The real foundation of Marx's political philosophy was the economic argument that there would

be a tendency for the rate of profit to fall, and that tendency for the rate of profit to

fall would lead to capitalists battening down on workers harder, paying them less than their

subsistence, a revolt by workers against this, and then you would get socialism on

the other side.

So what he called the tendency for the rate of profit to fall played a critical role in

his explanation of why socialism would have to come about.

If you look at Marx's own vision of the revolution, it was going to happen in England.

The advanced economies would be first to go through the revolution.

The socialist, the primitive economies would have to go through a capitalist transition,

and this is the difference between the Mensheviks and the Bolsheviks.

So the Mensheviks, when Hyman Minsky came out of the Menshevik family, the Mensheviks

believed you had to go through a capitalist phase.

Russia had to go through a capitalist period before it becomes socialist.

The Bolsheviks believed they could get there in one go.

The following is a conversation with Steve Keen, a brilliant economist that criticizes

much of modern economics and proposes new theories and models that integrate some ideas

and ditch others from very thinkers, from Karl Marx to John Maynard Keynes to Hyman

Minsky.

In fact, a lot of our conversation is about Karl Marx and Marxian economics.

He has been a scholar of Karl Marx's work for many years, so this was a fascinating

exploration.

He has written several books I recommend, including The New Economics and Manifesto

and Debunking Economics.

This is the Lex Friedman Podcast.

To support it, please check out our sponsors in the description.

And now, dear friends, here's Steve Keen.

Let's start with a big question.

What is economics?

Or maybe what is or should be the goal of economics?

Well, it should be I understand how human civilization comes about and how it can be

maintained.

And that's not what it's been at all.

So we have a discipline which has the right name and the wrong soul.

What is the soul of economics?

The soul of economics really is to explain how do we manage to build a civilization that

elevates us so far above the energy and consumption and knowledge levels of the base environment

of the Earth?

Because if you think about—and this is actually work I've learned from Tim Garrett, who's

one of my research colleagues who's an atmospheric physicist—and his idea is that we exploit

these high grade energy sources from the sun itself to coal, nuclear, et cetera, et cetera,

which means we can maintain a level of human civilization well above what we'd have if

we were just still running around with rocks and stones and spears.

So it's that elevation above the base level of the planet, which is human civilization.

And if we didn't have this energy we were exploiting, if we didn't use the environment

to elevate ourselves above what's possible in the background, then you and I wouldn't

be talking into microphones.

We might be doing drumbeats and stuff like this, but we wouldn't be having the sort

of conversation we have.

So to explain how that came about, that's what the economics should be doing, and it's

not.

So this is the greatest thing that the Earth has ever created, is what you're saying,

this conversation?

Yeah, we're the most elaborate construction on the planet.

And that's not what we've done, we've denigrated the planet itself.

We don't have respect for the fact that life itself is an incredible creation.

And my ultimate—if I had to see how humanity is going to survive what we're putting ourselves

through, then we'd have to come out of it as a species which sees its role as preserving

and respecting life.

I like how you took my silly, incredible statement and made it into a serious one about how amazing

life is.

Life is incredible, and we humans don't respect it enough, we trash it.

And that's what economics, I think, has played a huge role in that.

Until I actually regard my discipline, I would never call it a profession, let alone a science.

My discipline has probably helped bring about the termination potential, the feasible termination

of human civilization.

Strong words.

Okay, let's return to the basics of economics.

So what is the soul and the practice of economics?

What should be the goal of it?

Because you're speaking very poetically, but we'll also speak pragmatically about the tools

of economics, the variables of economics, the metrics, the goals, the models.

Practically speaking, what are the goals of economics?

Well, in terms of the tools we use, we should be using the tools that engineers use, frankly.

And that sounds ridiculously simple, because you would expect that economists are using

up to date techniques that are common in other sciences, where you're dealing with similar

ideas of stocks and flows, and interactions between the environment and a system and so

on.

And that's fundamentally systems engineering.

And that's what we should be using as the tools of economics.

Now if you look at what economists actually do, the sophisticated stuff involves difference

equations.

And like difference equations, you know, if you've done enough mathematics as you have,

you know, difference equations are useful for like individual level processes.

If you're talking about autonomous, it'll go from state t to t plus one, t plus two,

and so on.

But not when you're talking at the aggregate level.

There you use differential equations to measure it all.

Economists have been using difference equations.

So there's like a book, I think it's by Sargent and one other, called Advanced Methods in

Economics Using Python, two volumes set.

It's about close to 2,000 pages, and four of those pages are on differential equations.

The rest is all difference equations.

So they're using entirely the wrong mathematics to start with.

For people listening, what is difference equations versus differential equations?

Difference equation is like you can do in a spreadsheet.

You'll have, this is the value for 1990, this is the value for 1991, 92, 93, 94.

So you have discrete jumps in time, whereas the differential equation says there's a process

moving through time.

And you will have a rate of change of a variable is a function of the state of itself and other

variables and rates of change of those variables.

And that is what you use when you're doing an aggregate model.

So if you're modeling water, for example, or fluid dynamics, you have a set of differential

equations describing the entire body of fluid moving through time.

You don't try to model the discrete motion of each molecule of H2O.

So at the aggregate level, you use differential equations for processes that occur through

time.

And that's economics.

It occurs through time.

You should be using that particular technology.

But some economists do learn differential equations, but they don't learn stability

analysis.

So they simply assume equilibrium is stable, and they work in equilibrium terms all the

time.

And the technical level, it's an incredibly complicated way of modeling the world using

entirely the wrong tools.

OK, we'll talk about that because it's unclear what the right tools are.

Maybe it's more clear to you, but I've got to make it clear to an audience.

Well, so this is a very complicated world.

It's a complex world.

You talk about there are some of the most complex systems on Earth are the human mind,

the economy and the biosphere.

So we'll go, you know, we'll go to that place.

I'm fascinated by complex systems.

I'm humbled by them, even at their simplest level of like cellular automata.

I'm not sure what the right tools are to understand that, especially when part of the complex

system is like a hierarchy of other complex systems.

So you said the economy is a fascinating complex system, but it's made up of human minds.

And those are interesting.

Those are interesting, perhaps impossible to model, but we can try and we can try to

figure out how to approximate them.

And maybe that's the challenge of economics.

OK, we'll keep returning to the basics.

Let us try to learn something from history.

I also see as part of economics is us trying to figure out stuff.

And there's a few smart folks that write books throughout human history.

And sometimes they name schools of economics after them.

So let us take a stroll through history.

OK.

Can you describe at a high level what are the different schools of economics, perhaps

ones that are interesting to you, perhaps ones that the difference between which reveals

something useful or insightful for our conversation.

So you know, you could neoclassical, post Keynesian, Austrian, like the biophysical

economics and so on, other heterodox economic schools that you find interesting.

OK, I actually find interesting a school which went extinct about 250 years ago.

That's where I'd like to start from.

And they're called the Physiocrats.

And the name itself implies where the knowledge came from, because if you go back far enough

in history, we didn't do autopsies.

But when you started doing autopsies, they found wires, they found tubes, etc., etc.

And they started seeing the body as a circulation system, and they applied the same sort of

logic to the economy.

And they came out of an agricultural economy, which was France, and they saw that the wealth

came effectively from the sun.

So their soil wealth comes from, like I said, the soil, but what they really mean is sun.

The soil absorbs the energy of the sun.

One seed plants, a thousand flea seeds come back.

There is no surplus.

We are simply mining what we can find out of the natural economy.

That's where we should have stayed and developed from that forward.

We then went through the classical school of economics, which comes out of Adam Smith.

And Smith, coming from Scotland, looked at what the Physiocrats said, and what the Physiocrats

argued was that agriculture is the source of all wealth, and the manufacturing sector

is sterile.

That's literally the term they used to describe the manufacturing sector.

What does sterile mean?

Sterile means you don't extract value.

You simply change the shape of value.

So the value comes from the soil.

Yeah, it comes from the soil.

That's the free gift of nature.

That's literally the phrase they used.

And we then distribute the free gift of nature around, and we need carriages, which was the

manufacturing term they used at the time, as well as wheat.

So to make the carriages, we take what's been taken from the soil, and we convert it to

a different form.

But there is no value added in manufacturing.

So Smith looked at that and said, well, I'm from Scotland.

And we've got these industries, and we make stuff, and it's machinery.

And he said, no, it's not land that gives us the source of value, it's labor.

Now, that led to the classical school of thought, and that said that all value comes from labor,

that value is objective, so it's the amount of effort you put in, that the price two things

will exchange for reflects the relative effort that's involved in the manufacturing.

So this computer takes two hours to make, and this bottle takes two minutes to make,

then this is worth 60 times as much as that.

