this unpronounceable trio
link |
of words called thesis, antithesis, synthesis.
link |
I can barely get the words out myself.
link |
And that actually is not Hegel at all.
link |
That's another German philosopher.
link |
Oh, I thought it was Kant.
link |
Well, I'm not sure.
link |
All Germans look the same to me.
link |
So, but if you look, there's a beautiful book called Marx and Contradiction.
link |
You want to find a great explanation for Marx's philosophy.
link |
I've forgotten the author.
link |
I think it's Wild, W I L D E, Marx and Contradiction.
link |
And he points out the actual origins of Marx's philosophy, but I didn't know that when I
link |
So I became exposed to Marx when I was a student at Sydney University.
link |
And we'd had a strike at the university over the teaching of philosophy.
link |
And what happened was the philosophy department had a lot of radical philosophers in it and
link |
a conservative chief philosopher.
link |
And the radicals wanted to have a course on what they called philosophical aspects of
link |
And the staff voted in favor of it.
link |
This is back in the days when university departments were democratic.
link |
The professor opposed it.
link |
He got it blocked at a high level.
link |
The staff lipfrogged over that, and then finally the vice chancellor blocked it.
link |
So that led to a strike over the teaching of philosophy at Sydney University, which
link |
at one stage, over half the students were on strike.
link |
Economics began out of that.
link |
Over teaching of a philosophy of feminism.
link |
God, it's good to be a student.
link |
That's such a different life to what we're living now.
link |
That's the academic milieu in which I developed all my ideas.
link |
And I had become a critic.
link |
I've gone from being a believer of mainstream economics when I was a first year student
link |
to disbelieving it halfway through first year.
link |
And I then spent a long time trying to change it, getting nowhere.
link |
And then this philosophy strike happened and we took it on in economics and we formed what's
link |
called the political economy movement and had a successful strike.
link |
We actually managed to pressure the university into establishing a department of political
link |
economy at Sydney University, as well as a department of economics.
link |
What was the foundational ideas?
link |
Were you resistant to the whole censorship of why can't you have a philosophy of anything
link |
Well, it was much more libertarian in the genuine sense of the word, period of time,
link |
at the end of the 60s, beginning of the 70s than the word libertarian has been corrupted
link |
But it really was about free thought.
link |
And you went to university to learn.
link |
It was about education.
link |
I remember having a fight with my father once where dad was angry about the marks I was
link |
getting for some of my courses.
link |
And he said, if you don't get a decent result, you won't get a decent job.
link |
And I said, I'm not here to get a job.
link |
I'm here to get an education.
link |
Now, the thing is, ultimately, it's been a pretty good job for me as well.
link |
This is in Sydney, by the way, and Sydney in summer is absolutely gorgeous.
link |
And what does a bunch of lefties decide to do during summer but read Karl Marx?
link |
Actually, inside the room of the philosophy department at the University of Sydney in
link |
the main quadrangle.
link |
There's sandstone all around us, and we have a bunch of about 20 or 30 of us reading our
link |
It was volume one capital.
link |
And I remember walking off to that meeting with one of my friends who's a law student.
link |
And this was a period of a huge construction boom in Sydney, so the whole skyline, which
link |
we could see from the campus, was full of what they call kangaroo cranes, which were
link |
an Australian invention, that are cranes that can be leapfrogged over each other to build
link |
So, here you are reading Karl Marx, looking at the mechanisms of capital.
link |
And I looked at those mechanisms, and I knew Marx argued that labor was the only source
link |
And he said machinery doesn't add value.
link |
So, the cranes are worthless.
link |
I'm looking at these cranes and thinking, I want a very good explanation by Marx as
link |
to why these cranes don't add value.
link |
So, reading through the first seven chapters of Capital, what you found was Marx applying
link |
And like the Fichte and stuff is bullshit.
link |
That is not how Marx thought at all.
link |
I was reading, trying to find the thesis and the synthesis, and it's not there at all in
link |
any of Marx's works.
link |
And I've read everything he's ever written on economics from 1844 to 1894, when his last
link |
books were published.
link |
There's not one word of mention of that.
link |
What he does talk about is foreground and background and tension.
link |
And his idea of a dialectic is that a unity will exist in society, and that unity can
link |
be individual, it can be a commodity, anything at all.
link |
The unity will be understood by that society.
link |
One particular aspect will be focused upon.
link |
So, if you think about the human being in capitalism, the focus on the human being as
link |
an object is their capacity to work.
link |
You're a worker, okay?
link |
It's put in the foreground.
link |
The fact that you're human and you want to play a guitar and go surfing and make love
link |
and all the other things that humans do is pushed into the background.
link |
There's a tension between the two of those.
link |
And that can transform that unity over time.
link |
And that's a beautiful dynamic vision of change.
link |
So dialectics is a philosophy of change.
link |
So synthesis, antithesis is what does every idea have a counter argument?
link |
There's a positive and negative and you bring them together somehow.
link |
And then Marx has this foreground, background, and tension.
link |
Foreground is all what we think of as economics and background is all the lovemaking we do
link |
That sort of thing.
link |
And why is there a tension?
link |
Because if you imagine the unity, like if you take a human in a, any preview, like
link |
if you go back to Cro Magnum days, when we're living in caves and we've got to go hunting
link |
and cook food and stuff like that, but there's no social hierarchy.
link |
Because we've become used to, so you don't get labored as a worker or a capitalist.
link |
You're just a human in that situation.
link |
Then you've got more an integrated view of who you are.
link |
And I think that's one of the appeals of a tribal, a genuine tribal culture that you
link |
get treated for the whole of who you are.
link |
You've certainly categorized you're male, you're female, you're young, you're old,
link |
you're a hunter, you're a tool maker, et cetera, et cetera.
link |
But you're treated as more an integrated object.
link |
When you get put in a complex society, like a capitalist society, then one side of you's
link |
emphasized and the others are deemphasized.
link |
So is it fair to say that the background is like our basic fundamental humanity and the
link |
foreground is the machine of capitalism?
link |
And when you look at it in terms of a human, but what Marx did is apply this to a commodity.
link |
So he said, what is the essential unity in a capitalist economy?
link |
And the essential unity is a commodity.
link |
The essential unit.
link |
The essential unity.
link |
Unity is an object in society.
link |
So he started from the point of view of trying to understand how exchange occurs.
link |
How do we set prices?
link |
And his starting vision was to say that a commodity is a unity in a capitalist economy.
link |
The part of the unity that we focus upon is the exchange value.
link |
A capitalist produces a commodity, not because of its qualitative characteristics, but because
link |
it'd be sold for a profit.
link |
So the foreground aspect of a commodity is its exchange value.
link |
The background aspect of it, it won't succeed as a commodity unless it has a use value.
link |
So the background is the utility thing.
link |
See, if you made something which didn't work, okay, then you might be able to sell it, but
link |
it has no utility.
link |
You can't make that into a commodity.
link |
A broken thing can't be sold.
link |
Does that have the subjective?
link |
Yeah, it has to have the subjective side as well as the objective.
link |
So the objective is what capitalists worry about.
link |
I'll give you my favorite counter example of that.
link |
I took a bunch of Australian journalists to China way back in the period when the Gang
link |
of Four was being on trial, and we did a tour of the Forbidden City in Beijing.
link |
And at that stage, all the artifacts of the royal family, the emperor, were actually in
link |
the building still.
link |
And we walked past one of them, and it was this gold, solid gold bar about this long,
link |
shaped like a fist, turned over like this.
link |
And on this side, there were rubies, emeralds, diamonds.
link |
You'd never seen gemstones.
link |
I mean, gems that big, okay?
link |
And one of the journalists asked me what I thought it was, and I said, oh, it's obvious.
link |
Jane is a backscratcher, ha, ha, ha.
link |
She caught up with me about 20 minutes later, said, I asked one of the guides, it is a backscratcher.
link |
So here's a backscratcher for the emperor made of solid gold with diamonds and rubies
link |
and emeralds during the scratching.
link |
Now, that's a commodity in a feudal society, okay?
link |
The cost doesn't matter.
link |
You want the most elaborate, beautiful thing because you are the emperor.
link |
So in a feudal society, the commodity, what's focused upon is the utility.
link |
And the cost of production when you're the emperor is immaterial.
link |
Capitalism reverses that.
link |
So the commodity in a capitalist economy is a plastic $2.00 scratchy you can get from
link |
And so the use value is necessary but irrelevant to forming the price.
link |
Now, that was a completely different vision of exchange in capitalism to what I found
link |
in the neoclassical theory because that says it's the marginal utility and the marginal
link |
cost of everything that determines the exchange ratio.
link |
And the crazy thing about that is not so much the marginal utility, but the argument in
link |
the neoclassical theory is that the price ratio, the price will, when there's an exchange
link |
going on, there's two person, two commodity exchange of two commodities between two people.
link |
The price will change until such time as the ratio of the marginal utilities is equal to
link |
the ratio of the marginal costs that's supposed to be the equilibrium.
link |
And Marx says that's bullshit.
link |
That's a previous society where you exchange stuff that you happen to have for stuff somebody
link |
else happened to have without any real production mechanism being involved.
link |
And he said that's like when you have two ancient tribes meeting for the very first
link |
time and one tribe can make something the other tribe can't make.
link |
And they will therefore, the price they were willing to pay will reflect how unique this
link |
other object is that this one tribe can make and the other can't.
link |
So for example, the story of Manhattan being sold for 40 glass beads, it's actually 40
link |
glass trading beads, I believe it is a true story.
link |
But the thing is the Indians couldn't make glass beads.
link |
So they valued the glass beads at the island of Manhattan, okay, which is a utility based
link |
And what Marx said, that's the very initial contact over time, even if you don't know
link |
Over time, you start to realize how much work goes involved to making what they're selling
link |
you versus what you're selling to them.
link |
And you start making stuff specifically for sale.
link |
So you know, Elon's not losing personal utility each time a Model 3 goes out the door.
link |
He might get utility out of the fact that he's created that vehicle, that concept and
link |
manufactures it and so on, but he's not losing utility each time a Model T Ford goes out
link |
the door, going back for the ancient commodity there.
link |
So the utility plays no role in setting price in Marx's model.
link |
Whereas it's essential in the neoclassical model.
link |
What's the difference between utility and marginal utility?
link |
What does the word marginal mean?
link |
And why is it such a problem?
link |
It turns marginal utility or utility itself has different meanings than the two schools
link |
If you take the classical school of thought, which when Marx comes from, utility is effectively
link |
So the utility of a chair is that you can sit in it, okay, not how comfortable it makes
link |
Okay, now if you think about the utility of the chairs, we're both sitting and they're
link |
identical from a classical point of view, we're both sitting.
link |
But from a neoclassical point of view, it's how comfortable it makes you feel.
link |
And that depends upon your subjective feelings of comfort.
link |
You might be far more comfortable in the identical chair that I'm sitting in than I am.
link |
And therefore, the comparison is difficult.
link |
And therefore, working out a ratio involves you've got a decline in your, each time you
link |
give away a chair in exchange for an iPhone, you have a fall in your utility, okay?
link |
And then therefore, you want a higher return because you're losing more utility each time.
link |
The more chairs you give away, the less utility you're getting from chairs.
link |
So there's a decline in your utility.
link |
That's your marginal utility.
link |
So it's including your subjective valuation in setting the price.
link |
And what Marx pointed out is this is a caricature of actual change in a capitalist economy because
link |
we have, in a capitalist economy, huge factories turning out huge quantities, specifically
link |
They've got no utility to the seller unless they're sold, okay?
link |
So it's a very different vision of how price is set.
link |
And Marx used that to explain where profit comes from, but he made a mistake.
link |
And his argument was that talking about a worker, as now your unity, this foreground
link |
background tension thing, the foreground is that you hire a worker for their cost of production.
link |
And the cost of production is a subsistence wage, okay?
link |
Their utility to the buyer is the fact that they can work in a factory.
link |
Now, it might take six hours, let's say, to make the means of subsistence.
link |
And that's the exchange value, and that's what the capitalist pays as a wage to the
link |
But they can work in the factory for 12 hours.
link |
That's the utility.
link |
12 minus 6 is 6 surplus of value hours, and that's where profit comes from.
link |
And that was Marx's argument.
link |
And I thought it was brilliant, but it also applied to machinery.
link |
Let's blink on that.
link |
You just want to define terms.
link |
Don't take that statement out of context, the internet, please.
link |
You said buyer, seller, worker in a factory, who's the seller, who's the buyer?
link |
Why is the worker the buyer?
link |
The worker is the commodity in this case.
link |
Because if you're going to make stuff in a factory, you've got to hire workers.
link |
And what Marx is saying, the buyer in that situation is a capitalist.
link |
So what does the buyer pay?
link |
He says he pays the exchange value.
link |
That's back to the commodity thing, because that's the starting point.
link |
He said the essential unity in a capitalist economy is the commodity.
link |
A commodity has two characteristics, exchange value and use value.
link |
Exchange value of a commodity in a capitalist economy will be its cost of production.
link |
The use value is what you do with it, okay, once you've purchased it.
link |
But labor is a commodity?
link |
In this case, when a worker is being hired for a job, yes.
link |
So the worker's labor has an exchange value and a use value as well?
link |
Use value of a worker's labor.
link |
Let me think about that.
link |
So the hours they put in is the use value.
link |
So what does the worker want in this?
link |
What are the motivations?
link |
Are we not considering the worker in this context as a human being?
link |
Well, you come in and that's actually, that's the next layer.
link |
What Marx gives us is like a layered cake, starting from a foundation of saying straight
link |
commodity exchange, and then saying, well, you're treating a worker as a commodity.
link |
Now a commodity is something like this, okay, that has, so far as I'm aware, no soul, okay?
link |
Not going to be complaining if I turn it upside down.
link |
So there's no soul there as a human, is both a commodity and a noncommodity.
link |
And therefore there'll be a tension in the person.
link |
I'm being treated as a commodity here.
link |
I'm being paid just enough to stay alive.
link |
I've got a wife and kids back at home.
link |
So that is another layer of thinking in Marx, and on that layer he then says, well, workers
link |
will therefore demand more than their value.
link |
So that's when you get like political.
link |
You get political and you get money coming above that and so on.
link |
But the basic idea starts from the commodity is the fundamental unity in capitalism.
link |
The important commodity in Marx's thinking was the worker, because that's where he said
link |
profit came from, okay?
link |
And then that explains the motivation of the capitalist, and that ultimately is the labor
link |
theory of value and Marx's arguments about how capitalism will come to an end.
link |
So first of all, what is the labor theory of value?
link |
And actually before that, what is value?
link |
Is that, this is like me asking what's happiness.
link |
Is there something interesting to say about trying to define value?
link |
You vary, and this is a huge problem in economics is arguments of what does value mean?
link |
And the neoclassicals came down as that it's subjective.
link |
Its value is whatever you get out of it, but it's your personal evaluation of something,
link |
your personal feelings.
link |
So they've got that very subjective idea of value, whereas the Marxists, being inheritors
link |
of classical school, talk in terms of objective value.
link |
So the value is the number of hours it takes to make something, or the effort.
link |
Value is the effort that goes into making something in the classical school.
link |
Well, that's just one measure of objective.
link |
Where do you fall?
link |
Where do you fall?
link |
Subjective versus objective spectrum of value.
link |
I think you have to have the capacity to move between one and the other in a structured
link |
The K model of value.
link |
Yeah, well, my base model is the objective, okay?
link |
But above that, as soon as you start talking, you said about the worker, for example, then
link |
you get involved in the subjectivity, because a worker will be angry, and justifiably so,
link |
about being treated as a commodity, because I'm not a commodity, I'm a human being, okay?
link |
And that's where Marx saw political organization coming from.
link |
And that's subjective now.
link |
And then when you get to money itself, Marx actually said, well, what's the value of money?
link |
Now if you use an objective theory of value, you would say, well, the value of money is
link |
its cost of production.
link |
What's the cost of producing a dollar?
link |
It's about two cents.
link |
So he said it can't be, the value of money cannot be its cost of production.
link |
Or the most value, I think if I remember the phrase properly, is value here as it must
link |
mean the, effectively, uncertain expectations or subjective valuation.
link |
Uncertain expectations or subjective valuation.
link |
Okay, but he's okay with that?
link |
He was okay with that, because he could move between different levels, because he had a
link |
structured foundation of this dialectical vision of foreground, background tension,
link |
commodity, having use value, exchange value, and a gap between the two when you're talking
link |
about machines, when you're buying stuff for production.
link |
And then at the next level, he could look at workers, worker organization, and say that's
link |
driven by being treated as a commodity when you're a noncommodity.
link |
So the basic labor theory of value that is described to Karl Marx is that value at the
link |
base layer fundamentally comes from the labor you put into something.
link |
And you say, well, there's some deep truth there, except he misses one fundamental point,
link |
which is machines can also bring value to the world.
link |
He was saying they don't, the only thing that matters is human labor, not labor.
link |
How do you measure what's the role of whatever value machines bring to the world?
link |
This is another intriguing history, because Marx, when he first started, had what you
link |
can call an exclusivist explanation for why labor created value.
link |
And that was to say that labor is the only commodity with both what he called commodity
link |
and commodity power.
link |
So you have labor and labor power.
link |
Labor is the, and I get fuzzy about this, I haven't read it for something like 30 years,
link |
but labor has both commodity and commodity power.
link |
The commodity is you can buy labor, which is the means of subsistence.
link |
Labor power is the capacity to work inside a factory.
link |
There's a difference between the two, therefore that difference will give rise to surplus.
link |
And there's no other commodity that has this essence of commodity and commodity power.
link |
So that was his exclusivist argument.
link |
In the middle of 1857, he was visited by a guy called Otto Brau in his home in Chelsea.
link |
And Otto returned to Marx a copy of Hegel's, I think it's called Phenomenology of Right,
link |
I haven't read it, but that's the book.
link |
And Marx was then at that stage reading through all the classical theorists again.
link |
And he was, suddenly he read Hegel again.
link |
And if you know Hunter S. Thompson, okay, okay.
link |
Who doesn't know Hunter S. Thompson?
link |
Somebody who hasn't had enough drugs, obviously.
link |
But Hunter S. Thompson.
link |
He comes to you in a dream after you take your first puff of...
link |
And of course, we've all...
link |
If you know your drugs well enough, you can tell, okay, he's stoned, okay, he's on cocaine,
link |
But suddenly, his writing style in the middle of a book called The Grundrisse completely
link |
He switched from weed to cocaine.
link |
He switched from Ricardo to Hegel, okay.
link |
And what in Ricardo, he had this exclusivist argument about labor, and suddenly Hegel is
link |
back talking in terms of dialectics, not actually using a word, but foreground and background
link |
That's where this use value, exchange value, attention thing came from, is rereading Hegel
link |
13 years after he stopped reading philosophy, because made in 44, he was reading just The
link |
So you're saying Karl Marx is human after all.
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I would love to have a beer with Karl.
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He's Mr. Marx to me.
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He'd be Karl to me, I'm afraid, after all these years.
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You've had quite a journey together.
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So that's where after Hegel, his interpretation of the dialectic comes in the form of background,
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foreground, and background.
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And then on page 267 of the Penguin edition of the Grundrisse.
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One and a half pages long footnote.
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It's pretty hard to forget.
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Because when I did this, when I first read Marx way, way back when I was...
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I tried to explain my explanation of Marx's use value, exchange value stuff to my colleagues
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in this philosophy discussion room at Sydney University during a beautiful summer that
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we were inside, concrete and sandstone walls discussing Marx.
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And I went to say, look, the use value, exchange value argument can be applied to a machine.
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What's the exchange value of a machine?
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It's cost of manufacturing it.
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What's its use value?
link |
Its capacity to produce goods for sale.
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No relation between the two, there'll be a gap, a machine can be a source of profit.
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Now, I said that and I got laughed at and I quite literally laughed at.
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So when I went back to university 13 years later to do my master's degree, I chose to
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read through and find in Marx where he first came across this insight.
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So my first master's thesis failed, by the way, and justifiably so.
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I didn't know the level of academic discourse necessary.
link |
I had an advisor who didn't understand what I was writing.
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He got me to write for his New Keynesian audience and it was a mess and it got failed.
link |
So I got rid of him.
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Did it get failed?
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It wasn't a good thesis.
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I didn't know the level.
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It was written for an audience my supervisor thought that I should be writing for, and
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And so I met another guy, Jeff Fishburne, as a lecturer at New South Wales University.
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And Jeff was open minded.
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He was not a conventional neoclassical thinker.
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And I realized I'd throw out the half that Bill had got me to do, focused just on Marx.
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And so I decided to read Marx in chronological sequence from his very first works of economics,
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which are called the Economic and Philosophical Manuscripts of 1844.
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And he wrote those in a garret in Paris after he'd been expelled from Prussia.
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And so he decided to read having been an expert on philosophy and regarded it as the towering
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intellect of Hegelian philosophy in Prussia, but driven out because he was a radical.
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He ended up running a newspaper or being writing for a newspaper, and he was reporting about
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the eviction of peasants from the forests, taking away their feudal rights.
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And so this is where his passion for economics and humanity came from.
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And he was a poet as well.
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I mean, he loved poetry to Jenny von Westhalen.
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His first published works were pretty much in poetry.
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He was a rouse about, he was a wild character.
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We'd probably fight like crazy, I imagine, if we met.
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I'm slightly, even though I can be, I can get involved in an argument like nobody's
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But I'm a bit more peaceful of personality.
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Oh, you think Marx is feistier than you?
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He was feisty, but feisty with, he could be arrogant.
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Like I've got an intellectual arrogance, I've come to accept that.
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But there's like a fundamental humility to you.
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You're saying Marx is like, has ego that's hard to control.
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A bit too big ego, yeah.
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I mean, I'm never going to meet him.
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Well, the beard says ego to me.
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The beard is huge, yeah.
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So this is interesting.
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So you went chronologically right through his works, the development of the human being
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through his works.
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And I was trying to find the point at which he discovered this use value exchange value
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And it occurs in a footnote on page 267 to 268 of the Penguin edition of the Guindrisa,
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which his notes he was taking literally not meant for publication, literally sitting at
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a stall inside the British Museum, I think, reading all the classical authors in chronological
link |
And then somebody throws Hegel at him, and suddenly he's talking in Hegelian terms.
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And he suddenly says, is not, because it's whole value issues, what is value?
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Is it exchange value, use value?
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How do they relate to each other?
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That's what he was thinking about.
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And he said, is not use value, which was left out of the classical school, a fundamental
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aspect of the commodity?
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Is there not a tension between the use value and exchange value?
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Just so we're clear in that context, use value is kind of the subjective thing, exchange
link |
value is the objective thing.
link |
And Marx was, found a way to integrate the two.
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He was focused on labor being the only thing that can generate both the use value and the
link |
If you look at the classical school, they focus on exchange value, objective.
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Look at the neoclassical, they focus upon use value, subjective, or they call it utility.
link |
So Marx, coming from the Ricardian tradition, basically dismissed the role of utility.
link |
And then when he reads Hegel, he's suddenly starting to think in terms of unities.
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And exchange value and use value is the unity of the commodity.
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And he thinks, well, I can't ignore use value.
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So rather than leaving it out completely, which is what Ricardo and Smith does, I've
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got to somehow bring it in.
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And this Hegelian insight occurs to him.
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And it's remarkable, I really recommend taking a look at the book, even just to look at that
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particular page, because what it would have been, as shown as a footnote, but it would
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have been him saying, oh, wow, and his asterisk, asterisk, is not use value, a fundamental
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aspect of the unity of a commodity.
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So in the notes, you see the discovery of an idea in the human mind, the integration
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And it's beautiful.
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And he actually writes, does this have significance in economics, question mark.
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And then he probably went home that night, and that idea changed him.
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Yeah, it changed him completely.
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And from that point on, his writing was completely different.
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But he still had this idea from the Ricardian days of saying that labor is the only source
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of value, using an exclusive argument to say there's something unique about labor that
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explains why it's a source of value.
link |
But suddenly, this insight occurs to him, and he thinks, I can get a positive derivation.
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I can use use value and exchange value and the fact they're not related to each other
link |
as a dialectical tension to explain surplus value.
link |
And that's what he does.
link |
So he goes from a negative explanation of where value comes from to a positive explanation
link |
on that page of the Guindarisa.
link |
He then triumphantly uses it to explain why labor is a source of value.
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You buy it for its exchange value.
link |
You use its use value.
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They're unrelated.
link |
The use value will be bigger.
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That's where profit comes from.
link |
Then he does exactly the same thing for machinery, about 30 pages on.
link |
He says it also has to be contemplated, which was not done before.
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This is wrote nice to himself, by the way.
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It's written really in a colloquial style, that the use value of a machine is significantly
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greater than its exchange value.
link |
He actually left out the word is.
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It's used to be a translation into English of the German, I'm sure.
link |
I haven't seen the original notes.
link |
I'd love to see them.
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But he says, he leaves out the word is.
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It also has to be contemplated that the use value is significantly greater than its exchange
link |
value, i.e. that the contribution of the machine to production exceeds its depreciation.
link |
That was an insight which undermined his explanation for revolution.
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Can you say that again?
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The cost of production exceeds its depreciation?
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Can you linger on that?
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Well, what Marx argued, and you read this in Capital, and I read this in Capital when
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I first saw the contradiction in his own thought.
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He said that no matter how useful a machine is, whether it took a hundred hours to make
link |
or cost 150 pounds, it cannot under any circumstances add more to production than 150 pounds, which
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in his old exclusivist logic he could justify, and which in his post 1857 argument is bullshit.
link |
Can you steel man his case?
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Can we go to the mind of Marx and thinking if a machine costs a hundred bucks, it can't
link |
be ever more, bring more value than a hundred bucks to the world?
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But that contradicts his previous logic, because what he said is commodities are the essential
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unity in capitalism.
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Capitalism focuses upon the exchange value.
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That pushes the use value into the background, and there's a tension between the two.
link |
What that means is the exchange value of a commodity sets its price.
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The use value is independent.
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He called them incommensurable.
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He literally used the word incommensurability between exchange value and a use value, whereas
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neoclassicals make them commensurable.
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So he's saying exchange value and use value incommensurable, and that normally means that
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exchange value is objective, like the number of hours it takes to make something.
link |
Use value is subjective, how comfortable the chair is, the fact that you can sit in a chair.
link |
So that's incommensurability, but when you apply it in production, the exchange value
link |
of something is objective.
link |
It's how many hours it takes to make a machine or how many hours it takes to make the means
link |
of subsistence for a worker.
link |
The use value is also objective.
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You're making commodities for sale, and the worker does six hours.
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Six hours of work will make the means of subsistence for the worker, but the worker will work a
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twelve hour day, and the six hours becomes a gap.
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Now that's incommensurability between use value and exchange value of labor, but when
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you look at what he said about no matter how long it takes to make a machine or how many
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pounds it costs, he's saying they're identical, and that's contradicting his own logic.
link |
Well, what's the use value of a machine?
link |
The fact that it can produce goods for sale, exactly the same as the worker.
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Now in my modern reinterpretation of Marx, which brings in my work on energy, I see both
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labor and machinery as a means to harness energy and produce useful work, and they can
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In fact, they do it together.
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It's a collective enterprise.
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Okay, so, and we'll go to that.
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So there's no fundamental difference from an exchange value and use value perspective
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between a human and a machine.
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And therefore, they're using the same logic that can both be a source of surplus, which
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is what Marx contradicted because his explanation for where socialism would come from is that
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only profit comes from, like profit comes only from labor.
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Over time, we'll add more machinery than labor that will mean a falling rate of profit and
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therefore a tendency towards socialism.
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And what he did in that insight in 1857 is contradict his own idea about what would lead
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to socialism, and he couldn't cope with it.
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Okay, what's the difference between Marxian economics and Marxist political ideology?
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The gap between the two, the overlap, the differences, what?
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The real foundation of Marx's political philosophy was the economic argument that there would
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be a tendency for the rate of profit to fall.
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And that tendency for the rate of profit to fall would lead to capitalists battening down
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on workers harder, paying them less than their subsistence, a revolt by workers against this,
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and then you would get socialism on the other side.
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So what he called the tendency for the rate of profit to fall played a critical role in
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his explanation for why socialism would have to come about.