They didn't talk about marginal cost.

It was absolute cost, effectively.

They didn't talk about utility as a subjective thing, they ridiculed subjective utility theory.

That led to Marx, and Marx is probably the most brilliant mind in the history of economics.

The only other competitor I'd see is Schumpeter, possibly Keynes, but in my terms of ranking

of intellects, it would be Marx, Schumpeter, Keynes, in terms of the outstanding capacities

to think.

But Marx then turned that classical school, which was pro capitalism and anti feudal,

into a critique of capitalism, which led to the neoclassical school coming along as a

defense of capitalism.

But they defended it using the ideas of the subjective theory of value, so that value

does not reflect effort, it's the satisfaction individuals get from different objects that

determines their value, marginal utility.

It's the marginal cost that determines how much they sell for.

Capitalism equilibrates marginal cost and marginal utility, and the concepts of equilibrium

and marginal this and marginal that became the neoclassical school, and that's still

the dominant school now 150 years later.

That's the one that everybody learns.

When you first learn economics, if you don't have the critical background that I managed

to acquire, that's what you think is economics, the marginal utility, equilibrium oriented

analysis of mainstream economics, and for example, they ignore money.

People think economists, you must be an expert on money because you're an economist.

Well, in fact, economists learn literally in the first few weeks at university that

money is irrelevant.

They say money illusion.

They represent people's tastes using what they call indifference curves, and they're

like isoquants on a weather map.

If you look at an isoquant, it shows you all the points of the same pressure.

So you can be here or you can be in Denver and the air pressure can be the same if you're

in the same weather unit, so you just draw a cell that links together.

Well, they do the same thing with utility and say lots of bananas and very few coconuts

can give you the same utility as lots of coconuts and very few bananas, and you draw basically

like a hyperbola running down linking the two, and they'll say, well, that's your utility.

That describes your tastes, and then we have your income, and given your income, you can

buy that many bananas completely or that many coconuts or a straight line combination of

the two, and then if we double the nominal price of coconuts and double the nominal price

of bananas and double your income, what happens, and the correct answer is, oh, nothing, sir.

You stay at the same point of tangency between what your budget is and which particular utility

curve gives you the maximum satisfaction.

So that gets ingrained into them, and they think anybody who worries about money suffers

from money illusion.

You are therefore ignorant of the deep insights of economics if you think money actually matters.

So you have an entire theory of economics which presumes we exchange through barter.

Like I'll swap you that Microsoft Surface for, actually, I'll take two of those for

one of these.

We do this bartering type arrangement.

In fact, that only works if money plays no creative role in the economy, and that's where

you find, reading Schumpeter, the insight that's the school of thought that I come from

that says money is essential.

Money actually adds to demand, and we'll talk about that later on.

So that's the neoclassical school that ends up being subjective theory of value, nonmonetary,

as though everything happens in barter, and focusing on equilibrium, as though everything

happens in equilibrium, or if you get disturbed from equilibrium, you return back to it again.

And that mindset describes capitalism.

Its most interesting feature is that it reaches equilibrium.

Now what planet are we on to believe that?

Because if you look at the real world, the real exciting world of capitalism in which

we live, change is by far the most obvious characteristic of it.

There's no equilibrium.

There's no equilibrium.

It's unstable.

And as a mathematician, it's easy to – you work with stability analysis.

You work out what the Jacobian is.

You work out your Lyapunov exponents in a complex system.

You're used to the idea that equilibrium is unstable.

But economists get schooled into believing that everything happens in equilibrium, and

they don't learn stability analysis.

So all that stuff is missing.

So onto the schools of thought, treating the economy as an equilibrium system, which was

what the neoclassical school did, is what Keynes disturbed.

And he really disturbed it by talking about, fundamentally, that uncertainty determines

our decisions about the future.

So when we consume, you know if you like Pfizer or whatever particular drink we want to have,

you know the current situation.

But to invest, you must be making guesses about the future.

But you don't know the future.

So what do you do?

You extrapolate what you currently know.

And as you said, this is a terrible basis on which to plan for the future.

But this is the only thing you can do where there is no possibility of solid calculation.

So investment is therefore subject to uncertainty, and therefore you will get volatility out

of investment.

You will get fads, of course, booms and slumps coming out of that, because people extrapolate

for the current conditions.

And that's the normal state of a capitalist economy.

And Schumpeter argued that that's what gives it its creativity as well, the fact that you

can perceive a potential demand, but first of all, you don't know whether that demand

is going to work.

Secondly, you don't know who your competitor is going to be, whether somebody is going

to be ahead of you or behind.

If there's a fad, you'll overinvest.

All this stuff is the real nature of capitalism, and that's what we're trying to capture,

the dynamic nonequilibrium monetary violence and creativity of capitalism.

That's what we should be analyzing.

And the post Keynesian school has gone in that orientation.

They've been, in my opinion, inhibited by learning their mathematics from neoclassical

economists, so they don't have enough of the technology of complex systems.

There's only a really tiny handful of people working in complex systems analysis in post

Keynesian economics, but that is, to me, the most interesting area.

So their tools may be lacking, but they fundamentally accept the instability of things.

That's right.

That's right.

That's interesting.

So let me try to summarize what you said, and then you say how stupid I am.

Okay.

So then there was the physiocrats that thought value came from the land.

Then there's Adam Smith, who said, nah, value comes from human labor.

That was the classical school.

And then neoclassical is value comes from bananas and coconuts, human preferences, like

human happiness, how happy a banana makes you.

And then the Keynesian and the post Keynesian were like, yeah, well, you can't, you can

never, the moment you try to put value to a banana and a coconut, you're already working

in the past.

It's always going to be chaos and stability.

And then you just, you're fishing in uncertain waters, and that's why we have to embrace

that and come up with tools that model that well.

And also Joseph Schumpeter, what school would you put him under?

Is he a Keynesian or is he Austrian economics?

He's an Austrian.

The Austrians deny.

Okay.

That's the intriguing.

He's from Austria, but he's not an Austrian economist.

There are elements of the Austrian school of thought, which are worthwhile.

What is Austrian economics in this beautiful whirlwind picture that you painted?

Okay.

Austrian economics grew out of the rebellion against the classical school.

So you had three intellects who mainly led the growth of the neoclassical school back

in the 1870s.

It was William Jevons from England, Menger, who's from Austria, and Vollras from France.

And Vollras tried to work out a set of equations to describe a multiproduct economy where there's

numerous producers and numerous consumers.

Everybody's both a producer and a consumer, and you try to work out a vector of prices

that will give you equilibrium in all markets instantaneously.

And that's his equilibrium orientation.

Jevons is also one about equilibrium, but he worked more at the aggregate level.

So there's a supply curve and a demand curve, and that's what Marshall ultimately codified.

Menger was pretty much saying that, well, yes, there might be an equilibrium, but you're

going to get disturbed from it all the time.

You'll be above or below the equilibrium.

And what came out of the Austrian school was an acceptance of that sort of vision that

a market should reach equilibrium, but then said, well, you'll get disturbed away from

the equilibrium.

And that's what gives you the vitality of capitalism, because an entrepreneur will see

an arbitrage advantage and try to close that gap, and that will give you innovation over

time.

And Schumpeter went beyond that and saw the role of money and said that an entrepreneur

is somebody with a great idea and no money.

So to become a capitalist, you've got to get money.

And therefore, you've got to approach the finance sector to get the money, and the finance

sector creates money and also creates a debt for the entrepreneur.

And so you get this financial engine turning up as well, and you will get movements away

from equilibrium out of that.

You won't necessarily head back towards the equilibrium.

So Schumpeter has a rich vision of capitalism in which money plays an essential role, in

which you will be disturbed from equilibrium all the time.

And that is really, I think, a much closer vision of actual capitalism than anything

by even the leading Austrians, Hayek, et cetera, et cetera, and certainly Rombardo, I find

totally like reading a cardboard cutout version of The Wealth of Nations.

I find his work trivial.

But Schumpeter was rich, but with the same foundations as the Austrians.

But because he talked about the importance of money that took him away from the Austrian

vision, which is very much based on a hard money idea of capitalism, Schumpeter said

you needed the capacity of the financial sector to create money to empower entrepreneurs.

And that's a very important vision.

So Schumpeter's argument is the deviation from equilibrium, that's where all the fun

happens.

That's where all the magic happens.

That's the magic of capitalism.

And like the Austrians, because they focus on the deviation from equilibrium, they're

better than their classicals, but they still have this belief in the, you'll reach equilibrium

ultimately or you'll head back towards it, whereas they don't have an explanation of

capitalism that gives you cycles apart from having the wrong rate of interest.

So there's no role for an accumulation of debt over time.

So what Schumpeter gave us was a vision of the creativity of capitalism being driven

by entrepreneurs who are funded by money creation by the finance sector.