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He was saying it would have to come about, or is it a good thing for it to come about?
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He had a should, but he was trying to say it must.
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So if you look at Marx in the history of radical thought, he was preceded by what were called
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utopian socialists.
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Saint Simon, even the Cadbury's company came out of utopian socialist, and they had an
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idea about a perfect society in the future where people were properly rewarded, were
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treated as human beings rather than cogs in a machine and all this sort of stuff.
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And they said socialism should come about because it treats humans better than capitalism
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Marx said, I can prove that socialism must come about.
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So he preferred, he had a utopian vision of a future society, but he thought he could
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prove that it had to come about.
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And the proof relied critically upon tendency for the rate of profit to fall, and that relied
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upon labor being the only source of profit.
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What was his utopian view?
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So this idea from each according to his ability to each according to his needs.
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Is that the utopian?
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I think it's utopian in the context of our modern world.
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It says that rather than being rewarded, like Jeff Bezos gets enormous fortune, you get
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what you need, not what you want, necessarily.
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All needs is fulfilled.
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It was a vision of utopia where you could be a fisherman in the morning, a poet in
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the afternoon, and a chef at night, this paraphrasing one of his phrases.
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So he did have a utopian vision of a future society, and he did think human creativity
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would be much, much greater under socialism than it was under capitalism.
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So let's explore in different ways where he was wrong.
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You're saying there's a fundamental flaw in the logic, but also if we can explore high
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level philosophical concepts of socialism too, like the dreams of a utopia.
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So first of all, what is socialism?
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That's another loaded term.
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Socialism particularly in America is a very loaded term.
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What Americans call socialist is a large amount of provision of services by the state, which
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is commonplace in Europe.
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It's still moderately commonplace in my own home country of Australia.
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And that Americans will call public education socialist.
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It's a total parody of the word.
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Strictly speaking, what socialism meant is the public ownership of the means of production,
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no private ownership of the means of production.
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What is the means of production?
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Machine factories.
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So all the goods that are produced in factories, no, the means of producing the goods is owned
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by a centralized entity.
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Centrally planned.
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This is what actually was done under Gold's plan under the Soviets.
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And even with the collective farms as well.
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You no longer own your land.
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The state owns the land.
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You worked on the land.
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And this was supposed to be a utopia.
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Now it didn't turn out to be one.
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And we'll talk about maybe your ideas of why it didn't turn out to be one.
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So the fascists did the same.
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So is this fascism also central?
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Fascism, so called national socialism.
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It's also a kind of socialism.
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So yeah, but there was no, it wasn't a public owner, there was public direction.
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So the state would tell factories what to do, but there's still a private profit.
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And a large part of why the Nazis succeeded was the extent to which they managed to coopt
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major manufacturers in Germany.
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So it's, you know.
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Direction versus ownership.
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A dictatorial, I mean, that's a very particular implementation.
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So you have to consider the full details of the implementation, but it's basically dictator
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And if you want to take a proper vision, then you have to say it's the ownership of the
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means of production by the state.
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Versus the ownership by private.
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That rules out the Nazi period.
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Use the word that, again, they're bastardizing as much as Americans do in the opposite direction.
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Well, what does ownership exactly mean?
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Well, it became incredibly complicated.
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And this is actually the best work on this is done by recently deceased Hungarian economist
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called Janos Kornai.
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And Kornai tried to explain why socialism failed.
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Because why did socialism fail in your view?
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In his view, in Janos's view, in your view.
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I think Janos is 100% correct.
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It's a brilliant piece of work, so I'm going to be really paraphrasing his view.
link |
And he imagined an ideal socialist society, and there wasn't a Stalin, there weren't
link |
purges, and you lived up to all the ideals that Marx had for socialism.
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So he said, but you do it in a context of an economy which is incredibly primitive,
link |
Because if you look at Marx's own vision of the revolution, it was going to happen
link |
The advanced economies would be first to go through the revolution.
link |
The socialist, the primitive economies would have to go through a capitalist transition.
link |
And this is the difference between the Mensheviks and the Bolsheviks.
link |
So the Mensheviks, when Hyman Minsky came out of the Menshevik family, the Mensheviks
link |
believed you had to go through a capitalist phase.
link |
Russia had to go through a capitalist period before it becomes socialist.
link |
The Bolsheviks believed they could get there in one go, bypass the capitalist phase, do
link |
the development under socialism rather than under capitalism.
link |
And this is what Yanis was actually analyzing.
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You start from a primitive feudal economy, very little industrialization, and you want
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to jump to an advanced industrial society from that foundation.
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So he said what you have then for is a whole range of industries, all of which need as
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much resources as you can get for them.
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So you want to develop agriculture, mining, industry, every little division of it.
link |
They all have legitimate demands on the resources of the country and the state.
link |
That means that all your resources are fully employed and are probably over employed.
link |
So you have a resource constraint in that society.
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The easiest way to cope with a resource constraint is to produce last year's commodity, not to
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innovate, not to make change.
link |
So what they will give you is as you start to add, you invest so you now have the beginnings
link |
of a steel industry, beginnings of a car industry, and so on, you start investing, but you continue
link |
producing the same product you made last year.
link |
And I have a perfect personal example of that, which I'll throw in now if you like a pretty
link |
heavy conversation.
link |
I know my first major girlfriend had a brother who wanted to get a motorbike, but he couldn't
link |
afford a Honda or a Kawasaki.
link |
At the time, they cost about $3,000 for a 650 cc Japanese motorbike.
link |
He found he could buy a Cossack for $650, $1 per cc.
link |
So I was there when he got this is in suburban Sylvania waters in Sydney.
link |
So this crate arrives with a Cossack motorbike inside it.
link |
So we take it apart, it's then got all these wooden palings, we have to pull off the wooden
link |
palings to open it up.
link |
Then there's oil soaked rag over this thing, which is tied on a wooden base.
link |
We take the oil soaked rag off and we stare in all its glory in a 1942 BMW.
link |
It was exactly the same as Steve McQueen in The Great Escape.
link |
So the Russians for 30 years were making the same bloody motorbike.
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It had a bicycle seat.
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And that's how they cope.
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They've just made the same damn machine every year.
link |
And he said, so that's the outcome.
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You actually want the best possible world.
link |
You're trying to build as fast as possible.
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You're paying workers as high wages as you possibly can.
link |
And that leads to a world where you don't innovate.
link |
But he said capitalism, on the other hand, pure capitalist economy, you're trying to
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pay workers as little as possible.
link |
You have competitive industries.
link |
You're trying to take demand away from your rivals.
link |
You have Kawasaki versus Honda versus BMW, et cetera, et cetera.
link |
The way you get demand away from your competitors is by innovating.
link |
So what you will get is cycles and booms and slumps, but you'll innovate and change over
link |
So what you find was this huge gap between socialist volume production with no innovation
link |
and capitalism with innovation.
link |
So that was the fundamental failing that Janos Korneis saw, so why did socialism not innovate?
link |
Because if you go back to this famous historical incident with Khrushchev in the United Nations,
link |
bangs Texophe Shewan, bangs the desk, says, we will bury you.
link |
He literally meant we're going to bury you in commodities.
link |
We're going to produce more output than you are.
link |
Because fundamentally, in the long term, to bury somebody in commodity production, you
link |
And there's also another remarkable Soviet engineer who was given the job of interpreting
link |
Marx's ideas of industrial sectors.
link |
So he had the commodity sphere, the industry sphere, sector one, sector two, sector three.
link |
Sector one producing consumer goods, sector two producing capital goods, sector three
link |
producing luxury goods for capitalists.
link |
And so he had a three sector model of the economy, and he was talking about the dynamics
link |
And what Feldman did was reinterpret this as an engineer would reinterpret it, which
link |
was brilliant work.
link |
So what he said was, you need to produce the means of production.
link |
If you want to grow quickly, you focus on producing the means of production rather than
link |
So you don't make cars, you make car factories.
link |
You make a few cars, but most of the effort goes into expanding how many factories you
link |
And what he did was do a mathematical model where you start off with very low levels of
link |
consumer good output, but then you would just go exponential.
link |
Now, I took a look at that back when I was doing my master's degree.
link |
And the training in mathematics, I took Feldman's equations and then looked at what was actually
link |
driving it was he was imagining correctly a huge pool of unemployed labor.
link |
If you go back to the earliest stages of Soviet industrialization back in 1917, post the Second
link |
World, post the First World War, you had all these unemployed workers, you had all these
link |
peasants you could take off the land and put into factories.
link |
So you had a huge supply of workers.
link |
What you had to do was build the factories.
link |
See building the factories, but at a certain point you exhaust the supply of lowly employed
link |
or unemployed labor.
link |
And so rather than having this exponential takeoff, you hit a ceiling and then you can
link |
only grow as fast as the population because you're not innovating.
link |
So that's what actually hit the Soviet system.
link |
And it's why they never buried the Western consumer goods.
link |
And instead why Western consumers looked in envy at the goods being purchased by their
link |
Western people and said, if that's exploitation, we want exploitation.
link |
So okay, there's a lot of interesting stuff to ask here, which is, so Marx's vision for
link |
the socialist utopia is you have to go through capitalism.
link |
The Mensheviks were true to Marx's original idea.
link |
So is there a case to be made that in the long arc of human history on like human civilization
link |
on earth that we're going to live out Marx's vision for utopia, which is like, will we
link |
run into a wall with capitalism?
link |
I think we are running into a wall with capitalism.
link |
In fact, I think we've already gone through the wall and we haven't yet realized we've
link |
smashed our skulls.
link |
But on the other side, we're bleeding and everything like that.
link |
Does Marx have any insights on what the other side of capitalism, what is beyond capitalism?
link |
I think that beautiful phrase of from each according to his ability to each according
link |
to his needs describes what we should end up with.
link |
And I think that's actually, if I think about, you know, I'm an Elon Musk fan.
link |
That's what I think is partially going to be the nature of society if we build one that
link |
functions on Mars.
link |
Because and I've actually seen the interview with the Italian who's involved in designing
link |
what the future colony will look like.
link |
He was actually asked this question, can there be enormous inequality in Martian civilization?
link |
The guy said, absolutely not.
link |
Because the resources, again, resource constraint applies.
link |
You simply can't give somebody underground bunker 100 times the size of somebody else's
link |
100 underground bunker.
link |
Because the scarcity of resources imposes a need for equality overall.
link |
That's interesting.
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I mean, the scarcity of resources, wait, but I feel like that's a contradiction.
link |
Are you thinking neoclassical about scarcity?
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I'm barely thinking at all.
link |
So wait, I thought scarcity, the best way to build on top of scarcity is a capitalist
link |
No, this is where, again, our vision of what scarcity is, is wrong.
link |
Because and Ricardo said this, but it's actually better than Marx.
link |
Because Ricardo said, there are some products whose value is determined entirely by their
link |
Paintings, rare wines, et cetera, et cetera, they are things you cannot reproduce in a
link |
He said, the essence of capitalism is what you can make in a factory.
link |
And therefore, for these unique objects, these rare objects, Picasso painting a beautiful
link |
bottle of wine, et cetera, et cetera, then the utility, it can't be reproduced easily.
link |
So its price will be determined by subjective valuation.
link |
He said, what we're talking about in capitalism is the stuff you can make en masse.
link |
And that is the true focus of the capitalist economy.
link |
And that is not about scarcity.
link |
That is about, the only scarcity applies when you don't have the resources to make them
link |
anymore or you can't use the energy involved because you'll damage the biosphere too much,
link |
which we've already done.
link |
But fundamentally, the scarcity that neoclassicals have been able to think about and Austrians
link |
think about as well is nonreproducible.
link |
But the essence of capitalism is the commodity, the backscratcher, the two buck backscratcher,
link |
anybody can, you know, the cheapest chips to make, and that's why it can make a profit
link |
Not the elaborate gold thing with diamonds and rubies that only the king gets.
link |
So we think our vision of scarcity has been perverted by neoclassicals analyzing the exception
link |
to capitalism and calling it capitalism.
link |
So, you know, let's put Mars aside because I think there's a lot of strange factors that
link |
have to do with a whole nother planet, civilization, that we don't quite understand.
link |
Think how economics works with different geographic locations, one of which have new challenges,
link |
which is what essentially this is.
link |
I don't know if you can apply the same economic theory.
link |
No, I'm saying your question, I think we'll be forced into that ultimately by having to
link |
make a compromise with the ecology.
link |
And we've been ruthless about the ecology of this planet, and we're going to pay the
link |
So if you have a planet where you can't be ruthless, okay, you have to mind it as carefully
link |
as possible, then that utopian might be imposed upon you for the needs for survival on that
link |
Back here, Marx's utopia was still the one that ignored the ecology.
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And I think if I have a vision of a utopia in future, it's got bugger all to do about
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what humans get out of it.
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It's what humans respect.
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They have to respect life.
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So I see that as a one eyed utopia, a utopia for a single species, as if it can exist on
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its own, which we should know it can't.
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Quick bathroom break?
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Yeah, that would be great.
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We took a little bit of a break and now we're back.
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We needed to take a break because my brain broke and I'm piecing it back together.
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You mentioned ecology and life and the value of all of that.
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We'll return to it if we can.
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But first, we said why this kind of, this idea of why socialism failed, can we linger
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on this a little bit longer in how did the ideas of Karl Marx lead to Stalinism?
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So this particular implementation, is there something fundamental to these ideas that
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leads to a dictator and that leads to atrocities?
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There's something about the mechanism of the bureaucracy that's built that leads to a human
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being that's able to attain, integrate absolute power and then start abusing that power?
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All that kind of stuff.
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Like some of the history of the 20th century, is that inextricably connected to the ideas
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I think to some extent it is, but I'm going to also say that if it hadn't been for the
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Bolsheviks interpreting Marx and saying we can reach socialism without going through
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capitalism, then it might not have happened.
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So if you look at the, like the Mensheviks were a rival political group in Russia and
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that's where Hyman Minsky, who's a huge inspiration for me.
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So he's an economist who was maybe, can we take a little attention, who was Hyman Minsky?
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Hyman Minsky was the person who developed an analysis of capitalism based on financial
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And he was actually the PhD student of Joseph Schumpeter and an Austrian economist as well
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whose name I've forgotten temporarily.
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And he asked him, his parents were both refugees from Russia during the Stalinist period because
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the Mensheviks were being wiped out in Russia, just like any other opponents to the Bolsheviks
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were being eliminated.
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So I think his parents met in Chicago, still remain socialist, still remain politically
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active, and he was educated in a family that was just imbued with Marx as his vision.
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He ended up fighting in the Second World War on the American side, coming back to America
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and studying mathematics and then also doing an economics degree leading to a PhD.
link |
And the question he posed for himself is what causes Great Depressions?
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And he put it beautifully, he said, can it happen again, it being the Great Depression?
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And if it can't happen, then what has changed between the society before the First and Second
link |
World War and after that makes a depression impossible?
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What's the answer to those two questions?
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Can it happen again?
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His answer was yes, it can happen again, but what has prevented it happening by the time
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he started writing about it, which was the late 50s to the mid 80s, late 80s.
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We met once, but only once.
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No, he gave a seminar at New South Uni and he's a bit of an obstreperous bastard.
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It means argumentative and likely to dismiss you.
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So like a good mate of mine was the guy who brought him out to Australia, a guy called
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We're still good mates.
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I love your language and your accent.
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Actually, there's a really good TikTok I saw earlier today with an Aboriginal guy saying
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he loves the Australian language because it's absolutely ironic.
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You ask an Australian a question and he'll give you an answer, which is the opposite
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of what he means, and you've got to work out the rest for yourself.
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So he goes up to another Aboriginal mate and says, G'day, mate.
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He says, how are you?
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What have you been doing recently?
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When are we going?
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Oh, not too far away?
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And he's a beautiful, beautiful rendition.
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Yeah, that's the cool thing about the internet culture.
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They appreciate that ironic side.
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Like for example, the best compliment you can give as an Aboriginal to somebody else
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That's a compliment.
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I've got another mate of mine and this comes to the Australian language.
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If I call you a bastard, that's a compliment.
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Depending on how I insinuate the word bastard.
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And there's something, unfortunately, there's something about the British accent that makes
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people sound maybe brilliant, maybe sophisticated, wise.
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But actually pompous.
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No, that's unfortunately the downside of that is you can sound pompous.
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There's something about the Australian accent that you just can't sound brilliant.
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You sound like you're having a lot of fun.
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There's all that good stuff.
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But you just can't be like Karl Marx in an Australian accent would just not come off.
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That is a very good point.
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He would not be able to pull off the beard.
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That's like, yeah.
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I mean, I just, yeah.
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It's fascinating that the accent determines something about the person.
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Maybe it's the chicken and the egg too.
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It drives the way of the discourse.
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Obviously there's a lot of brilliance.
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There's a lot of brilliance in your work, but it sounds like you're always having fun.
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And look, this, Pat Poncho has got a lot of Australian mates here.
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He spent, what about, how long in Australia?
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And he's got all these mates here who play Aussie rules football in Austin.
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You should join them one day.
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It's actually, it's a very creative sport.
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It's much more fun.
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It's different than rugby?
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Rugby is hopeless.
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Rugby is two morons smashing their bodies against each other.
link |
We did not mean to offend the rugby fans in the audience.
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What's, so it's too simplistic.
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It's too simplistic.
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It's, I mean, there's skill in it.
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I've seen some really skillful rugby union and rugby league players in my day.
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But it, fundamentally, if you hit somebody hard enough, they go down.
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Whereas in Aussie rules, it's about catching the ball and then kicking the ball and pass.
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More skill, less pass.
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And it's, and the bodies of the athletes, I can actually get off and measure what a sport
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is like by the bodies it creates.
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And you get these incredibly elegant lithe muscular forms out of Aussie rules.
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Such beautiful words you have in your vocabulary, lithe, I don't even know.
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But I'll assume you know what it means and maybe somebody in the audience.
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So, all right, fine, fine.
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We should also mention that you, in your youth, you know, like last year, have had Olympic
link |
weightlifting as part of your life.
link |
And like you said, tennis.
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I also played tennis for many, many, many, many years.
link |
It's a fascinating game.
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It's a wonderful game.
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That's my favorite game.
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Karl Marx and Stalin.
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So how do we get onto Aussie football in Australia and the accent?
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I'm not really sure you talked about the way I said something about Karl Marx and with
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Anyway, we got there.
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We got there and now we return.
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It's not the destination.
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I think Marx, the failure of socialism with Janos Kornei captured beautifully.
link |
This idea already called demand constrained versus resource constrained economies.
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And capitalism is demand constrained.
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And this is, again, where neoclassical theory is completely wrong, empirically completely
link |
So the neoclassicals have a vision of capitalism being resource constrained, and it's about
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maximizing your usage of resources subject to constraints.
link |
And as Kornei said, that's really what happened to socialism.
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What happens under capitalism is that you have 15, 20 companies producing automobiles.
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They are all trying to capture as much of the market as they can.
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If you add up their marketing plans, you're going to get 120, 130% of the actual market.
link |
So they're all going to have excess capacity.
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When you build a factory, you're building it with a plan for it to exist for five, 10,
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You have to have excess capacity in the factory.
link |
So that means that capitalism has far greater productive capacity than it actually uses.
link |
And then the way that you manage to get demand into your factories to innovate and produce
link |
something nobody else does, or you're producing in volume and when somebody produces like
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a bung tire, comes out of Firestone, then Goodyear is ready to expand its production
link |
and take advantage of that.
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So that's the actual nature of competition in capitalism.
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And that means that we get a cornucopia of goods, even if we're lowly workers.
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The variety of goods in capitalism is overwhelming, and that just doesn't happen in socialism.
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You get your 1942 Cossack as your motorbike, that's it.
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When you put your money down to buy a refrigerator, it'll arrive in 10 years because the factory's
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already fully constrained.
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So all these resource constraints mean that people aren't happy under socialism.
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And if you've got a whole bunch of people that aren't happy, then the best way to control
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them is to suppress them.
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So I think in that sense, ultimately, yes, it does lead to something like Stalinism.
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So it's easier to give happy people freedom.
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Yeah, I mean, happy people get pretty silly outside.
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I'm not particularly, the extent to which Americans overuse and distort the word freedom
link |
All of these words can be distorted, but they all, at the core, have some fundamental power
link |
and beauty, and then we just distort on the surface for the fun of it, just to start battles
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on Twitter and so on.
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But what citizens of the Soviet world didn't feel was freedom.
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Not just in, first of all, it wasn't freedom to buy commodities.
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The commodities that were supposed to be on the shops weren't there.
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The volume couldn't be produced.
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And what you then got out of that as well was the classic Soviet joke, they pretend
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to pay us and we pretend to work.
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Yeah, so you're not motivated.
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Oh, look, I went to Cuba about eight years ago, invited to give a talk there.
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And staying in a hotel itself, the hotel's a story.
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There was one day my meetings were canceled, so I thought I might go down to the beach.
link |
And in the hotel, they had a wing, which is the tourist office, and there were three women
link |
working inside the office.
link |
So I thought I'd just go up and ask them, you know, how do I get to the beach?
link |
And one of them says to me, and I stood there, just stood in the room, waiting to see if
link |
they'd make eye contact with me.
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Three women, nobody else in the place.
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None of them looked at me.
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So I finally went up to one of them and said, I want to go to the beach and do some surfing
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She said, I can get a taxi outside.
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Now, fundamentally, she was saying, well, I'm being paid shit money here, I don't want
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to work, I'm not going to do anything apart from sit here and qualify for my time.
link |
And as much as there are reasons the Cubans have suffered from American embargoes and
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all that sort of stuff, you've still got that fundamental shortage economy that Cornet spoke
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about coming out of the structure of central ownership and central control of distribution
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It breaks my heart because I think some of the effects of that persist throughout time.
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It become part of the culture too.
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It's very interesting.
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Well, from the Western perspective.
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Well, even from the people living through it.
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I mean, I had enough conversation with Cubans, you know, meeting them on the street, hopping
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There was one guy I was talking to, he was an industrial chemist and he'd got a bit of
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money being a cab driver because he could make money out of taking foreign tourists
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from the airport to the city.
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By the way, this episode is brought to you by delicious Coca Cola.
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That's why I didn't want to have it on camera, but anyway.
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No, maybe they'll actually sponsor.
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You want to make sure you rotate the label to show, this is capitalism.
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What are we talking about here?
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Even though it's red.
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Red and black is actually anarchist.
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I should tell you, I don't know if you know who Michael Malice is.
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He's an anarchist and he lives next door.
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Now, I've lost touch with anarchist philosophy.
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I actually used to read, you know, Kropotkin and Bakunin and so on, and I enjoyed their
link |
philosophy and then I helped organize an anarchist conference once, and that was the
link |
biggest antidote possible to being an anarchist.
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That sounds like an entry point to a joke, helped to organize an anarchist party.
link |
I mean, we literally spent three days arguing over whether there should or should not be
link |
a chairperson for conversations.
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Well, that may be that.
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Monty Python's Life of Brian lived out live.
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Look at the bright side of life.
link |
So part of that explains why, for example, even to this day, in some of those parts of
link |
the world, entrepreneurship does not flourish.
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There's not a spirit in the people to start businesses, to launch new endeavors and all
link |
those kinds of things.
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We're just taking all kinds of strange little strolls, but how do you explain the mechanisms
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of China today, where there's quite a bit of sort of flourishing of businesses and so
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It's a very peculiar kind of entrepreneurship.
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They got away from central control, but they still manage central political control, but
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diversified economic control.
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So you could, it is possible to draw a line between politics and economics.
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It is possible, and I think in some ways, China's more likely to survive as a society
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going into the future than Western capitalist societies are.
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So it's like, if we do the Karl Marx, the foreground and the background, you can centralize
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the politics, the humanity, the subjective stuff, and then distribute the objective stuff.
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You've got to have the goods, and the big change from Mao Zedong Xiaoping was the characterizing
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that little saying that I don't care whether you have a black cat or a white cat, so long
link |
as it catches mice.
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And there was a level of pragmatism to the Deng Xiaoping revolution over Mao and Madame
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Mao in particular, and that was manifest in the desire to get as much of those Western
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goods as possible.
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And I was actually in China in 1981, took a group of journalists there, as I mentioned
link |
earlier, for a tour, and we ended up going to the Sichuan Free Trade Zone, and that gave
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us an idea of why China was going to succeed, because they had a rule that you couldn't
link |
just come in and exploit the cheap wages, you had to also have a Chinese partner, and
link |
within five years, the Chinese partner had to earn 50 percent of the business, which
link |
And that gives you an idea of the reduction in wages these American corporations were
link |
They'd shut down the factory in what's now the Rust Belt of America that might be paying
link |
somebody there at that time maybe $2 an hour, and they come across to China and they're
link |
paying two cents an hour.
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So the enormous amount of wages that they dropped, they were willing to forego half
link |
the profits and the ownership of the firm.
link |
So what the Chinese were doing wasn't just exploiting their labor force, it was also
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building a capitalist class, and that meant that you had this, that's where all the Chinese
link |
corporations have come from.
link |
So they were building a capitalist system within a socialist command political system,
link |
and that worked, and it's still working.
link |
So there was the centralization of the economic stuff, the Gosplan approach.
link |
I think that was where the Soviets failed.
link |
And what the Chinese realized after what they went through under Mao was you have to have
link |
that capitalist period, but they weren't going to abandon the communist control politically
link |
of the country at the same time.
link |
And that worked out brilliantly, and there's a huge amount of innovation taking place in
link |
And they also will do gigantic infrastructure projects, breathtaking planning going into
link |
You would have seen videos of building a skyscraper in a day.
link |
The planning that has to go into that, the pre preparation that's necessary is enormous.
link |
So there's a real respect for engineers as well in that society, which does not apply
link |
What do you think about, from the Western perspective, the destructive effects of centralized
link |
control of the populace, of the ideas of the discourse, of the censorship and the surveillance,
link |
all those kinds of things?
link |
It's a bit like we were talking about Russia to some extent beforehand, with centralized
link |
versus decentralized corruption.
link |
And when you had the centralized political stuff, it means you know you can't criticize
link |
But so long as you don't criticize, you can do what you like.
link |
And how destructive is that to the human spirit?
link |
From the American perspective, that feels destructive.
link |
I've been to China quite a few times over my life, a lot in the last, not for about
link |
four years, but for the six years before that, a few visits.
link |
And staying in second and third and fourth tier cities, so populations of only four million
link |
people, which is quite small on Chinese standards.
link |
And I had a lot of happy people that I was interacting with.
link |
My girlfriend at the time, her social circle.
link |
And you can feel when people can't discuss a political issue.
link |
For example, in Thailand, you can't discuss the king.
link |
They still have, you know, les majestes laws, so you can actually be jailed for discussing
link |
And you can feel that to some extent, and it is a political issue in Thailand now.
link |
But in China, what I got back from most people, it was a bit like a benevolent big brother.
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But then when you get things out like the lockdown, which was applied recently, then
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you get the failings of the Soviet system is still there in the Chinese system.
link |
In that, the easiest way to avoid criticism as an underling carrying out instructions
link |
of people above you is to carry those instructions out to the letter beyond what the people actually
link |
want you to do at the top.
link |
So we had a classic illustration of that when I took these journalists.
link |
There was a news report saying that China's output of light industry had grown by 17 percent
link |
in the previous year, but heavy industry had fallen by 7 percent.
link |
We just don't compute.
link |
So we kept on asking, why did this happen?
link |
Every time we asked a question, this is back in 1981, the answer would be the initial answer,
link |
we followed the directive of the Central Committee of the Communist Party of China.
link |
We finally got a guy to elaborate and say what that was.
link |
He said, well, the Central Committee sent out a directive to promote light industry.
link |
So what did you do?