And that's fundamentally the world in which we live.

So there's also the kids these days are all into modern monetary theory, what's that

about?

Okay.

Modern monetary theory is accounting.

I want to summarize it bluntly.

It's simply saying let's do the accounting because what money is, is a creature of double

entry bookkeeping.

Okay.

What's double entry bookkeeping?

This was invented back in the 1500s in Italy.

I've forgotten the particular merchant who did it based on some Arabic ideas as well.

But the thing is, if you want to keep track of your financial flows, then you divide all

the financial claims on you.

You divide into claims you have on somebody else, which are your assets, claims somebody

else has on you, which are your liabilities, and the gap between the two is your equity.

So you record every transaction twice on one row.

Okay.

So for example, if you and I do a financial transfer, you have a bank account, I have

a bank account, your bank account will go down, mine goes up.

Okay.

And that's the sum of the operation is zero.

Okay.

But on the other hand, if I go to a bank and borrow money, then my account goes up, they

put money in my deposit account, the bank's assets go up.

Okay.

And there's still the same sum applies, assets minus liabilities minus equity equals zero.

Now that's simply saying money is an accounting, a creature of accounting.

It's not a creature of a commodity.

So if you think about how Austrians think about money, and how gold bugs think about

money and Bitcoin enthusiasts, if there are any left, think about money, what they see

is money is an object.

Okay.

And you and I can both have more gold, if we're both willing to go to this mine somewhere

and dig a few holes and get a few specks of gold out.

So there's no competition or no interaction between you and me if money is gold.

And they think money should be an object, a commodity.

But money fundamentally is not a commodity.

It's a claim on somebody else.

That's money's essence.

So when you do it, you must use double entry bookkeeping to do it.

And then when you do, you find all the answers that come out of thinking of money as a commodity

are wrong.

So for example, and I've got Elon on this one.

So I want to get this with Elon because I saw him making a comment about this a few

weeks ago on Twitter.

He said that it's wrong for the government, effectively it seems wrong for the government

to always be in deficit.

Okay.

Now, when you look at it and say, well, how is money created?

How does money come about when it's not a commodity like gold, which you dig up out

of the ground, when it's actually social relations between people that create money?

Well, money is the fundamentally the liabilities of the banking sector.

If we make a transfer between us, your deposit account goes down, my deposit account goes

up.

Deposit exchange is on the liability side of the banking sector.

But if we have a transaction with a bank, then if the bank lends us money, as its loans

go up, its deposits go up, again, that same balance.

So you've got to look and say, money therefore is fundamentally the liabilities of the banking

sector.

So how do you create additional liabilities?

You must have an operation which occurs both on the liability side and the asset side of

the banking sector.

So if you and I make a new transaction, no money is created.

Existing money is redistributed.

But if you go to a bank and take out a bank loan, then money is created by the bank loan.

So the liabilities of the banking sector rise, the assets rise, they're balanced, but more

liabilities of the banking sector means more money.

So that's how private banks create money.

And that's what I first started working on when I became an academic about 35 years ago,

the actual dynamics of private money creation.

But the government has the same sort of story.

If the government runs a deficit, it spends more money on the individuals in the economy

than it taxes them, which means their bank accounts increase.

So a government deficit creates money for the private sector.

So that's where money creation occurs from the government.

So it puts more money into people's bank accounts by spending, by welfare payments than it takes

out by taxation.

So that's creating new money.

And then on the other side on the bank, the money turns up in the reserve accounts of

the banks, which are basically the private bank's bank accounts at the central bank.

So rather than the asset of private money creation being loans, the asset of government

money creation is reserves.

Okay?

Right.

Money creation.

Money creation.

It's a good thing.

So you mentioned a bunch of stuff like private money creation with the liabilities in the

banks and then how the government is doing, the reserves, blah, blah, blah.

At the end of the day, there's a bunch of printers that are printing money.

And then you also said something interesting, which is social relations between humans is

what creates money.

I think my mind was blown several times over the past minute.

So it's difficult for me to reconstruct the pieces of my mind back together.

But basic question, is money creation a good thing or a bad thing?

Money creation is a good thing because money creation is what allows commerce to happen.

Isn't there a conservation of...

No, there isn't.

I had to have arguments with physicists over this and it took me a long time to answer

it.

So the sum total of all money is zero.

Yeah.

Okay.

It's the sum total of all assets and liabilities is zero.

So if you imagine your assets minus your liabilities is your equity and your asset is somebody

else's liability and your liability is somebody else's asset.

When we're talking about financial assets, and this is another mind blowing thing that

I've just recently solved myself.

So the sum total of all financial assets and liabilities is zero.

Okay.

Wait, wait, wait.

I'm sorry to interrupt you rudely.

What are assets?

What are liabilities?

Assets are your claims on somebody else.

So...

Specific.

Give me an example of an asset.

Okay.

Do you have a mortgage for this house?

No.

I'm renting.

You're renting.

There you go.

Well, if you had a mortgage, that'd be your liability.

That would be my liability.

Okay.

The mortgage with the bank's asset.

Right.

Okay.

If you add the two together, you get zero.

Okay.

So that's zero.

That's zero.

So money is the liabilities side of the banking sector.

Okay.

Okay.

Assets are the...

The assets on the other side can be either created by the banking sector, which is where

you get bank loans, or created by the government, where you get reserves.

But money is the liabilities.

Money is...

If you think about protons and anti protons, in that sense, money is like the anti proton.

It's the negative, the liability.

But wait, wait, wait.

The liability is the negative.

Yeah.

How's that money?

I thought money is the positive.

What is the liability for the banking sector is an asset for you and me.

And assets includes money?

Yeah.

Yeah.

Okay.

If you have a bank account, you'd have a bank account, and you'd have some cash.

Yeah.

Okay.

Those are your assets.

But the bank account is a liability of the banking sector, and the cash is a liability

of the Federal Reserve.

Okay.

So what's money?

Well, money is the promise of a third party that we both accept to close our transaction.

And this is...

And that's a bank with a liability?

That's a bank.

Yeah.

One of the most important works I've ever read is a work by a wonderful, now unfortunately

deceased, Italian economist called Augusto Graziani.

And he's the most wonderful personality.

Augusto, I met him on a few occasions, is one of the few human beings who can speak

in perfectly formed paragraphs, okay, superbly eloquent.

And what he did was write a paper called The Monetary Theory of Production.

You can find it, download it on the web, it's pretty much open source now.

And what he said is, what distinguishes a monetary economy from a barter economy?

So he said, in a barter economy, what we do is, you know, I'll give you two of these for

one of those.

Yeah.

Okay, barter.

So we've got a relative price, there are two of us involved, and there are two commodities.

So with money, money is a triangular transaction, okay?

There is one commodity, I want to buy that can of drink off you, two people, and the

price that's worked out ends up being in a transfer from the promises to pay the bank

that the buyer has to the promises to pay the bank that the seller has.

So if I, so what you have is a monetary transaction in a capitalist economy involves three agents,

the buyer, the seller, and the bank.

So the bank always has to be part of it.

Well, the bank has to be part of it.

When I hand you the money, you accept that as you've now got, rather than it's the bank

promising to pay me something, it's now the bank promising to pay you something.

And we exchange the promises of banks, and that's fundamentally money.

So money is fundamentally a threesome, and everybody gets fucked.

Is that a good way to put it?

No, I'm just kidding.

It leaves it, it leaves it for the guy to be like, oh no, I can use French in this conversation,

that's good.

That's not French, that's a different language, I'll explain it to you one day.

You Australians will never understand.

Okay, if I can return to, we'll jump around if it's okay.

Oh, that's fine.

So you mentioned Karl Marx as one of the great intellects, economic thinkers ever.

He might be number one.

You study him quite a bit, you disagree with him quite a bit, but you still think he's

a powerful thinker.

A powerful mind.

A powerful mind.

So first of all, let's just explore the human.

Why do you say so?

What's interesting in that mind?

In the way he saw the world, what are the insights that you find brilliant?

Marx once described his major work as, towards a critical examination of everything existing.

So he's a modest bastard.

So he wanted to understand and criticize everything.

And even, he wasn't trained directly by Hegel, but his teachers were Hegelian philosophers.

And what Hegel developed was a concept called dialectics.

And dialectics is the philosophy of change.

And when most people hear the word dialectics, they come up with this unpronounceable trio

of words called thesis, antithesis, synthesis.

I can barely get the words out myself.

And that actually is not Hegel at all.

That's another German philosopher.

Kant?

Fichte.

Oh, I thought it was Kant.

No, Fichte.

Well, I'm not sure.

I mix them up.

All Germans look the same to me.

Yeah.

Yeah.