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Quote unquote, we stripped heavy industry factories and turned them into light industry.
link |
Now that's destructive of everything.
link |
And that's the overlay that you've still got sitting over the top of China.
link |
But a huge part of the industrialization was simply saying, produce whatever you can, make
link |
goods, market them, sell them.
link |
And you get that innovative component of humanity is respected and the goods turn up and everybody's
link |
Food in Russia is far better than food in America.
link |
So in terms of material satisfaction and freedom, for example, enjoy dancing.
link |
We went to, I think, somewhere in Shanghai, and there's this line of people involving
link |
a woman who would have been close to her 90s and a kid who was about six or four.
link |
Partying it up in the open air and doing this Chinese collective dance.
link |
You have to be really careful about that kind of thing.
link |
So in terms of measuring the flourishing of a people by looking at their happiness, I
link |
have so many thoughts on this, but I'm imagining North Korea.
link |
And if you talk to people in North Korea, I think they would say they're happy.
link |
Well, let me try to complete this argument, not an argument, but a sort of challenge to
link |
your thought, which especially in the bigger cities, because they don't know the alternative.
link |
So what else do you need?
link |
There's enough food on the table.
link |
We have a leader that loves us and we love him.
link |
Our hearts are full of love.
link |
Our table is full of food, they would say, because it's enough food.
link |
What else do you want from life?
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No, I think, okay, like that's...
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So let me sort of chat, because like...
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That's an alternative.
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I mean, I've spent time in Romania.
link |
So let me sort of complete that, sorry.
link |
Because I'm taking the most challenging aspect.
link |
When there's centralized control of information, that you don't know the alternative, that
link |
you don't know how green the grass is on the other side.
link |
And so your idea of happiness might be very constrained.
link |
So you could also argue that is happiness, if you don't know.
link |
Ignorance is bliss.
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Ignorance is bliss.
link |
And then so is happiness really the correct measure for the flourishing?
link |
But I mean, there's actually a classic book, a movie as well, called Mao's Last Dancer.
link |
And that is a young man explaining his progression from being a dancer in the Cultural Revolution
link |
through to a leading dancer in American and ultimately Australian ballet.
link |
And he explicitly says at one point that he's told that the Chinese people have the highest
link |
standard of living in the world.
link |
And the reaction of him and his kids, like his fellow six year olds, is, God, it must
link |
be miserable elsewhere in the world then.
link |
There's no such thing as that complete ignorance.
link |
But what I'm talking about is experiences in China say back in about 2016, 2014, there
link |
was a feeling of freedom within limits that you didn't want to transgress because the
link |
system was working.
link |
So if you like, it's kind of like marriage, it's kind of like marriage, hey, that's a
link |
You can have fun within those limits.
link |
And people did have fun and they did feel free, but they didn't want to go and get divorced.
link |
But that dilemma was accommodated because the boundaries, until you started hitting
link |
restrictions were wide.
link |
And like when you look at it, I mean, look at the, again, with the Chinese Communist
link |
Party, the administrators of that are often highly qualified engineers who can then make
link |
intelligent decisions about what should be done as infrastructure and so on.
link |
And you go to China and you've got incredible high speed rail, fantastic infrastructure,
link |
internet, telecommunications and so on, rapidly evolving solar.
link |
There's a range of things there that are so well done that reflect the fact that the selection
link |
process that gives you your political elite is partially focused upon sucking up, et cetera,
link |
It's still there, but it's also focused upon your skill levels.
link |
And you get people making decisions who damn well know what they're talking about.
link |
Like Australia's got a classic example, the internet in Australia sucks.
link |
The reason it sucks is that the Labour Party, which is our version of the Democrats, was
link |
in control during the global financial crisis.
link |
And as part of that, they wanted to bring in optical fiber connections to the house.
link |
So you'd have an optical fiber backbone and an optical fiber right to your T100 output
link |
And the Liberal Party fought that and said, that's going to be too expensive, it'd take
link |
We're going to do cable to the node and then have a copper network linking from a node
link |
on a street to all the houses in the street.
link |
It's going to be cheaper and faster, have it more soon, blah, blah, blah.
link |
It was a total technical fuck up.
link |
And Australia now has internet that's about 50 or 60 years fast in the world.
link |
It's dreadful for the internet.
link |
Two political figures made that decision, Tony Abbott and Malcolm Turnbull, rivals and
link |
leaders of the Conservative Party we call Liberal over there.
link |
Now that was shitty decisions that wouldn't happen in a country like China because you've
link |
got actual engineers making the decisions.
link |
They say you can't get decent speed if you link optical fiber to copper.
link |
So what you get is even though you can't make the decisions yourself, a vast majority of
link |
the decisions are made intelligently and therefore you expect it.
link |
It's interesting, but don't you worry about the corrupting aspects of power?
link |
That you start, you know, you have engineers making intelligent decisions, but at which
link |
point does the fat king start saying, oh, these engineers are annoying.
link |
I have good internet.
link |
I don't understand.
link |
Bring me the grapes.
link |
Well, that's, you know, you get your colligular effects.
link |
Like Z from what I've seen has got elements of that.
link |
So friends of mine who are Caucasians can get away with it.
link |
They have a game that they play at conferences, scoring how often people use with Z's name
link |
in a presentation and giving extra points for the number of photographs of Z that turn
link |
up in the whole thing.
link |
So you've got this sort of personality cult coming along as well.
link |
But at the same time, the planning for the infrastructure that's being built, the social
link |
services, the general freedom that exists is so great.
link |
And like any Chinese person alive today, like somebody who's Chinese my age, would have
link |
been an adult under the early period of, the late period of Mao.
link |
And God almighty, the change, the improvement they've seen in their lives, that's what they
link |
But it's the, if you just look at the history of the 20th century, your intuition would
link |
say that some of the mechanisms we see in China now will get you into trouble in the
link |
So it seems to be working really well in many ways in terms of improving the quality of
link |
life of the average citizen in China, but you start to get worried about how does this
link |
But at the same time, maybe, I mean, often people will say, you know, what's your vision
link |
And what they mean is what vision for the future do you have that I'm going to like?
link |
What if you have a vision of the future that you don't like?
link |
I mean, that's the ecological crisis I think we're walking blindfolded into.
link |
Well, that's right.
link |
That part of the picture we'll have to talk about how fundamental of a problem that is.
link |
But what does that have to do with the future of China?
link |
What it has to do is that if you wish to impose dramatic controls on the consumption of the
link |
rich, which would be necessary to reduce our consumption burden so that we can get closer
link |
to the ecological envelope we've destroyed already, then you're going to make more likely
link |
successful doing that with a centralized system where people accept centralized political
link |
Then you're in a country where it's all diversified and you scream freedom between every point
link |
in a tennis match.
link |
And I've literally seen that when I was in Philadelphia some time back.
link |
So the ideology that accepts a collectivist attitude may be more successful in controlling
link |
our reducing human consumption levels.
link |
Because when we talk about democracy, I mean, who's voting here?
link |
How many horses and elephants and birds get to vote?
link |
You don't see them around here.
link |
It's a very human centric vision we have of this planet.
link |
And we're going to pay a price for that.
link |
So you're saying to deal with global catastrophic events, centralized planning might be...
link |
I think will work better, period.
link |
But there is some centralized stuff in the United States, for example.
link |
Oh, your military.
link |
Now there's that feisty Australian.
link |
So besides the military, that's the ideal of the federal government in the United States
link |
is that there is some centralized infrastructure building.
link |
There's some big...
link |
There's not enough of it, yeah.
link |
The question is, when you deal with greater and greater global catastrophic events, like
link |
the pandemic that we're just living through, that the government would be able to step
link |
up and impose enough centralized planning to allow us to deal, sort of enable, empower
link |
the citizenry to deal with these catastrophic events.
link |
In the case of the pandemic, a lot of people argue that the, first of all, the world, but
link |
also the United States failed to effectively deal with the pandemic.
link |
On the medical side, on the social side, on the financial side, the supply chain, everything.
link |
In terms of communication, in terms of inspiring the populace with the power of science and
link |
But the ideal is that we'd be able to succeed.
link |
You would have to have a small, efficient, the ideal, the American ideal is you have
link |
a small, efficient government that's able to take on tasks precisely like the pandemic.
link |
But the thing is, maybe it shouldn't have been as small as it was.
link |
I mean, my favorite instance of that actually involves the UK because the whole neoliberal
link |
approach is about small, efficient government.
link |
Well, small, efficient government works when you face small, efficient challenges.
link |
When you face something systemic rather than episodic, then it's going to break down.
link |
And like this is, I mean, one of the things I greatly respect is Taleb's idea of antifragile.
link |
You want a society which is antifragile, not easily broken, whereas neoliberalism has pushed
link |
us towards this vision of efficiency, but it's easily snapped.
link |
Like in the UK, I've forgotten the government minister involved, but she was, she asked
link |
her expert committee, how many, this is before, well before the pandemic, how many masks should
link |
we have on hand in case of a pandemic?
link |
And the answer from the experts was about a billion.
link |
That's 50 masks, that's 20 masks per person.
link |
Oh, that's too many.
link |
Let's just make 50 million masks.
link |
That's one mask per person.
link |
It was gone in a matter of a day.
link |
And therefore that's why they told us, well, masks don't work.
link |
You know, what they meant was we don't have enough masks for our health people, let alone
link |
for you and the public.
link |
So we're going to bullshit you and tell you those masks don't really work.
link |
And then people don't wear masks and then we've got enough masks, we rush up the production
link |
And by the time it comes along, people have got the skepticism about masks.
link |
So who does, can you elaborate, who does the blame in that case go on to?
link |
The blame comes down to the philosophy that says government should always be small.
link |
No, but do you, do you really think that bigger government would be the solution to the mask
link |
So let me, let me push back.
link |
Sort of it's possible that that's capitalism solves that problem.
link |
Well, not, not if there's no money in really longterm planning and capitalism.
link |
There's money, there's money in the, isn't it possible to construct, isn't possible for
link |
capitalism to construct the system that ensures against catastrophic events?
link |
Not when they're systemic, you can ensure against episodic events.
link |
If you occasionally have a really bad storm, but in general the weather's not so bad that
link |
all the infrastructure is being destroyed, then you can share that around on a percentage
link |
If you have a Gaussian distribution for your events and you don't, the mean doesn't move
link |
around too much and the standard deviation doesn't change all that much, then insurance
link |
But if you have an, if that's episodic, if you have systemic stuff where the climate
link |
is changing completely and you're going to wipe out your agricultural capabilities, you
link |
simply can't do insurance on that front.
link |
You can't make a profit out of catastrophe and capitalism.
link |
So that example of climate change, let's talk about it.
link |
So you mentioned that the human brain, the economy, and the biosphere are three of the
link |
most complex systems we know.
link |
And you also criticize the economics community for looking at the effects of climate change
link |
when measured as the effect on the GDP.
link |
So you're saying it's a catastrophic thing that the biggest challenge our society, our
link |
If the economists disagree with you, the effects on the GDP will be minor.
link |
So we'll deal with it when it comes.
link |
That's the argument against, that's the devil's advocate.
link |
You're saying, no, it is a thing that will change our world forever in ways that we should
link |
really, really, really be thinking about.
link |
Make the case of why you disagree with the economists.
link |
The case is simple.
link |
Economists have made up their own numbers to say that it's trivial.
link |
No, I haven't even tried to make the numbers.
link |
I'm reading what the scientists write.
link |
And what the economists have done, and like this is William Nordhaus in particular, Nobel
link |
Prize winner, ex president of the American Economic Association, literally assumed that
link |
a roof will protect you from climate change.
link |
And he didn't say it in those words.
link |
What he said was 87% of American industry occurs in carefully controlled environments,
link |
which will not be subject to climate change.
link |
Now the only things that all of manufacturing, all of services, he included mining as well,
link |
meaning about open cut mining, government activities, and the finance sector, all they
link |
have in common is they happen beneath a roof.
link |
So he's basically saying climate affects the weather, climate is weather.
link |
Now that is not at all what is meant by climate change.
link |
It's changing the entire pattern of the weather system of the planet.
link |
For example, the most extreme form of climate change would be a breakdown in the three circulation
link |
cells that exist in each hemisphere.
link |
The Hadley cell, the Ferrer cell, I think it's called, and the polar cell, 0 to 30,
link |
30 to 60, 60 to 90, those are the main bubbles, if you like, in the atmosphere.
link |
Now if we get enough increase in the energy in the atmosphere, just like you turn the
link |
temperature up on a stove and you have nice bubbles occurring in a pot of soup and then
link |
turn the temperature up and they all break down and you've got bubbles everywhere, that's
link |
called the equitable climate.
link |
If that happens, then most of the rainfall is going to occur between 0 and 20 and 70
link |
and 90, and the middle is going to be dry, except for extreme storms.
link |
We built our societies in a period of extreme stability of the climate, and when you look
link |
at the long term temperature records, it's up and down like a seesaw, like a sawtooth
link |
blade between, say, one degree warmer than now and four degrees or six degrees cooler
link |
over the last million years.
link |
When you look at where we evolved, it's just at a turning point on the peak of one of those
link |
I've forgotten the name of the cycles, but the cycles are caused by changes in the Earth's
link |
rotation around the sun, and so we evolved our civilization just at the top, so coming
link |
up from a cold period, and then we're going to head down to another cold period, and that's
link |
when human civilization came along.
link |
It's about a period of about 12,000 years.
link |
So across that period, the temperature has changed by not much more than half a degree
link |
Now, we're blasting it well and truly out of those confines, and my way of interpreting
link |
what climate change means is the stability of that climate that enables to build sedentary
link |
civilizations and not be a nomadic species is being destroyed.
link |
So the challenge, and by the way, I'm playing devil's advocate right here.
link |
The question is, is there something fundamentally different now about human civilization that
link |
we're able to build technology that alleviates some of the destructive effects that we have
link |
We're going to find out the hard way.
link |
And the uncertainty, you think, would be very costly.
link |
Like, many of the trajectories we might take would be much more costly than they're profitable.
link |
And like, when we're seeing some of the storms that are happening now in Europe, the ones
link |
that washed away a village in Germany some time ago, the firestorm that hit Canada of
link |
all places, I've forgotten the name of the town that was burnt down, but enormous temperatures
link |
in Canada, again, the storms that have been happening back in Australia.
link |
These are all manifestations of a complete shift in the weather patterns of the planet.
link |
And they can wipe out, like a village just disappears, just wiped out by unprecedented
link |
rains, and this keeps on happening.
link |
We are still living in a sedentary lifestyle when we're a nomadic species.
link |
So to be able to maintain that sedentary lifestyle, we do need to engineer the planet.
link |
We need to keep it within that range of plus half a degree Celsius, minus half a degree,
link |
which is really what it's been like for the last 10,000, 12,000 years, instead we're blasting
link |
it right out of that range.