So, but if you look, there's a beautiful book called Marx and Contradiction.

You want to find a great explanation for Marx's philosophy.

I've forgotten the author.

I think it's Wild, W I L D E, Marx and Contradiction.

And he points out the actual origins of Marx's philosophy, but I didn't know that when I

first read Marx.

So I became exposed to Marx when I was a student at Sydney University.

And we'd had a strike at the university over the teaching of philosophy.

And what happened was the philosophy department had a lot of radical philosophers in it and

a conservative chief philosopher.

And the radicals wanted to have a course on what they called philosophical aspects of

feminist thought.

And the staff voted in favor of it.

This is back in the days when university departments were democratic.

The professor opposed it.

He got it blocked at a high level.

The staff lipfrogged over that, and then finally the vice chancellor blocked it.

So that led to a strike over the teaching of philosophy at Sydney University, which

at one stage, over half the students were on strike.

Economics began out of that.

Over teaching of a philosophy of feminism.

Yes.

God, it's good to be a student.

That's such a different life to what we're living now.

That's the academic milieu in which I developed all my ideas.

And I had become a critic.

I've gone from being a believer of mainstream economics when I was a first year student

to disbelieving it halfway through first year.

Okay.

And I then spent a long time trying to change it, getting nowhere.

And then this philosophy strike happened and we took it on in economics and we formed what's

called the political economy movement and had a successful strike.

We actually managed to pressure the university into establishing a department of political

economy at Sydney University, as well as a department of economics.

What was the foundational ideas?

Were you resistant to the whole censorship of why can't you have a philosophy of anything

kind of course?

Well, it was much more libertarian in the genuine sense of the word, period of time,

at the end of the 60s, beginning of the 70s than the word libertarian has been corrupted

since then.

But it really was about free thought.

And you went to university to learn.

It was about education.

I remember having a fight with my father once where dad was angry about the marks I was

getting for some of my courses.

And he said, if you don't get a decent result, you won't get a decent job.

And I said, I'm not here to get a job.

I'm here to get an education.

Oh, wow.

Okay.

Now, the thing is, ultimately, it's been a pretty good job for me as well.

This is in Sydney, by the way, and Sydney in summer is absolutely gorgeous.

And what does a bunch of lefties decide to do during summer but read Karl Marx?

Yeah.

On the beach or?

Actually, inside the room of the philosophy department at the University of Sydney in

the main quadrangle.

There's sandstone all around us, and we have a bunch of about 20 or 30 of us reading our

way through Marx.

Capital?

Which capital?

It was volume one capital.

And I remember walking off to that meeting with one of my friends who's a law student.

And this was a period of a huge construction boom in Sydney, so the whole skyline, which

we could see from the campus, was full of what they call kangaroo cranes, which were

an Australian invention, that are cranes that can be leapfrogged over each other to build

a skyscraper.

So, here you are reading Karl Marx, looking at the mechanisms of capital.

And I looked at those mechanisms, and I knew Marx argued that labor was the only source

of value.

Yeah.

And he said machinery doesn't add value.

So, the cranes are worthless.

I'm looking at these cranes and thinking, I want a very good explanation by Marx as

to why these cranes don't add value.

So, reading through the first seven chapters of Capital, what you found was Marx applying

this dialectic.

And like the Fichte and stuff is bullshit.

That is not how Marx thought at all.

I was reading, trying to find the thesis and the synthesis, and it's not there at all in

any of Marx's works.

And I've read everything he's ever written on economics from 1844 to 1894, when his last

books were published.

There's not one word of mention of that.

What he does talk about is foreground and background and tension.

And his idea of a dialectic is that a unity will exist in society, and that unity can

be individual, it can be a commodity, anything at all.

The unity will be understood by that society.

One particular aspect will be focused upon.

So, if you think about the human being in capitalism, the focus on the human being as

an object is their capacity to work.

You're a worker, okay?

It's put in the foreground.

The fact that you're human and you want to play a guitar and go surfing and make love

and all the other things that humans do is pushed into the background.

There's a tension between the two of those.

And that can transform that unity over time.

And that's a beautiful dynamic vision of change.

So dialectics is a philosophy of change.

So synthesis, antithesis is what does every idea have a counter argument?

Yeah.

There's a positive and negative and you bring them together somehow.

And then Marx has this foreground, background, and tension.

Foreground is all what we think of as economics and background is all the lovemaking we do

as humans.

That sort of thing.

And why is there a tension?

Because if you imagine the unity, like if you take a human in a, any preview, like

if you go back to Cro Magnum days, when we're living in caves and we've got to go hunting

and cook food and stuff like that, but there's no social hierarchy.

Because we've become used to, so you don't get labored as a worker or a capitalist.

You're just a human in that situation.

Then you've got more an integrated view of who you are.

And I think that's one of the appeals of a tribal, a genuine tribal culture that you

get treated for the whole of who you are.

You've certainly categorized you're male, you're female, you're young, you're old,

you're a hunter, you're a tool maker, et cetera, et cetera.

But you're treated as more an integrated object.

When you get put in a complex society, like a capitalist society, then one side of you's

emphasized and the others are deemphasized.

So is it fair to say that the background is like our basic fundamental humanity and the

foreground is the machine of capitalism?

Effectively.

And when you look at it in terms of a human, but what Marx did is apply this to a commodity.

So he said, what is the essential unity in a capitalist economy?

And the essential unity is a commodity.

The essential unit.

The essential unity.

What's unity?

Unity is an object in society.

Okay.

Okay.

So he started from the point of view of trying to understand how exchange occurs.

How do we set prices?

And his starting vision was to say that a commodity is a unity in a capitalist economy.

The part of the unity that we focus upon is the exchange value.

A capitalist produces a commodity, not because of its qualitative characteristics, but because

it'd be sold for a profit.

So the foreground aspect of a commodity is its exchange value.

The background aspect of it, it won't succeed as a commodity unless it has a use value.

So the background is the utility thing.

Yeah.

See, if you made something which didn't work, okay, then you might be able to sell it, but

it has no utility.

You can't make that into a commodity.

A broken thing can't be sold.

Does that have the subjective?

Yeah, it has to have the subjective side as well as the objective.

So the objective is what capitalists worry about.

I'll give you my favorite counter example of that.

I took a bunch of Australian journalists to China way back in the period when the Gang

of Four was being on trial, and we did a tour of the Forbidden City in Beijing.

And at that stage, all the artifacts of the royal family, the emperor, were actually in

the building still.

And we walked past one of them, and it was this gold, solid gold bar about this long,

shaped like a fist, turned over like this.

And on this side, there were rubies, emeralds, diamonds.

You'd never seen gemstones.

I mean, gems that big, okay?

And one of the journalists asked me what I thought it was, and I said, oh, it's obvious.

Jane is a backscratcher, ha, ha, ha.

I walked away.

She caught up with me about 20 minutes later, said, I asked one of the guides, it is a backscratcher.

So here's a backscratcher for the emperor made of solid gold with diamonds and rubies

and emeralds during the scratching.

Now, that's a commodity in a feudal society, okay?

The cost doesn't matter.

You want the most elaborate, beautiful thing because you are the emperor.

So in a feudal society, the commodity, what's focused upon is the utility.

And the cost of production when you're the emperor is immaterial.

Capitalism reverses that.

So the commodity in a capitalist economy is a plastic $2.00 scratchy you can get from

Kmart or Target.

And so the use value is necessary but irrelevant to forming the price.

Now, that was a completely different vision of exchange in capitalism to what I found

in the neoclassical theory because that says it's the marginal utility and the marginal

cost of everything that determines the exchange ratio.

And the crazy thing about that is not so much the marginal utility, but the argument in

the neoclassical theory is that the price ratio, the price will, when there's an exchange

going on, there's two person, two commodity exchange of two commodities between two people.

The price will change until such time as the ratio of the marginal utilities is equal to

the ratio of the marginal costs that's supposed to be the equilibrium.

And Marx says that's bullshit.

That's a previous society where you exchange stuff that you happen to have for stuff somebody

else happened to have without any real production mechanism being involved.

And he said that's like when you have two ancient tribes meeting for the very first

time and one tribe can make something the other tribe can't make.

And they will therefore, the price they were willing to pay will reflect how unique this

other object is that this one tribe can make and the other can't.

So for example, the story of Manhattan being sold for 40 glass beads, it's actually 40

glass trading beads, I believe it is a true story.

But the thing is the Indians couldn't make glass beads.

So they valued the glass beads at the island of Manhattan, okay, which is a utility based

comparison.

And what Marx said, that's the very initial contact over time, even if you don't know

the technology.

Over time, you start to realize how much work goes involved to making what they're selling

you versus what you're selling to them.

And you start making stuff specifically for sale.

So you know, Elon's not losing personal utility each time a Model 3 goes out the door.

He might get utility out of the fact that he's created that vehicle, that concept and

manufactures it and so on, but he's not losing utility each time a Model T Ford goes out

the door, going back for the ancient commodity there.

So the utility plays no role in setting price in Marx's model.

Whereas it's essential in the neoclassical model.

What's the difference between utility and marginal utility?

What does the word marginal mean?

And why is it such a problem?

It turns marginal utility or utility itself has different meanings than the two schools

of thought.

If you take the classical school of thought, which when Marx comes from, utility is effectively

objective.

So the utility of a chair is that you can sit in it, okay, not how comfortable it makes

you feel.

Okay, now if you think about the utility of the chairs, we're both sitting and they're

identical from a classical point of view, we're both sitting.

But from a neoclassical point of view, it's how comfortable it makes you feel.

And that depends upon your subjective feelings of comfort.

You might be far more comfortable in the identical chair that I'm sitting in than I am.

And therefore, the comparison is difficult.

And therefore, working out a ratio involves you've got a decline in your, each time you

give away a chair in exchange for an iPhone, you have a fall in your utility, okay?

And then therefore, you want a higher return because you're losing more utility each time.

The more chairs you give away, the less utility you're getting from chairs.

So there's a decline in your utility.

That's your marginal utility.

So it's including your subjective valuation in setting the price.

And what Marx pointed out is this is a caricature of actual change in a capitalist economy because

we have, in a capitalist economy, huge factories turning out huge quantities, specifically

for sale.

They've got no utility to the seller unless they're sold, okay?

So it's a very different vision of how price is set.

And Marx used that to explain where profit comes from, but he made a mistake.

And his argument was that talking about a worker, as now your unity, this foreground

background tension thing, the foreground is that you hire a worker for their cost of production.

And the cost of production is a subsistence wage, okay?

Their utility to the buyer is the fact that they can work in a factory.

Now, it might take six hours, let's say, to make the means of subsistence.

And that's the exchange value, and that's what the capitalist pays as a wage to the

worker.

But they can work in the factory for 12 hours.

That's the utility.

12 minus 6 is 6 surplus of value hours, and that's where profit comes from.

And that was Marx's argument.

And I thought it was brilliant, but it also applied to machinery.

Right, okay.

Let's blink on that.

Hold on a second.

No, no.

Deep is good.

You just want to define terms.

Don't take that statement out of context, the internet, please.

Okay.

You said buyer, seller, worker in a factory, who's the seller, who's the buyer?

Why is the worker the buyer?

The worker is the commodity in this case.

Because if you're going to make stuff in a factory, you've got to hire workers.

Yes.

And what Marx is saying, the buyer in that situation is a capitalist.

So what does the buyer pay?

He says he pays the exchange value.

That's back to the commodity thing, because that's the starting point.

He said the essential unity in a capitalist economy is the commodity.

A commodity has two characteristics, exchange value and use value.

Exchange value of a commodity in a capitalist economy will be its cost of production.

The use value is what you do with it, okay, once you've purchased it.

But labor is a commodity?

In this case, when a worker is being hired for a job, yes.

So the worker's labor has an exchange value and a use value as well?

That's it, yeah.

Use value.

Use value of a worker's labor.

Exchange value.

Let me think about that.

So the hours they put in is the use value.

Interesting.

So what does the worker want in this?

What are the motivations?

Are we not considering the worker in this context as a human being?

Well, you come in and that's actually, that's the next layer.

What Marx gives us is like a layered cake, starting from a foundation of saying straight

commodity exchange, and then saying, well, you're treating a worker as a commodity.

Now a commodity is something like this, okay, that has, so far as I'm aware, no soul, okay?

Not going to be complaining if I turn it upside down.

It'll fall over.

So there's no soul there as a human, is both a commodity and a noncommodity.

And therefore there'll be a tension in the person.

I'm being treated as a commodity here.

I'm being paid just enough to stay alive.

I've got a wife and kids back at home.

So that is another layer of thinking in Marx, and on that layer he then says, well, workers

will therefore demand more than their value.

So that's when you get like political.

You get political and you get money coming above that and so on.

But the basic idea starts from the commodity is the fundamental unity in capitalism.

The important commodity in Marx's thinking was the worker, because that's where he said

profit came from, okay?

And then that explains the motivation of the capitalist, and that ultimately is the labor

theory of value and Marx's arguments about how capitalism will come to an end.

Okay, okay, okay.

So first of all, what is the labor theory of value?

And actually before that, what is value?

Is that, this is like me asking what's happiness.

Is there something interesting to say about trying to define value?

You vary, and this is a huge problem in economics is arguments of what does value mean?

And the neoclassicals came down as that it's subjective.

Its value is whatever you get out of it, but it's your personal evaluation of something,

your personal feelings.

So they've got that very subjective idea of value, whereas the Marxists, being inheritors

of classical school, talk in terms of objective value.

So the value is the number of hours it takes to make something, or the effort.

Value is the effort that goes into making something in the classical school.

Well, that's just one measure of objective.

Where do you fall?

Huh?

Where do you fall?

I fall on...

Subjective versus objective spectrum of value.

I think you have to have the capacity to move between one and the other in a structured

way.

The K model of value.

Yeah, well, my base model is the objective, okay?

But above that, as soon as you start talking, you said about the worker, for example, then

you get involved in the subjectivity, because a worker will be angry, and justifiably so,

about being treated as a commodity, because I'm not a commodity, I'm a human being, okay?

And that's where Marx saw political organization coming from.

And that's subjective now.

And then when you get to money itself, Marx actually said, well, what's the value of money?

Now if you use an objective theory of value, you would say, well, the value of money is

its cost of production.

What's the cost of producing a dollar?

It's about two cents.

So he said it can't be, the value of money cannot be its cost of production.

Or the most value, I think if I remember the phrase properly, is value here as it must

mean the, effectively, uncertain expectations or subjective valuation.

Uncertain expectations or subjective valuation.

Okay, but he's okay with that?

He was okay with that, because he could move between different levels, because he had a

structured foundation of this dialectical vision of foreground, background tension,

commodity, having use value, exchange value, and a gap between the two when you're talking

about machines, when you're buying stuff for production.

And then at the next level, he could look at workers, worker organization, and say that's

driven by being treated as a commodity when you're a noncommodity.

So the basic labor theory of value that is described to Karl Marx is that value at the

base layer fundamentally comes from the labor you put into something.

And you say, well, there's some deep truth there, except he misses one fundamental point,

which is machines can also bring value to the world.

He was saying they don't, the only thing that matters is human labor, not labor.

How do you measure what's the role of whatever value machines bring to the world?

This is another intriguing history, because Marx, when he first started, had what you

can call an exclusivist explanation for why labor created value.

And that was to say that labor is the only commodity with both what he called commodity

and commodity power.

So you have labor and labor power.

Labor is the, and I get fuzzy about this, I haven't read it for something like 30 years,

but labor has both commodity and commodity power.

The commodity is you can buy labor, which is the means of subsistence.

Labor power is the capacity to work inside a factory.

There's a difference between the two, therefore that difference will give rise to surplus.

And there's no other commodity that has this essence of commodity and commodity power.

So that was his exclusivist argument.

In the middle of 1857, he was visited by a guy called Otto Brau in his home in Chelsea.

And Otto returned to Marx a copy of Hegel's, I think it's called Phenomenology of Right,

I haven't read it, but that's the book.

And Marx was then at that stage reading through all the classical theorists again.

And he was, suddenly he read Hegel again.

And if you know Hunter S. Thompson, okay, okay.

Who doesn't know Hunter S. Thompson?

Somebody who hasn't had enough drugs, obviously.

Yeah.

But Hunter S. Thompson.

He comes to you in a dream after you take your first puff of...

Mescaline or...

Or whatever.

And of course, we've all...

If you know your drugs well enough, you can tell, okay, he's stoned, okay, he's on cocaine,

you know.

But suddenly, his writing style in the middle of a book called The Grundrisse completely

changed.

He switched from weed to cocaine.

He switched from Ricardo to Hegel, okay.

And what in Ricardo, he had this exclusivist argument about labor, and suddenly Hegel is

back talking in terms of dialectics, not actually using a word, but foreground and background

and tension.

And then he...

That's where this use value, exchange value, attention thing came from, is rereading Hegel

13 years after he stopped reading philosophy, because made in 44, he was reading just The

Economists.

So you're saying Karl Marx is human after all.

He's human.

He could be...

I would love to have a beer with Karl.

For a wine.

For Karl?

He's Karl to you?

He's Mr. Marx to me.

Hang on.

He'd be Karl to me, I'm afraid, after all these years.

Yeah, yeah.

You've had quite a journey together.