link |
And we know some of the past climates that have existed then.
link |
We can model what they imply for our food production systems, for example.
link |
Not the only example, but obviously crucial.
link |
So when you look at what are called global climate models produced by scientists, one
link |
of the examples, and it was published by the OECD last year, 2021, in the chapter on what
link |
would happen if we lose what's called the Atlantic Meridional Overturning Circulation,
link |
or AMOC, and people would colloquially know that as the Gulf Stream.
link |
And that's what distributes heat around all the oceans of the planet.
link |
It's part of a huge chain called the thermohaline circulation.
link |
But the part that goes across from the equator to the North Atlantic, that's called the AMOC
link |
and Gulf Stream colloquially, if that disappears in the context of a two and a half degree
link |
Celsius increase in average global temperature, then the proportion of the Earth's surface,
link |
which is suitable for producing wheat, will fall from 20% to 7%.
link |
Proportion for corn, similar sort of fall.
link |
The proportion suitable for rice will go from 2% to 3%.
link |
Now that means a catastrophic, and that's the word used in the report, catastrophic
link |
collapse in food production.
link |
So that's what we're toying with.
link |
And we are one and a half, we're actually less than, we're about halfway there to that
link |
And economists, on the other hand, and this is Richard Toll, published a paper 2016, claiming
link |
using what he calls an integrated assessment model that economists developed, that losing
link |
the Gulf Stream would increase global GDP by 1.1%.
link |
Now his model, this is what really pisses me off about these people, it's the worst
link |
work I've read in 50 years of being a critic of neoclassical economics.
link |
The GCMs, the one scientists produce, of course include precipitation as well as temperature.
link |
The IAMs that the economists produce, and this is stated yet again in a paper in 2021,
link |
do not include precipitation, they simply have temperature.
link |
So they assume that if temperature improves by moving towards a temperature which is better
link |
for producing aquaculture, okay, then so will precipitation.
link |
Now that's completely wrong, they've left out a crucial, imagine trying to model the
link |
climate while ignoring the fact that there's rainfall.
link |
That's what they've done.
link |
So their work is so bad, so dreadfully bad, it should never have been published.
link |
So they over, all right, all right, okay.
link |
I'm not gonna go for them, sorry, this is...
link |
Well, no, no, 100% as they deserve it, so it's an oversimplification, but I also want
link |
you to steel man people you disagree with and criticize people you agree with, if possible,
link |
to be sort of intellectually honest here.
link |
You do say, sort of to push back on the catastrophic thinking about climate change, that the ecology,
link |
the biosphere is a complex system, economics, the economy is a complex system.
link |
So how can we make predictions about complex systems?
link |
How can we make a hope of having a semi confident predictions about the complex system?
link |
So the scientific community is very confident about the complex system that is the biosphere
link |
and the crisis that's before us on the horizon.
link |
And then the economists are, as a community, I don't know, I don't know what percentage,
link |
Too much, that part of the community is very confident looking at the economics complex
link |
system in saying that, no, this system we have of labor and money and capital and so
link |
on, we'll be able to deal with that crisis and any other crisis.
link |
And they kind of construct simplified models that justify their confidence.
link |
So how do we know who to believe?
link |
For a start, if you believe the economists, you need your head read.
link |
Because when you...
link |
It's not an argument.
link |
No, it's not an argument.
link |
It's a summary of an argument.
link |
And that is the...
link |
No, that sounds a lot like an opinion and an emotional...
link |
I'm so angry about it.
link |
Listen, I'll tell you where I stand.
link |
And I've begun looking, studying the climate change much more.
link |
I used to be on things I don't understand, have not spent time on.
link |
I have so many colleagues that are scientists that I deeply respect, and I trust their opinion.
link |
I have seen the lesser angels of my colleagues on the pandemic side, on the COVID side.
link |
The confidence, the arrogance that in part blinded, I believe, the jump between basic
link |
scientific research to public policy.
link |
And then, so I've become a little bit more cautious in my trust on climate change.
link |
I'm still in the same place, and I don't mean climate change, on anything scientists say.
link |
I become a little bit, wait a minute.
link |
How does the basic scientific facts of our reality map to what we should do as a human
link |
There, I want to be a little bit careful.
link |
So whenever now I see arrogance and confidence, I become suspicious.
link |
Well, I'm the same, and that's why I'm being angry about The Economist, because there's
link |
incredible arrogance, incredible stupidity at the arrogance, assumptions which you look
link |
at it and think, how did anybody let that get published?
link |
So the economic analysis of the effects of climate change are poor, in many cases.
link |
And this is like, Bjorn Lomborg styles himself as the skeptical environmentalist and criticizes
link |
the environmental models.
link |
He doesn't take a look.
link |
He doesn't criticize the work come out by economists.
link |
Is it possible to do good economics modeling of the effects of climate change?
link |
Yeah, it is possible.
link |
Or is it like one complex systems tech?
link |
In that case, yeah.
link |
I mean, like to me, what you should be looking at is saying, what are the scientists saying
link |
are the consequences, probable consequences, not guaranteed, but probable consequences
link |
of increasing the energy level of the atmosphere by the amount we're doing.
link |
What can the scientists say in terms of like, the effects, because it's so complicated,
link |
the effects of sort of shifting resources, so basically, what are the effects of climate
link |
How can we really model that?
link |
Because it's basically you're looking through the fog of uncertainty because they're rising
link |
How can we know what effect that has?
link |
Well, we know there'll be a lot of change.
link |
Well, I don't actually, I think the sea level one is a poor argument, and I don't focus
link |
What I mainly focus upon is the weather patterns, okay?
link |
And if you look at, like we've got the, the wheat belt in America goes through what Idaho
link |
and countries, places like that, and you've got an incredibly deep topsoil, like Ukraine
link |
is another classic example.
link |
The depth of the topsoil in Ukraine is remarkable, and that's the wheat bowl of Europe.
link |
And that requires both the right temperature for growing wheat and the right rainfall for
link |
Now, when you look at the models that climate scientists are building of that, you have
link |
pretty much, your ultimate foundation is the Lorenz model of turbulent flow.
link |
And of course, that's the first model which we saw chaos theory, complexity, that beautiful
link |
simple model, three variables, three parameters, an incredible complexity out of the system.
link |
But and what that meant was you also had an exponential decay in the accuracy of your
link |
So if you have, if you're accurate to a thousand decimal places, then in a thousand days, you'll
link |
have no data whatsoever, because each time you're losing an order of magnitude of accuracy.
link |
So that's the point about the inability to predict for the very long future.
link |
But what you can do is say, well, there's a prediction horizon.
link |
If we're close enough to the, if our statistical measurement of where we are is close enough
link |
to where we actually are, and our forecast horizon is narrow enough to not extrapolate
link |
too far, then for this direction forward, we can make a reasonable fist of predicting
link |
what the weather's going to be.
link |
And that's the foundation of meteorological, the stuff we watch on TV.
link |
You know, most of the time, the forecasts are going to be correct these days.
link |
40, 50 years ago, most of the time, the forecasts were wrong.
link |
So that's the background foundation to these GCMs.
link |
But even they've got to massively simplify the world.
link |
So you have this enormous sphere of where they might divide it down to 100 kilometer
link |
by 100 kilometer by 10 kilometer cube, rectangles, whatever, oblongs.
link |
That's how they're modeling the transition of where they're from one location to another.
link |
So they've got a chunky vision of the planet, which they have to.
link |
They can't model it now down to the last molecule.
link |
So you're losing it.
link |
It's getting better, better, better, better.
link |
I think that's just too much processing power.
link |
But you're going to have some confines.
link |
You can't go, I mean, if you look at the models to do the weather, they used to be of that
link |
100 kilometer, I think they're about 10 kilometer grids now, I don't know.
link |
So the processing powers let us get more and more precise that way.
link |
I do know that the models now include chemical mixing that occurs above cities.
link |
They've added that complexity to them over time.
link |
So you're looking at the increasingly accurate models of weather patterns, the effect they
link |
have on agriculture, on food.
link |
And you're saying that there's a lot of possibilities in which that's going to be really destructive
link |
to society on the food production side.
link |
And if you have that increase in temperature, you're going to get a change in precipitation.
link |
And it could mean that where the rainfall and the sunshine are adequate for growing
link |
wheat is an area where there's no topsoil.
link |
Like a huge part of the models, the models the economists use, which only use temperature,
link |
don't include precipitation.
link |
They predict that a large amount of the wheat output of the world is going to occur in Siberia
link |
in the frozen tundra.
link |
What about, so that's a straightforward criticism of oversimplified models.
link |
What about the idea that we innovate our way out of it?
link |
So there's totally new, what is the, there's a silly, poor example at this time perhaps,
link |
but lab grown meat, sort of engineered food.
link |
So a completely shifting source of food for civilization.
link |
So therefore alleviating some of the pressure on agriculture.
link |
That comes down to the difference that Elon makes between producing a prototype and mass
link |
producing the prototype.
link |
You can develop the idea very rapidly to put that into production on the scale that's necessary
link |
to replace what we're currently doing.
link |
And we haven't got years.
link |
We've got, we might have decades.
link |
We certainly haven't got centuries.
link |
So in the timeframe we've got, I can't see that engineering going from prototype to production
link |
levels to replace what we're currently doing in the stable environment they're currently
link |
What do you think about the sort of the catastrophic predictions that people that have thought
link |
have written about climate have made in the past that haven't come to people?
link |
That's mainly unfortunately involving Paul Ehrlich and the population bomb and the predictions
link |
A few individuals or the one individual in that case.
link |
So I'm mostly playing devil's advocate in this conversation and enjoying doing so.
link |
I do think I'm in agreement with the majority of the scientific community.
link |
But you still see that argument made.
link |
I still see the argument made.
link |
And I also am a little bit worried about the arrogance and the ineffectiveness of the arrogance.
link |
This is the problem.
link |
And that's what worries me because it's all been put into the sort of sea level rise,
link |
temperature changes.
link |
It's not put into the fragility of the system in which we currently live.
link |
And the Earth will survive.
link |
And there's a wonderful science fiction book called The Earth Abides about a world in which
link |
humans get wiped out.
link |
There's only a tiny little band left and then the Earth reasserts itself.
link |
So the Earth's going to survive us.
link |
Will we survive what we do to the Earth?
link |
That's the question.
link |
And my feeling is that we have underplayed the extent to which the civilizations were
link |
built have depended upon a relatively stable climate.
link |
And it's then there's that turning point in the global average temperature that we evolved
link |
right on the top of it.
link |
And if we had done nothing, we could find that heading back down towards another ice
link |
age could equally destroy the possibility of sedentary life.
link |
So for example, if we'd never developed fossil fuel based industries, we'd never built superphosphate,
link |
so our population would never have reached one billion people, and we were still living
link |
like fairly sophisticated animals, but like 17th century level of load on the planet,
link |
then we would have gone down that decline.
link |
And the approaching ice age would have started to wipe out our farming areas, the glaciers
link |
would have encroached, and we would have been driven out of like an agricultural sedentary
link |
civilization by that change.
link |
So it's just the fact that we evolved on this stable period in the overall temperature cycle
link |
And that stability is something which just reflects the turning point in the regular
link |
cycle of Malicevich cycle, I think it's called.
link |
I've forgotten the actual name, but it's a cycle caused by change in the Earth's orbit
link |
around the sun, reflectivity and so on.
link |
That cycle, it's just that tiny top bit that we evolved in.
link |
So what we should have done is, well, that's really useful for us, we should stay at that
link |
Now, if we hadn't done it, we'd go back down here and that'd be the end of our civilization
link |
Instead, we're going up here really rapidly, and we're causing a change in temperature
link |
compared to that long term cycle 100,000 times faster.
link |
So yeah, I mean, my biggest worry is even subtle changes in climate might result in
link |
geopolitical pressures that then lead to nuclear war.
link |
And that's, yeah, I mean, there's an argument that's actually behind, to some extent, not
link |
the Ukraine war so much, but the Arab Spring, the wars in Syria, which partially has led
link |
to what's happening in Ukraine.
link |
And our weapons are getting more and more powerful and more and more destructive.
link |
More and more nations are having these destructive weapons.
link |
And now we're entering cyberspace, where it's even easier to be destructive.
link |
And hyperbaric weapons, which didn't exist in the Second World War.
link |
So you don't need nuclear weapons to have catastrophic attacks on each other.
link |
So yeah, it's incredibly scary that the warlike side of human nature could be extremely enhanced
link |
by climate breakdown.
link |
So in this world, on a happy note, I don't know how we went from Marxism and Stalinism
link |
to ecology, but all those are beautiful, complex systems.
link |
What is the best form of government, would you say?
link |
We talked about the economics of things.
link |
You ran for office, so you care about politics too.
link |
How can politics, what political systems can help us here?
link |
I think we first of all have to appreciate we're one species on a planet out of millions.
link |
And as the intelligent species, we should be enabling a harmonious life for those other
link |
Can we actually linger on that?
link |
What is, you mentioned that we need to acknowledge the value of life on Earth.
link |
Can we integrate the labor theory of value, can we integrate into that the value of life?
link |
So there's human life, and there's life.
link |
If you take that structure that I talked about of Marx's use value, exchange value, dialectic,
link |
and foreground background, that only exists, that only works because we're exploiting the
link |
free energy we find in the universe.
link |
There could be no production system without free energy, which is the first law of thermodynamics
link |
There is free lunch, after all, and it's grounded in the energy that's provided to us by the
link |
Well, yeah, that's the free lunch.
link |
That's what we're exploiting.
link |
It's the only free lunch we get.
link |
You know Ginsburg's summary of the laws of thermodynamics, don't you?
link |
The laws of thermodynamics are summarized as A, you can't win, B, you can't break even,
link |
C, you can't leave the game.
link |
Beautiful summary.
link |
Beautiful summary.
link |
But the fact that it exists in the first place is the free lunch.
link |
So we're exploiting the free lunch.
link |
But to be able to do it, we can't put waste back into that system so much that it undermines
link |
And that's what we've been doing.
link |
And once you respect the fact that we have to, living on the biosphere, the planet we're
link |
actually on, we have to enable that biosphere to survive us.