So that's where after Hegel, his interpretation of the dialectic comes in the form of background,

foreground, and background.

And then on page 267 of the Penguin edition of the Grundrisse.

What early?

Your memory...

One and a half pages long footnote.

It's pretty hard to forget.

Because when I did this, when I first read Marx way, way back when I was...

How old was I?

20.

Okay.

I tried to explain my explanation of Marx's use value, exchange value stuff to my colleagues

in this philosophy discussion room at Sydney University during a beautiful summer that

we were inside, concrete and sandstone walls discussing Marx.

And I went to say, look, the use value, exchange value argument can be applied to a machine.

What's the exchange value of a machine?

It's cost of manufacturing it.

What's its use value?

Its capacity to produce goods for sale.

No relation between the two, there'll be a gap, a machine can be a source of profit.

Now, I said that and I got laughed at and I quite literally laughed at.

So when I went back to university 13 years later to do my master's degree, I chose to

read through and find in Marx where he first came across this insight.

So my first master's thesis failed, by the way, and justifiably so.

I didn't know the level of academic discourse necessary.

I had an advisor who didn't understand what I was writing.

He got me to write for his New Keynesian audience and it was a mess and it got failed.

So I got rid of him.

Did it get failed?

Why do you think?

It wasn't a good thesis.

I didn't know the level.

It was written for an audience my supervisor thought that I should be writing for, and

it was a mess.

And so I met another guy, Jeff Fishburne, as a lecturer at New South Wales University.

And Jeff was open minded.

He was not a conventional neoclassical thinker.

And I realized I'd throw out the half that Bill had got me to do, focused just on Marx.

And so I decided to read Marx in chronological sequence from his very first works of economics,

which are called the Economic and Philosophical Manuscripts of 1844.

And he wrote those in a garret in Paris after he'd been expelled from Prussia.

And so he decided to read having been an expert on philosophy and regarded it as the towering

intellect of Hegelian philosophy in Prussia, but driven out because he was a radical.

He ended up running a newspaper or being writing for a newspaper, and he was reporting about

the eviction of peasants from the forests, taking away their feudal rights.

And so this is where his passion for economics and humanity came from.

And he was a poet as well.

I mean, he loved poetry to Jenny von Westhalen.

His first published works were pretty much in poetry.

He was a rouse about, he was a wild character.

We'd probably fight like crazy, I imagine, if we met.

Over the beers?

I'm slightly, even though I can be, I can get involved in an argument like nobody's

business.

No, really?

No, really.

But I'm a bit more peaceful of personality.

Oh, you think Marx is feistier than you?

He was feisty, but feisty with, he could be arrogant.

Like I've got an intellectual arrogance, I've come to accept that.

But there's like a fundamental humility to you.

You're saying Marx is like, has ego that's hard to control.

A bit too big ego, yeah.

I'm guessing.

I mean, I'm never going to meet him.

Well, the beard says ego to me.

The beard is huge, yeah.

That's huge.

Okay.

So this is interesting.

So you went chronologically right through his works, the development of the human being

through his works.

Yeah.

And I was trying to find the point at which he discovered this use value exchange value

idea.

And it occurs in a footnote on page 267 to 268 of the Penguin edition of the Guindrisa,

which his notes he was taking literally not meant for publication, literally sitting at

a stall inside the British Museum, I think, reading all the classical authors in chronological

sequence.

And then somebody throws Hegel at him, and suddenly he's talking in Hegelian terms.

And he suddenly says, is not, because it's whole value issues, what is value?

Is it exchange value, use value?

How do they relate to each other?

That's what he was thinking about.

And he said, is not use value, which was left out of the classical school, a fundamental

aspect of the commodity?

Is there not a tension between the use value and exchange value?

Just so we're clear in that context, use value is kind of the subjective thing, exchange

value is the objective thing.

Yeah.

And Marx was, found a way to integrate the two.

He was focused on labor being the only thing that can generate both the use value and the

exchange value.

But, no.

If you look at the classical school, they focus on exchange value, objective.

Look at the neoclassical, they focus upon use value, subjective, or they call it utility.

So Marx, coming from the Ricardian tradition, basically dismissed the role of utility.

And then when he reads Hegel, he's suddenly starting to think in terms of unities.

And exchange value and use value is the unity of the commodity.

And he thinks, well, I can't ignore use value.

So rather than leaving it out completely, which is what Ricardo and Smith does, I've

got to somehow bring it in.

And this Hegelian insight occurs to him.

And it's remarkable, I really recommend taking a look at the book, even just to look at that

particular page, because what it would have been, as shown as a footnote, but it would

have been him saying, oh, wow, and his asterisk, asterisk, is not use value, a fundamental

aspect of the unity of a commodity.

So in the notes, you see the discovery of an idea in the human mind, the integration

of an idea.

And it's beautiful.

And he actually writes, does this have significance in economics, question mark.

And then he probably went home that night, and that idea changed him.

Yeah, it changed him completely.

And from that point on, his writing was completely different.

But he still had this idea from the Ricardian days of saying that labor is the only source

of value, using an exclusive argument to say there's something unique about labor that

explains why it's a source of value.

But suddenly, this insight occurs to him, and he thinks, I can get a positive derivation.

I can use use value and exchange value and the fact they're not related to each other

as a dialectical tension to explain surplus value.

And that's what he does.

So he goes from a negative explanation of where value comes from to a positive explanation

on that page of the Guindarisa.

He then triumphantly uses it to explain why labor is a source of value.

You buy it for its exchange value.

You use its use value.

They're unrelated.

The use value will be bigger.

That's where profit comes from.

Then he does exactly the same thing for machinery, about 30 pages on.

He says it also has to be contemplated, which was not done before.

This is wrote nice to himself, by the way.

It's written really in a colloquial style, that the use value of a machine is significantly

greater than its exchange value.

He actually left out the word is.

It's used to be a translation into English of the German, I'm sure.

I don't know.

I haven't seen the original notes.

I'd love to see them.

But he says, he leaves out the word is.

It also has to be contemplated that the use value is significantly greater than its exchange

value, i.e. that the contribution of the machine to production exceeds its depreciation.

That was an insight which undermined his explanation for revolution.

Okay.

Can you say that again?

The cost of production exceeds its depreciation?

Can you linger on that?

Well, what Marx argued, and you read this in Capital, and I read this in Capital when

I first saw the contradiction in his own thought.

He said that no matter how useful a machine is, whether it took a hundred hours to make

or cost 150 pounds, it cannot under any circumstances add more to production than 150 pounds, which

in his old exclusivist logic he could justify, and which in his post 1857 argument is bullshit.

Can you steel man his case?

Can we go to the mind of Marx and thinking if a machine costs a hundred bucks, it can't

be ever more, bring more value than a hundred bucks to the world?

But that contradicts his previous logic, because what he said is commodities are the essential

unity in capitalism.

Capitalism focuses upon the exchange value.

That pushes the use value into the background, and there's a tension between the two.

What that means is the exchange value of a commodity sets its price.

The use value is independent.

He called them incommensurable.

He literally used the word incommensurability between exchange value and a use value, whereas

neoclassicals make them commensurable.

So he's saying exchange value and use value incommensurable, and that normally means that

exchange value is objective, like the number of hours it takes to make something.

Use value is subjective, how comfortable the chair is, the fact that you can sit in a chair.

So that's incommensurability, but when you apply it in production, the exchange value

of something is objective.

It's how many hours it takes to make a machine or how many hours it takes to make the means

of subsistence for a worker.

The use value is also objective.

You're making commodities for sale, and the worker does six hours.

Six hours of work will make the means of subsistence for the worker, but the worker will work a

twelve hour day, and the six hours becomes a gap.

Now that's incommensurability between use value and exchange value of labor, but when

you look at what he said about no matter how long it takes to make a machine or how many

pounds it costs, he's saying they're identical, and that's contradicting his own logic.

Well, what's the use value of a machine?

The fact that it can produce goods for sale, exactly the same as the worker.

Now in my modern reinterpretation of Marx, which brings in my work on energy, I see both

labor and machinery as a means to harness energy and produce useful work, and they can

both do that.

In fact, they do it together.

It's a collective enterprise.

Okay, so, and we'll go to that.

So there's no fundamental difference from an exchange value and use value perspective

between a human and a machine.

And therefore, they're using the same logic that can both be a source of surplus, which

is what Marx contradicted because his explanation for where socialism would come from is that

only profit comes from, like profit comes only from labor.

Over time, we'll add more machinery than labor that will mean a falling rate of profit and

therefore a tendency towards socialism.

And what he did in that insight in 1857 is contradict his own idea about what would lead

to socialism, and he couldn't cope with it.

Okay, what's the difference between Marxian economics and Marxist political ideology?

The gap between the two, the overlap, the differences, what?