link |
Because if it doesn't survive us, we won't survive it disappearing.
link |
And there's not that realization in humanity in general.
link |
And when you say the value of life, you know, all the different living organisms on Earth
link |
are part of that biosphere.
link |
So in order to maintain the biosphere, we have to respect, like pragmatically speaking,
link |
what that means is actually respecting all of life on Earth.
link |
Even the mosquitoes?
link |
I've got some, no.
link |
I mean, we are a parasite.
link |
When you look at it, we're the mosquitoes of the large organizations.
link |
You're a fan of the Matrix movies at all?
link |
That's what I'm wearing.
link |
I was wondering what the inspiration was.
link |
It's not really inspiration.
link |
We are living in a simulation, and I have a conversation offline to have with you about
link |
You've been misbehaving, and we're going to have to put you back in line.
link |
So what's Agent Smith says when he's got Morpheus in his possession, he said, I've been trying
link |
to classify your species, and I've decided you're a virus.
link |
Now there's truth to that.
link |
We have intruded into everything.
link |
We've taken over every element of the biosphere, and we think we can continue doing that.
link |
And the thing is, we're breaking that.
link |
We're exporting it so much, we're breaking it down.
link |
And I think it's E.O. Wilson who argued the 50 percent rule.
link |
He believed that we should reserve 50 percent of the planet for nonhuman species.
link |
In other words, we make 50 percent of it off limits.
link |
Humans cannot go there.
link |
And we just let that evolve as it does.
link |
And then we control the other 50 percent.
link |
I think it's probably giving too much to us.
link |
I think we should actually save like 20 percent, 25 percent max on the rest of the planet.
link |
We let life go on and evolve as it does without our interference, without our dominance.
link |
Now that's neither a democratic system nor an authoritarian one.
link |
It's one which starts off with saying the first thing humans have to do is respect life
link |
So would we do that?
link |
We haven't done it, obviously.
link |
I don't think the Soviets would have done it if we had a generally Soviet system.
link |
We haven't done it under a capitalist.
link |
We continue intruding.
link |
So I think we have to go through something like a Star Trek, a Star Trek, you know, catastrophic
link |
200 years to realize that ultimately if we're going to survive as a species, we have to
link |
respect life in general.
link |
And then that means parts of the planet we can no longer touch, while we also try to
link |
maintain the planet at the temperature that we found it in what we now call the Anthropocene.
link |
So politically, we have to have, like in many ways what native societies often have, a vision
link |
of the cycle of life, not this exponential progression we've developed over the last
link |
And again, I'll use another movie, the Avatar type respect for the cycle of life.
link |
We need to have that as part of our innate nature.
link |
And then on top of that, the political system comes out.
link |
Now that political system has to be one that lets us feel like we have a say in the direction
link |
of society while that part is sacrosanct.
link |
We can't touch it.
link |
But we also, because we are now living with so many challenges created by our own civilization,
link |
I mean, the main threat to the existence of human civilization is the existence of human
link |
Is both a feature and a bug.
link |
And therefore, we need to have people who can understand complex systems making those
link |
Now that means it isn't a political system as much as it is an appreciation that the
link |
world is a complex system.
link |
And therefore, effects, which we think are direct effects, will actually come through
link |
an oblique fashion.
link |
And we cannot, there's no simple linear progression from where we are to where we want to be.
link |
So you have to see how everything feeds together in a systemic way.
link |
And that's why, one reason I designed this off where I'm wearing the tshirt for now,
link |
Minsky, is to have, it's nowhere near to this scale, I hope it one way will be, but something
link |
which means we can bring together all that complexity, all those systems, and perceive
link |
them on an enormous screen where we have all the various interacts and we can see what
link |
a potential future is.
link |
And that then guides us.
link |
So it isn't a case of democracy and, you know, our side wins a vote and therefore we ban
link |
abortion or we don't, you know, whatever else happens.
link |
It's seeing what the, respecting the fact that we're in a complex system, and being
link |
uncertain about the consequences, and not making the bold, expansionary ideas that we've
link |
So like, being a little bit more, uh, humble.
link |
Humble is a good word.
link |
But wouldn't you like to apply that same humility both to the considerations of the pros of
link |
capitalism and to the catastrophic view of the effects of climate change?
link |
And also, like, I think we can afford to be bold in space.
link |
And that's one reason I respect the practical vision of Musk and so far impractical vision
link |
of Bezos, that if we're going, we look for the very far future, the only way we can continue
link |
expanding our knowledge of the universe is to move our civilization, the productive side
link |
of off the planet.
link |
So can you actually linger on this?
link |
So let's actually talk about this.
link |
So first of all, you have the new book, uh, humbly named, uh, named The New Economics
link |
Publisher chose the title.
link |
No, but I'm joking, but, um, maybe I will ask you about why Manifesto, but we'll go
link |
through some of the ideas in this book.
link |
We have been already, uh, so some of it is embracing the fact that the economy, our world,
link |
our mind is a complex system.
link |
So this t shirt that you're wearing, yep, take it out, yeah, is, uh, the software I'll
link |
There you go, there you go, you're wearing a, what is this, an infomercial?
link |
So there's a t shirt that says Minsky, um, after not, not, not my Minsky, it's your
link |
So no, the Hyman Minsky, not Marvin Minsky.
link |
Not Marvin Minsky, right.
link |
So that's, so AI Minsky is, is Marvin and then, uh, Harman, uh, it all rhymes.
link |
So stability is free open source system dynamic software invented by Mr. Steve Keen, uh, coded
link |
by Russell Standish, it's on SourceForge.
link |
It's destabilizing.
link |
Stability is destabilizing.
link |
So that's sort of embracing the, the complex aspect of it.
link |
So how can you model the economy?
link |
What are some of the interesting, whether detailed or high level, big picture ideas
link |
behind your efforts of Minsky?
link |
Minsky, um, meaning the software, the modeling software that, that models the dynamic system.
link |
Basically what Minsky is doing is system dynamics modeling.
link |
So it's, if anybody's used Stellar or Vensim or Simulink, um, then they've used exactly
link |
the same family of software that Minsky is part of.
link |
So I didn't invent that.
link |
It was invented by Jay Forrester, who's one of the great intellects, one of the great
link |
engineers, uh, in American history.
link |
And the idea of, of, of Forrester's system was, uh, complex interactions.
link |
So he was doing his work in the fifties, um, uh, if people don't know Forrester's work,
link |
he actually built the models of the, um, uh, the, the mathematics for the gun turrets on
link |
American warships in the second world war mechanical systems, obviously.
link |
So he had to work out, you know, how to give a feedback system that meant when the boat
link |
rolled in one direction, the, the tower did not roll the other way.
link |
All that stuff was his work.
link |
So marvelous engineering.
link |
And then he realized if you want to look at a, even like a factory, a factory is a complex
link |
And so you get cycles generated out of the interaction between different components of
link |
the factory that he was first involved in taming, that he built the software to model
link |
complex interactive systems.
link |
So Minsky is that, the thing that Minsky adds, which is unique is the Godley table.
link |
And that's the double entry bookkeeping.
link |
So you can model the financial system, Godley, the economist, Godley, the economy, Wynn Godley,
link |
another great, great man.
link |
So there, there's like this, so you're modeling it as like a state diagram.
link |
It's actually, it is circuit diagrams.
link |
It's exactly what engineers have been using for decades, almost a century.
link |
So you're using a circuit diagram to model the economy.
link |
And that's, that's the, so other factories have done it.
link |
What they, what they haven't had in the circuit diagram is a way of handling the dynamics
link |
of the financial system.
link |
So what the Godley table does is bring it financial flows as being everything goes from
link |
somewhere and ends up somewhere.
link |
So you have a positive and a negative, if you're looking on the liability side, a positive
link |
and a positive or negative and a negative, you're looking at assets and liabilities side
link |
and Minsky gets the accounting right for that.
link |
So you can do an enormous complex model looking at the economy financially from the point
link |
of view of a dozen different actors in the economy and know that the mathematics is right.
link |
Even though what you're building is set of differential equations, which might be 50
link |
differential equations with 350 terms in them.
link |
If you've got the Godley tables right, you know the mathematics is correct.
link |
So that's the main innovation that Minsky adds.
link |
And you're operating there at the macroeconomics level.
link |
It's definitely macro.
link |
It's not agent based.
link |
And then this, I'm just open on random page that I think is very relevant here.
link |
The process, this is referring to Minsky, not the software, maybe the software.
link |
The process can be captured in an extremely simple causal chain.
link |
Capital determines output, output determines employment.
link |
The rate of employment determines the rate of change of wages.
link |
Output minus wages and interest payments determines profit.
link |
The profit rate determines the, there's a very nice circuit here.
link |
The profit rate determines the level of investment, which is the change in capital, which takes
link |
us back to the beginning of this causal chain.
link |
And the difference between investment and profits determines the change in private debt.
link |
And there's some nice, the Keen Minsky model and the intermittent route to chaos on page
link |
These are, do these come from the software?
link |
I was a mathematician back in 1992, August, 1992.
link |
Mathematics is another amazing piece of software.
link |
And I find it, it's very much a programmer's approach to mathematics.
link |
I prefer like a program called Mathcad, which is what I'm using for all my, when I do my
link |
mathematics on the computer, I write in Mathcad.
link |
It's been ruined by bad management.
link |
They chucked out all the good engineers and I'm still using a version which is 12 years
link |
If only engineers ruled the world.
link |
If only engineers, rather than this particular case, there was a bunch of marketers for CAD
link |
I'm definitely a fan of engineers.
link |
What are the plots that we're looking at here?
link |
Growth rate, private debt ratio, employment versus wages, employment versus debt, income
link |
So this is across years, like different trade offs.
link |
Is there something interesting to say about the plots and the insights from those plots
link |
that are generated by the software?
link |
That's a particular parameter value is to give that outcome.
link |
But what happened when I first simulated the model, I took a model by a guy called Richard
link |
Goodwin who's one of the great neglected economists, American Marxist, mathematical Marxist.
link |
And what he did was build a model of cycles.
link |
And he actually wrote a paper called, it's only about a five page paper published in
link |
a book and a very, very obscure conference paper.
link |
And what he was doing was trying to build a model of Marx.
link |
So he wrote it in 1967 and it was putting into mathematical form a model that Marx came
link |
So it was a centenary birthday present to Marx.
link |
And what Marx had argued in chapter 25, I think, of volume one of Capital, section three,
link |
he built a verbal model of a cyclical system.
link |
And it's quite out of character with the rest of the book.
link |
So when you read volume one of Capital, people think Marx has got a commodity view of money.
link |
He doesn't at all.
link |
The idea was he had like an onion, you start off on the middle level and you ignore the
link |
outer layer, then you bring the outer layer and so on and so forth.
link |
Anyway, in this model, in volume one of Capital, he normally just assumed work has got a subsistence
link |
In this little chapter, he said that if the economy is, effectively he said, the economy
link |
is booming, then workers will demand wage rises.
link |
And the wage rises will cut into the profit so that capitalists will not get the level
link |
of profit they're expecting.
link |
Therefore they will invest less and the economy will slump.
link |
And the slump will mean workers become unemployed and have to accept wage cuts.
link |
And it was a model of a cyclical economy.
link |
And as it happens, Marx spent his later years trying to learn enough calculus to be able
link |
to model it himself mathematically.
link |
And he never managed.
link |
There's Marx's mathematical notes on calculus, which are quite fun to read if you have a
link |
mathematical background.
link |
He got too caught up in the whole philosophy and never really got to build the model.
link |
But what Goodman realized was a predator prey model.
link |
The Locta Volterra model was the basis of the idea.
link |
So the idea is you have a prey, and the example that Locta actually used initially was grass.
link |
Grass is the prey.
link |
And then you have a predator, and the predator were cows.
link |
So you start off with a very few cows, lots of grass.
link |
And then because of lots of grass, the numbers of cows grow.
link |
And then because the cows grow, they start to eat the grass.
link |
So the grass runs out, so the cows starve, and you get a cycle.
link |
And what Locta was amazed by was that the cycles were persistent.
link |
They didn't die out.
link |
So Goodman got that vision, and he then built a predator prey model.
link |
And I, first of all, read Goodman and really found it really hard to follow his writing.
link |
He's not a very good writer, but a guy called John Blatt, who was a professor of mathematics
link |
at New South Wales University, wrote a brilliant explanation of Goodman's model in a book called
link |
Dynamic Economic Systems.
link |
It was superb, and he said a way he could extend this was to include finance.
link |
So I thought, okay, what I'm going to have is that what Goodman presumed is capitalists
link |
invest all their profits.
link |
So you get a boom when there's a high rate of profit because they invest all that money,
link |
and then a slump when there's low profit because depreciation will wipe away capital and you'll
link |
go boom and slump.
link |
So I simply added in, well, capitalists will invest more than their profits during a boom,
link |
but less than their profits during a slump.
link |
And that therefore means they had to borrow money to finance the gap and pay interest
link |
So I ended up with a model with just three systems states, the income share, the wages
link |
distribution of income between workers, capitalists, and bankers, the level of employment, and
link |
the level of private debt.
link |
And those three equations are fundamentally like going from the Locke to Volterra model
link |
with just two equations, and therefore you get a fixed cycle, to the Lorenz model where
link |
And therefore what I got out of it was a chaotic outcome.
link |
So what you're seeing is a manifestation of chaos, complexity in those plots.
link |
But one of the many fascinating parts about it was that as the level of private debt rose,
link |
in my model I had capitalists being the only ones who borrowed, but the people who paid
link |
for the high level of private debt were the workers.
link |
The rising banker's share corresponded exactly to a falling worker's share.
link |
So you can infer from that that the workers are the ones paying.
link |
Effectively, the workers end up paying for it.
link |
They get a lower level of wages.
link |
And the basic dynamic is that capitalists, when you have a three social class system,
link |
your income goes between workers, capitalists, and bankers.
link |
Now in the system, the good one did, they're just workers and capitalists.
link |
So if workers share rose, capitalists share had to fall.
link |
But when you have three social classes, then capitalists share can remain constant while
link |
workers fall and bankers rise.
link |
So that's what actually happened.
link |
Because capitalists, the simple way I modeled it was there's a certain rate of profit at
link |
which capitalists invest all their profits.
link |
Above that they borrow more, below that they pay off debt.
link |
So what would happen is when you got back to that point, then the level of investment
link |
would be a precise share of GDP.
link |
And therefore you'd get a precise rate of economic growth.
link |
But if there was a higher percentage going to bankers and offset by a lower share going
link |
to workers, it didn't affect the capitalists.
link |
So what you get is the cycles sort of diminish for a while because there's the income distribution
link |
effect is important.
link |
So the workers pay for the increasing level of debt.
link |
But the other side of it was that the cycles would diminish for a while.
link |
Now what you get is a period of diminishing cycles, then leading to rising cycles.
link |
And technically this is known as the Pomeranville route to chaos, and it's one particular element
link |
of Lorenzo's equations of fluid dynamics.
link |
So what they found was in examining laminar flow in a fluid, you have a period where the
link |
laminar flow got more laminar, and then suddenly it'd start to get less laminar and go turbulent.
link |
And this is what actually goes on in the model, so in my model of Minsky.
link |
So what you have is a period where there's big berms and cycles, and then as the debt
link |
level rises, the berms and slumps get smaller.
link |
And that looks like what neoclassical economists call the Great Moderation.
link |
So when I first modeled this in 1982, I finished up my paper, which was published in 95, with
link |
what I thought was a nice rhetorical flourish, saying the chaotic dynamics of this paper
link |
should warn us against regarding a period of relative stability in a capitalist economy
link |
as anything more than a lull before the storm.
link |
Now I thought it was a great speed of rhetoric, I didn't think it was going to fucking happen.
link |
But it did, because you had this period from 1990 through to 2007 where there were diminishing
link |
cycles, and the neoclassicals labeled that the Great Moderation, and they took the credit
link |
They thought that the economy was being managed by them to a lower rate of inflation, a lower
link |
level of unemployment, less instability over time, and they literally took credit for it.
link |
And I was watching that and thinking, that's like my model running, and I'm scared as
link |
shit that there'll be a breakdown.
link |
I ended up not working in the area for a while because I wrote Debunking Economics, and I
link |
got involved in a fight over the modeling of competition in neoclassical theory that
link |
took me away for about four or five years.
link |
And then I got asked to do a court case in 2005, end of 2005, and I used Minsky as my
link |
framework for arguing that somebody who was involved in predatory lending should be able
link |
to get out of the debt they were in.
link |
And I explained Minsky's theory, and I used this throwaway line of saying debt levels
link |
of private debt have been rising exponentially.
link |
And then I thought, well, I can't, as an expert, just make a claim like that.
link |
I've got to check the data.
link |
And the debt ratio was rising exponentially, and I thought, holy shit, we're in for a financial
link |
crisis, and somebody has to warn about it, and at least in Australia, I was that somebody.
link |
So can you, given this chaotic dynamics idea, can you talk about the crises ahead of us
link |
So one of the things, I mean, it's a fundamental question of economics.
link |
Is economics about understanding the past or predicting the future?
link |
Because you can construct models that do poetic, like in 95, poetic, you know, yeah, and then
link |
you can, you know, watch years fly by, and some of the predictions in retrospect that
link |
you make turn out to be true, but, you know, all kinds of gurus throughout history have
link |
done that kind of thing, and you can call yourself right and forget all the many times
link |
you've been wrong.
link |
Let's talk about the future.
link |
What kind of stuff, you mentioned about the importance of the biosphere, but what are
link |
the crises that are ahead of us that a chaotic dynamics view allows us to predict and be
link |
Getting out of it, leaving aside the ecological, wasn't a crisis, it was stagnation.
link |
Because what we got out of the crisis was caused by a rising level of private debt.
link |
Now you reach a peak level where the willingness to take on debt collapses.
link |
And so you go to a period where debt is rising all the time.
link |
So credit, which is the annual change in debt, and that's credit as part of aggregate demand
link |
and aggregate income.
link |
So credit goes from positive to negative, and that causes a slump.
link |
So can you describe why that causes a slump?
link |
So credit goes to negative.
link |
If you ask Paul Krugman, he'll tell you credit plays no role in aggregate demand.
link |
Credit plays no role in aggregate demand.
link |
So the vision that the neoclassicals have for the banking system is what they call learnable
link |
Is Paul Krugman, by the way, the knight at the front of the army that is the neoclassical
link |
Yeah, fundamentally.
link |
He's politically reasonable, which makes him more dangerous than those that aren't.
link |
He's politically...
link |
Yeah, there's quite a lot of people that would disagree with that characterization of Paul
link |
Krugman as he's politically reasonable.
link |
You should see the people behind him.
link |
So he's not a negative or positive statement, that's just he can be feisty as well.
link |
But he's like the human face of neoclassical economics.
link |
It doesn't deserve having a human face.
link |
It's anti human theory.
link |
But he's the human face.
link |
Tell me what you really think.
link |
Well, so but the credit does not have any effect on aggregate demand.
link |
And you're saying that's not the case at all.
link |
It's absolutely crucial to aggregate demand.
link |
So what they model is, again, the example of you lending to me or vice versa.
link |
If I lend money to you, I can spend less, you can spend more.
link |
So credit is the change in debt.
link |
So if I lend money to you, then there's a level of private debt rises.
link |
So there's an increase in credit.
link |
But that increase in credit comes at an expense of my spending power.
link |
So you can spend what I've lent you, but I can't spend what I've lent you.
link |
So credit cancels out.
link |
When you look at that's learnable funds.
link |
But in the real world, and the Bank of England has said this is the real world and the textbooks
link |
are wrong categorically in 2014.
link |
When the bank lends, it adds to its asset side and says, you owe us more money.
link |
And it adds to its liability side and says, here's the money in your bank account.
link |
Now you spend that money.
link |
So what happens when you do your sums, credit is part of aggregate demand and aggregate
link |
And that's something I first solved in 2019, I think, 2000, I only recently proved it mathematically.
link |
So what that means is credit is a component of aggregate demand, and credit is also very
link |
It's like consumption demand never goes negative, investment demand never goes negative, but
link |
credit can go from positive to negative.
link |
And when you take a look at the long run of American history after the Second World War,
link |
there was no period until 2007 where credit was negative.
link |
It was a positive number, therefore, when you do it as a percentage of GDP, it was a
link |
positive percentage of GDP.
link |
It peaked at 16% of GDP in 2006, 2007.
link |
It fell to minus 5% in 2008, 2009.
link |
So you had a 20% of GDP turnaround in aggregate demand.
link |
Now when you plot that against unemployment, the correlation of credit to unemployment
link |
across the period from about 1990 to 2010 is about minus 0.9, okay?
link |
Enormous negative correlation.
link |
Now according to the neoclassicals, it should be close to zero.
link |
Empirically it's bleedingly obvious it's not.
link |
And it applies to every country in the world that had a financial crisis at that period.
link |
So it's bleedingly obvious in the data.
link |
And they ignore it because credit's not part of their model.
link |
And you're saying it's causation.
link |
Today we sit there, it's extremely high inflation.
link |
What role does inflation play in this picture?
link |
Is a little bit of inflation good?
link |
We talked about money creation at the beginning.
link |
What's a little bit of inflation good or bad?
link |
A lot of inflation good or bad?
link |
How concerned are you about?
link |
A little bit is good for a simple reason that, like again, it's taken me a while to get my
link |
But if you think about how people say, what are the functions of money?
link |
They say money, it's a unit of account, so you're measuring.
link |
It's a means of exchange, okay?
link |
And it's a store of value, okay?
link |
Now yes, okay, it has those three roles, but the last one is contradictory to the previous
link |
Because, and this is where you see this with the Bitcoin phenomenon, if you want to hang
link |
onto money as a store of value, then if prices are falling, the value of money is rising.
link |
And it's actually in your interests as a store of value to hang onto it and not spend it.
link |
So that contradicts its role as a means of exchange.
link |
Now if you have money which depreciates, and this was actually tried in the Austrian town
link |
of Wargel during the Great Depression.
link |
If you have money that depreciates, then if you don't use it, you lose it fundamentally.
link |
So it has a high rate of circulation.
link |
So there's a monetary theorist called Silvio Gazzell, and he wrote this proposal that money
link |
should depreciate.
link |
And he was ridiculed and opposed and derided, but Keynes said he was a great intellect.
link |
And the mayor of the town of Wargel in Austria during the Great Depression was facing an
link |
unemployment rate of 25% pretty much.
link |
Germany had the worst experience in the Great Depression in the world, as bad as America,
link |
slightly worse than America.
link |
And so he thought, how can I stimulate demand here?
link |
So he produced a script which could only be used for buying goods and services in Wargel.
link |
And it could be used to pay your local rates.
link |
But it was depreciated by putting a stamp on the money if you didn't use it.
link |
So what happened was people would pay their rates, they needed to pay the rates using
link |
this money, so the script, so they used the script.
link |
And because it depreciated, you'd use it rapidly.
link |
So people were using that money, this alternative to the Austrian shilling, and the economic
link |
activity in town took off, and unemployment fell to zero.
link |
And it was an absolute miracle, and everybody loved a Wargel experiment, and the Austrian
link |
central bank sued them for establishing an alternative form of money and shut it down.
link |
Unemployment went back up to 25% again, and Austria voted 99.6% for the Nazis, something
link |
crazy number like that when Hitler marched in.
link |
So the Wargel experiment showed that a depreciating currency led to a high rate of circulation.
link |
But of course, we're not talking Weimar Republic levels of inflation.
link |
So when you get that much inflation, and that's normally caused by, as the Weimar inflation
link |
was caused by, the reparation terms imposed on Germany, fundamentally by France at the
link |
Treaty of Versailles, they paid a large part of that with just basically printing the notes,
link |
and you went into this crazy period of hyperinflation.
link |
So hyperinflation almost always occurs when there's a massive destruction of physical
link |
resources, and the monetary authority tries to paper, literally, over it, and then you
link |
get hyperinflation, that's total social breakdown.
link |
So a moderate level of inflation inspires the means of exchange usage of money, but
link |
undermines the store of value usage of money.
link |
And that dilemma is why we have this antagonistic attitude towards inflation.
link |
Yeah, I mean, you're describing it as a tension, but it nevertheless is, like money is a store
link |
of value and a means of exchange, and I don't, you know, to push back, it's not necessarily
link |
that there's a tension, it's just that depending on the dynamics of this beautiful economic
link |
system of ours, it's used as one more than the other.
link |
If there's inflation, you're using it more for the means of exchange, there's deflation
link |
using more for store of value, but that doesn't, I don't see that as a tension, that's just
link |
a, how much you use it for those different, like...
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But it ends up saying that overall, the level of effective commerce, a bit of inflation
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is a good thing, because that's depreciating the money slightly and encourage its use.
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Yeah, but so the argument that some Bitcoin folks use or gold standard folks, again, HODL
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is not an argument, is that having an inflation of zero is actually achieving that balance.
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But they're actually in favor of negative, they want it to be appreciated rapidly, and
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because of the negative inflation, the value of the money rising relative to commodities,
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that's what they want, that's the HODL philosophy.
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Well, that's more of like an investment, I don't know if that, that's more of investment
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philosophy than the fundamental principles of why they believe in cryptocurrency, in
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forced scarcity, it's a model.
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The concern there is that when you print money, the public policy is detached from the actual
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Yeah, well, I mean, this is where, again, it matters to get money creation right, because
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the government's not the only money creator, banks are as well, private banks.
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And if we obsess too much about limiting government money creation, what we end up getting, if
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there is money creation going on, it's private banks doing it, and you get an increase in
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private debt, and fundamentally, private debt and its collapse, the collapse of credit,
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when it stops growing, that's the fundamental cause of financial crises.
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So yeah, but the question is, what's the cause for the collapse of the...
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Well, I think this is like the Austrian thinking leaves out the debt deflation.
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And that's like, I think one of the most important papers ever written was by Irving Fisher called
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the Debt Deflation Theory of Great Depressions.
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Fisher was somebody who accepted the neoclassical vision.
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He wrote the pre Efficiency Market Hypothesis, Efficiency Market Hypothesis.
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He had his own PhD called the Theory of Interest.
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And in that, he argued effectively for a supply and demand analysis of the financial system.
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And he argued for equilibrium, he said when you're working with a commodity market, then
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the sale and the transaction and the exchange occur at the same point in time.
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When you're working with the financial market, then the exchange occurs through time.
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So he said he assumed that debts are repaid, all debts are repaid, and he assumed that
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equilibrium through time was an essential part of his assumption.
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This is...and then the Great Depression comes along.
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And he has become a major shareholder in the rank Xerox because he invented the Roller
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And so he had taken out shares on margin, and he was worth about 100 million in modern
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terms when the Great Depression hit.
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And 90% of that was share market valuation.
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He'd taken out margin debt just like everybody else.
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And with margin debt, you could put down $100,000 and buy a million dollars worth of shares.
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So you got this huge leverage into debt.
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Now that when the financial crisis hit, the level of margin debt in America had risen
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from half a percent of GDP in 1920 to 13% of GDP in 1929.
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It then fell to zero again.
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That's why the stock market crash in 1929 was so devastating, that scale of margin lending.
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And everybody was being wiped out, they were selling Rolls Royces for 20 quid.
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You literally have photographs showing people doing that.
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Because a margin call comes in, you've got to liquidate everything.
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So he said the danger of a debt deflation is what we have to avoid.
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And that means you don't want too much private debt to accumulate, and you don't want falling
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prices because the falling prices will amplify the impact of being insolvent to begin with.
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And that's what we saw in the Great Depression.
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It's partially what we saw in 2007.
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But we didn't have anything like the level of margin debt.
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Margin debt was reduced from 90% to 50% ratio after the Great Depression.
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So there were limits on how bad it was in 2007.
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But the danger is still the period of deflation amplifies your debts.
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And I call it Fisher's Paradox, he didn't write those terms himself.
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But he wrote a line saying the more debtors pay, the more they owe.
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And this is because you're liquidating to try to meet your own debts.
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When you liquidate, the price level falls.
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You will end up having a lower level of monetary debt, but a higher level of debt when you
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deflate it using the price level.
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So the biggest danger in capitalism is the debt deflation, far more dangerous than inflation.
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And the cause of debt deflation is?
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Too much bank lending.
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Too much private money creation.