The real foundation of Marx's political philosophy was the economic argument that there would

be a tendency for the rate of profit to fall.

And that tendency for the rate of profit to fall would lead to capitalists battening down

on workers harder, paying them less than their subsistence, a revolt by workers against this,

and then you would get socialism on the other side.

So what he called the tendency for the rate of profit to fall played a critical role in

his explanation for why socialism would have to come about.

He was saying it would have to come about, or is it a good thing for it to come about?

He had a should, but he was trying to say it must.

So if you look at Marx in the history of radical thought, he was preceded by what were called

utopian socialists.

Saint Simon, even the Cadbury's company came out of utopian socialist, and they had an

idea about a perfect society in the future where people were properly rewarded, were

treated as human beings rather than cogs in a machine and all this sort of stuff.

And they said socialism should come about because it treats humans better than capitalism

does.

Marx said, I can prove that socialism must come about.

So he preferred, he had a utopian vision of a future society, but he thought he could

prove that it had to come about.

And the proof relied critically upon tendency for the rate of profit to fall, and that relied

upon labor being the only source of profit.

What was his utopian view?

So this idea from each according to his ability to each according to his needs.

Is that the utopian?

I think it's utopian in the context of our modern world.

It says that rather than being rewarded, like Jeff Bezos gets enormous fortune, you get

what you need, not what you want, necessarily.

All needs is fulfilled.

It was a vision of utopia where you could be a fisherman in the morning, a poet in

the afternoon, and a chef at night, this paraphrasing one of his phrases.

So he did have a utopian vision of a future society, and he did think human creativity

would be much, much greater under socialism than it was under capitalism.

He was wrong.

So let's explore in different ways where he was wrong.

You're saying there's a fundamental flaw in the logic, but also if we can explore high

level philosophical concepts of socialism too, like the dreams of a utopia.

So first of all, what is socialism?

That's another loaded term.

Socialism particularly in America is a very loaded term.

What Americans call socialist is a large amount of provision of services by the state, which

is commonplace in Europe.

It's still moderately commonplace in my own home country of Australia.

And that Americans will call public education socialist.

It's a total parody of the word.

Strictly speaking, what socialism meant is the public ownership of the means of production,

no private ownership of the means of production.

What is the means of production?

Machine factories.

Factories.

So all the goods that are produced in factories, no, the means of producing the goods is owned

by a centralized entity.

Yeah.

Centrally planned.

This is what actually was done under Gold's plan under the Soviets.

And even with the collective farms as well.

You no longer own your land.

The state owns the land.

You worked on the land.

And this was supposed to be a utopia.

Now it didn't turn out to be one.

And we'll talk about maybe your ideas of why it didn't turn out to be one.

So the fascists did the same.

So is this fascism also central?

Fascism, so called national socialism.

It's also a kind of socialism.

So yeah, but there was no, it wasn't a public owner, there was public direction.

So the state would tell factories what to do, but there's still a private profit.

And a large part of why the Nazis succeeded was the extent to which they managed to coopt

major manufacturers in Germany.

So it's, you know.

Direction versus ownership.

Yeah.

A dictatorial, I mean, that's a very particular implementation.

So you have to consider the full details of the implementation, but it's basically dictator

guided.

Yeah.

And if you want to take a proper vision, then you have to say it's the ownership of the

means of production by the state.

Okay.

Versus the ownership by private.

That rules out the Nazi period.

Use the word that, again, they're bastardizing as much as Americans do in the opposite direction.

Well, what does ownership exactly mean?

Well, it became incredibly complicated.

And this is actually the best work on this is done by recently deceased Hungarian economist

called Janos Kornai.

And Kornai tried to explain why socialism failed.

Because why did socialism fail in your view?

In his view, in Janos's view, in your view.

I think Janos is 100% correct.

It's a brilliant piece of work, so I'm going to be really paraphrasing his view.

And he imagined an ideal socialist society, and there wasn't a Stalin, there weren't

purges, and you lived up to all the ideals that Marx had for socialism.

So he said, but you do it in a context of an economy which is incredibly primitive,

Russia.

Okay?

Because if you look at Marx's own vision of the revolution, it was going to happen

in England.

The advanced economies would be first to go through the revolution.

The socialist, the primitive economies would have to go through a capitalist transition.

And this is the difference between the Mensheviks and the Bolsheviks.

So the Mensheviks, when Hyman Minsky came out of the Menshevik family, the Mensheviks

believed you had to go through a capitalist phase.

Russia had to go through a capitalist period before it becomes socialist.

The Bolsheviks believed they could get there in one go, bypass the capitalist phase, do

the development under socialism rather than under capitalism.

And this is what Yanis was actually analyzing.

You start from a primitive feudal economy, very little industrialization, and you want

to jump to an advanced industrial society from that foundation.

So he said what you have then for is a whole range of industries, all of which need as

much resources as you can get for them.

So you want to develop agriculture, mining, industry, every little division of it.

They all have legitimate demands on the resources of the country and the state.

That means that all your resources are fully employed and are probably over employed.

So you have a resource constraint in that society.

The easiest way to cope with a resource constraint is to produce last year's commodity, not to

innovate, not to make change.

So what they will give you is as you start to add, you invest so you now have the beginnings

of a steel industry, beginnings of a car industry, and so on, you start investing, but you continue

producing the same product you made last year.

And I have a perfect personal example of that, which I'll throw in now if you like a pretty

heavy conversation.

I know my first major girlfriend had a brother who wanted to get a motorbike, but he couldn't

afford a Honda or a Kawasaki.

At the time, they cost about $3,000 for a 650 cc Japanese motorbike.

He found he could buy a Cossack for $650, $1 per cc.

So I was there when he got this is in suburban Sylvania waters in Sydney.

So this crate arrives with a Cossack motorbike inside it.

So we take it apart, it's then got all these wooden palings, we have to pull off the wooden

palings to open it up.

Then there's oil soaked rag over this thing, which is tied on a wooden base.

We take the oil soaked rag off and we stare in all its glory in a 1942 BMW.

It was exactly the same as Steve McQueen in The Great Escape.

So the Russians for 30 years were making the same bloody motorbike.

It had a bicycle seat.

And that's how they cope.

They've just made the same damn machine every year.

And he said, so that's the outcome.

You actually want the best possible world.

You're trying to build as fast as possible.

You're paying workers as high wages as you possibly can.

And that leads to a world where you don't innovate.

But he said capitalism, on the other hand, pure capitalist economy, you're trying to

pay workers as little as possible.

You have competitive industries.

You're trying to take demand away from your rivals.

You have Kawasaki versus Honda versus BMW, et cetera, et cetera.

The way you get demand away from your competitors is by innovating.

So what you will get is cycles and booms and slumps, but you'll innovate and change over

time.

So what you find was this huge gap between socialist volume production with no innovation

and capitalism with innovation.

So that was the fundamental failing that Janos Korneis saw, so why did socialism not innovate?

Because if you go back to this famous historical incident with Khrushchev in the United Nations,

bangs Texophe Shewan, bangs the desk, says, we will bury you.

He literally meant we're going to bury you in commodities.

We're going to produce more output than you are.

And he was wrong.

Because fundamentally, in the long term, to bury somebody in commodity production, you

have to innovate.

Yeah.

And there's also another remarkable Soviet engineer who was given the job of interpreting

Marx's ideas of industrial sectors.

So he had the commodity sphere, the industry sphere, sector one, sector two, sector three.

Sector one producing consumer goods, sector two producing capital goods, sector three

producing luxury goods for capitalists.

And so he had a three sector model of the economy, and he was talking about the dynamics

between them.

And what Feldman did was reinterpret this as an engineer would reinterpret it, which

was brilliant work.

So what he said was, you need to produce the means of production.

If you want to grow quickly, you focus on producing the means of production rather than

commodities.

So you don't make cars, you make car factories.

Okay?

You make a few cars, but most of the effort goes into expanding how many factories you

have.

And what he did was do a mathematical model where you start off with very low levels of

consumer good output, but then you would just go exponential.

Okay?

Now, I took a look at that back when I was doing my master's degree.

And the training in mathematics, I took Feldman's equations and then looked at what was actually

driving it was he was imagining correctly a huge pool of unemployed labor.

If you go back to the earliest stages of Soviet industrialization back in 1917, post the Second

World, post the First World War, you had all these unemployed workers, you had all these

peasants you could take off the land and put into factories.

So you had a huge supply of workers.

What you had to do was build the factories.

See building the factories, but at a certain point you exhaust the supply of lowly employed

or unemployed labor.

And so rather than having this exponential takeoff, you hit a ceiling and then you can

only grow as fast as the population because you're not innovating.

So that's what actually hit the Soviet system.

And it's why they never buried the Western consumer goods.

And instead why Western consumers looked in envy at the goods being purchased by their

Western people and said, if that's exploitation, we want exploitation.

So okay, there's a lot of interesting stuff to ask here, which is, so Marx's vision for

the socialist utopia is you have to go through capitalism.

The Mensheviks were true to Marx's original idea.

So is there a case to be made that in the long arc of human history on like human civilization

on earth that we're going to live out Marx's vision for utopia, which is like, will we

run into a wall with capitalism?

I think we are running into a wall with capitalism.

In fact, I think we've already gone through the wall and we haven't yet realized we've

smashed our skulls.

But on the other side, we're bleeding and everything like that.

Does Marx have any insights on what the other side of capitalism, what is beyond capitalism?

I think that beautiful phrase of from each according to his ability to each according

to his needs describes what we should end up with.

And I think that's actually, if I think about, you know, I'm an Elon Musk fan.

That's what I think is partially going to be the nature of society if we build one that

functions on Mars.

Because and I've actually seen the interview with the Italian who's involved in designing

what the future colony will look like.

He was actually asked this question, can there be enormous inequality in Martian civilization?

The guy said, absolutely not.

Because the resources, again, resource constraint applies.

You simply can't give somebody underground bunker 100 times the size of somebody else's

100 underground bunker.

Because the scarcity of resources imposes a need for equality overall.

Is that always?

That's interesting.

I mean, the scarcity of resources, wait, but I feel like that's a contradiction.

I thought.

Are you thinking neoclassical about scarcity?

I'm barely thinking at all.

So wait, I thought scarcity, the best way to build on top of scarcity is a capitalist

type of machine.

No, this is where, again, our vision of what scarcity is, is wrong.

Because and Ricardo said this, but it's actually better than Marx.

Because Ricardo said, there are some products whose value is determined entirely by their

scarcity.

Yeah.

Paintings, rare wines, et cetera, et cetera, they are things you cannot reproduce in a

factory.

He said, the essence of capitalism is what you can make in a factory.

And therefore, for these unique objects, these rare objects, Picasso painting a beautiful

bottle of wine, et cetera, et cetera, then the utility, it can't be reproduced easily.

So its price will be determined by subjective valuation.

He said, what we're talking about in capitalism is the stuff you can make en masse.

And that is the true focus of the capitalist economy.

And that is not about scarcity.

That is about, the only scarcity applies when you don't have the resources to make them

anymore or you can't use the energy involved because you'll damage the biosphere too much,

which we've already done.

But fundamentally, the scarcity that neoclassicals have been able to think about and Austrians

think about as well is nonreproducible.

But the essence of capitalism is the commodity, the backscratcher, the two buck backscratcher,

anybody can, you know, the cheapest chips to make, and that's why it can make a profit

out of them.

Not the elaborate gold thing with diamonds and rubies that only the king gets.

So we think our vision of scarcity has been perverted by neoclassicals analyzing the exception

to capitalism and calling it capitalism.

Okay.

Fair enough.

So, you know, let's put Mars aside because I think there's a lot of strange factors that

have to do with a whole nother planet, civilization, that we don't quite understand.

Think how economics works with different geographic locations, one of which have new challenges,

which is what essentially this is.

I don't know if you can apply the same economic theory.

No, I'm saying your question, I think we'll be forced into that ultimately by having to

make a compromise with the ecology.

And we've been ruthless about the ecology of this planet, and we're going to pay the

price for it.

So if you have a planet where you can't be ruthless, okay, you have to mind it as carefully

as possible, then that utopian might be imposed upon you for the needs for survival on that

planet.

Back here, Marx's utopia was still the one that ignored the ecology.

And I think if I have a vision of a utopia in future, it's got bugger all to do about

what humans get out of it.

It's what humans respect.

They have to respect life.

So I see that as a one eyed utopia, a utopia for a single species, as if it can exist on

its own, which we should know it can't.

Quick bathroom break?

Yeah, that would be great.

We took a little bit of a break and now we're back.

We needed to take a break because my brain broke and I'm piecing it back together.

You mentioned ecology and life and the value of all of that.

We'll return to it if we can.

But first, we said why this kind of, this idea of why socialism failed, can we linger

on this a little bit longer in how did the ideas of Karl Marx lead to Stalinism?

So this particular implementation, is there something fundamental to these ideas that

leads to a dictator and that leads to atrocities?

There's something about the mechanism of the bureaucracy that's built that leads to a human

being that's able to attain, integrate absolute power and then start abusing that power?

All that kind of stuff.

Like some of the history of the 20th century, is that inextricably connected to the ideas

of Karl Marx?

I think to some extent it is, but I'm going to also say that if it hadn't been for the

Bolsheviks interpreting Marx and saying we can reach socialism without going through

capitalism, then it might not have happened.

So if you look at the, like the Mensheviks were a rival political group in Russia and

that's where Hyman Minsky, who's a huge inspiration for me.

So he's an economist who was maybe, can we take a little attention, who was Hyman Minsky?

Yeah.

Hyman Minsky was the person who developed an analysis of capitalism based on financial

instability.

And he was actually the PhD student of Joseph Schumpeter and an Austrian economist as well

whose name I've forgotten temporarily.

And he asked him, his parents were both refugees from Russia during the Stalinist period because

the Mensheviks were being wiped out in Russia, just like any other opponents to the Bolsheviks

were being eliminated.

So I think his parents met in Chicago, still remain socialist, still remain politically

active, and he was educated in a family that was just imbued with Marx as his vision.

He ended up fighting in the Second World War on the American side, coming back to America

and studying mathematics and then also doing an economics degree leading to a PhD.

And the question he posed for himself is what causes Great Depressions?

And he put it beautifully, he said, can it happen again, it being the Great Depression?

And if it can't happen, then what has changed between the society before the First and Second

World War and after that makes a depression impossible?

What's the answer to those two questions?

Can it happen again?

His answer was yes, it can happen again, but what has prevented it happening by the time

he started writing about it, which was the late 50s to the mid 80s, late 80s.

We met once, but only once.

Over a beer?

Over a beer?

No, he gave a seminar at New South Uni and he's a bit of an obstreperous bastard.

What?

A stripper?

Obstreperous.

Wow.

What is it?

It means argumentative and likely to dismiss you.

So like a good mate of mine was the guy who brought him out to Australia, a guy called

Graham White.

G'day, Graham.

We're still good mates.

G'day, Graham.

I love your language and your accent.

It's a great...

Actually, there's a really good TikTok I saw earlier today with an Aboriginal guy saying

he loves the Australian language because it's absolutely ironic.

You ask an Australian a question and he'll give you an answer, which is the opposite

of what he means, and you've got to work out the rest for yourself.

Yeah.

So he goes up to another Aboriginal mate and says, G'day, mate.

He says, how are you?

Oh, not bad.

What have you been doing recently?

Oh, not much.

When are we going?

Not too far?

Not too soon?

Yeah.

Where is it?

Oh, not too far away?

Yeah.

All negatives.

And he's a beautiful, beautiful rendition.

Yeah.

Yeah, that's the cool thing about the internet culture.

They appreciate that ironic side.

Like for example, the best compliment you can give as an Aboriginal to somebody else

is that's deadly.

That's deadly.

That's a compliment.

That's deadly.

Okay.

Yeah.

I've got another mate of mine and this comes to the Australian language.

If I call you a bastard, that's a compliment.

Yeah.

Depending on how I insinuate the word bastard.

Bastard.

Bastard.

Bastard.

That's deadly.

Yeah.

I love that.

And there's something, unfortunately, there's something about the British accent that makes

people sound maybe brilliant, maybe sophisticated, wise.

But actually pompous.

Yeah.

No, that's unfortunately the downside of that is you can sound pompous.

There's something about the Australian accent that you just can't sound brilliant.

It humbles you.

You sound like you're having a lot of fun.

There's wit.

There's all that good stuff.

Yeah.

Yeah.

But you just can't be like Karl Marx in an Australian accent would just not come off.

That is a very good point.

He would not be able to pull off the beard.

That's like, yeah.

I mean, I just, yeah.

It's fascinating that the accent determines something about the person.

Maybe it's the chicken and the egg too.

It drives the way of the discourse.

Obviously there's a lot of brilliance.

There's a lot of brilliance in your work, but it sounds like you're always having fun.

Yeah.

And look, this, Pat Poncho has got a lot of Australian mates here.

Yeah.

He spent, what about, how long in Australia?

Year and a half.

Year and a half.

And he's got all these mates here who play Aussie rules football in Austin.

You should join them one day.

I will.

It's actually, it's a very creative sport.

It's much more fun.

It's different than rugby?

Oh, very.

Rugby is hopeless.

Rugby is two morons smashing their bodies against each other.