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 batting 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 when the Mensheviks and the Bolsheviks.

So the Mensheviks and 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 become socialist.

The Bolsheviks believed they could get there in one go.

The following is a conversation with Steve Keane, 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 conversations 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 in 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 Keane.

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 working from, a 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 have these, 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 we'd explain how that came about, that what's the economic 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 when humans don't respect it enough, we trash it.

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

So 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 a time or so on, 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 different equations.

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

Using Python, two volume set.

It's about close to 2,000 pages and four of those pages run 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 a value for nine and ninety, this is a value for nine and ninety

one, ninety two and ninety three and ninety four.

So you have discrete jumps in time.

Just a differential equation says there's a process moving through time and you will

have a rate of change of the 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 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 that 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 that it is the technical level, it's an incredibly complicated way of modeling the

world using entirely the wrong tools.

Okay.

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.

We'll talk about some of the most complex systems on earth are the human mind, the economy,

and the biosphere.

So we'll go to that place.

I'm fascinated by complex systems.

I'm humbled by them even at their simplest level of 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.

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.

Okay.

Let's 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.

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 reveal

something useful or insightful for our conversation.

So you could, you know, classical, post Kenzian, Austrian, I like the biophysical economics

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

Okay.

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 Physicocrats and the name itself implies where their 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, et cetera, et cetera.

And they started seeing the body as a circulation system and they played the same sort of logic

to the economy.

And they became out of an agricultural economy, which is France, and they saw that the wealth

came effectively from the sun.

So this oil wealth comes from, they said the soil, but what they really mean is 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 Physicocrats said and what the Physicocrats

argued was that agriculture is the source of all wealth.

And the manufacturing sector is sterile.

That's literally the term they use 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.

The value 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, you know, and we make stuff and it's a 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 to 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

there's 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 of you, 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.

So that's the one that everybody learns.

And 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 and 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 price, 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 state 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.

I'll swap you that Microsoft surface for, 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, non

monetary 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 is 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, but it's unstable.

And as a mathematician, it's easy to 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 and 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 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

forward the current conditions.

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

And Schumpeter argued that that's what gives us this creativity as well.

The fact that you can perceive a potential demand, but you don't, 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's going to

be ahead of you or behind.

If there's a fad, you'll overinvest, OK?

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.

And so that's what makes them interesting.

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

OK, 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 preference is 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'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.

OK.

That's the intriguing.

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

There are elements that the Austrians go to thought, which are worthwhile.

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

OK.

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, as William Jevons from England, Menga, who's from Austria, and Volras from

France.

And Volras 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 this is a supply curve and a demand curve, and that's what Marshall ultimately codified.

Menga 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

the 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, you know, Hayek, et cetera, et cetera, and certainly

Rhombardo, I find totally like reading a cardboard cut out version of the wealth of

nations.

I find his worth 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 are better

than their classicals, but they still have this belief in the, you know, 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 kids these days are all into modern monetary theory, what's that about?

Okay.

Modern monetary theory is accounting when I 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?

Banks.

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 what

you, 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 Goldbugs 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, you know, a 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 as its 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 as money is a commodity,

you're wrong.

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

So I want to get this for 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.

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

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

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, 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 transaction, no money is created, money, existing money is redistributed.

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

bank loan.

So the liabilities of the banking sector rise, the assets rise, their balance, but more liabilities

means, or the banking sector means more money.

Okay.

So that's what, that's how private banks create money.

And that's what I first started working on when I became an academic about, well, 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.

Okay.

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 as reserves.

Okay.

Right.

Money creation is a good thing.

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

banks and then the 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.

What is 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 an argument with physicists over this and it took me a long time to answer it.

They thought the sum total of all money is zero.

Yeah.

Okay.

It's the sum type of 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 going to interrupt you rudely.

What are assets?

What are liabilities?

Assets are your claims on somebody else.

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 would be your liability.

That would be my liability.

Okay.

The mortgage with a bank's asset.

Right.

Okay.

If you add the two together, you get zero.

Okay.

So that's zero.

That's zero.

So the liability side of the banking sector, 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.

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

It's the negative.

The liability.

Wait, wait, wait, the liability is the negative.

How's that money?

I thought money is the positive.

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

An asset includes money.

Yeah.

Yeah.

Okay.

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

Okay.

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 that's a bank?

That's a bank.

Yeah.

This is 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've 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 downloaded 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, I'll give you two of these for one

of those.

Yeah.

Okay, barter.

Just working at 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 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.

Now I know 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, we'll jump around if it's okay.

Oh, it's fine.

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

Yeah.

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 workers 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 a 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.

Can't.

Ficht.

Oh, I thought it was Kant.

No, Ficht.

Well, I'm not sure.

You could be...

Yeah, yeah, yeah, yeah, yeah.

So but if you look at this beautiful book called Marx and Contradiction, you want to

find a great explanation for Marx's philosophy.

I forgot the author.

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

And he points out the actual origins of Marx's philosophy.

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 in what they called feminist aspects of philosophical

thought, sorry, 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 leopthrogged 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 pretty over half the students were on strike.

Okay.

Economics began out of that of a teaching of a philosophy of feminism.

Yes.

That's good.

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 at 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 the 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, then 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.

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 is sandstone all around us and we have a bunch of about 20 or 30 of us reading our

way through Marx.

Ah, Kapital League, which is the 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 Fictian stuff is bullshit, that is not how Marx thought

it all.

I was reading trying to find the thesis antithesis, 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 and his last

books were published.

There's not one more definition of that.

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

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

unity can be an individual, there 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.

That'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 and synthesis is what does every idea have a counterargument?

Yeah.

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

And then Marx has this foreground and background and tension.

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

as humans.

That sort of thing.

And why is there a tension?

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

go back to Chromagnon days and 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.

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 your male, your female, your young, your 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

is 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.

That's the essential unit.

The essential unity.

What's the unity?

The unity is an object in society.

Okay.

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

How do we set prices?

And he's 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.

If you made something which didn't work, okay, then it has, you might be able to sell it,

but it has no utility that can't, you can't make that an all 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 was in, 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 back scratcher.

I walked away, she caught up with me about 20 minutes later, I asked one of the guards,

it is a back scratcher.

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

and emeralds during the scratching.

And that's a commodity in a feudal society.

The cost doesn't matter.

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

So in that 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 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,

they will change, 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 an eight to ancient tribe or two 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 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 and said the island of Manhattan, which is a utility based

comparison.

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 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 for 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 this such a problem?

It turns marginal utility, the 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, not how comfortable it makes you

feel.

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.

But 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.

So it's a very different vision of how prices 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, the 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.

The 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 six is six 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.

I said, no, no.

Deep is good.

Just wanted to find 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?

Well, the worker's the commodity in this case, because if you're going to make stuff in a

factory, you've got to hire workers.

Yes.

Okay.

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, they'll get 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.

Okay.

The 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?

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 and then that's actually, that's the next layer.

What Marx give 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.

Yeah.

Not going to be a complaint 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 non commodity.

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 later 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 commodities, the fundamental unity in capitalism.

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

profit came from.

Yeah.

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.

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 over what does value mean?

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

It's 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 and being inherited as the classical school talking to us of objective

value.

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

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

That's just one measure of objective.

Where do you fall?

Huh?

Where do you fall?

I fall on subjective versus objective spectrum.

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

way.

The king model of value.

Yeah.

Well, my base model is the objective.

Yeah.

But above that, as soon as you start talking, you did about the worker, for example.

When 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.

And that's where Marx or 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 solve the cost of money, 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 there must value, I think, if I remember the phrase properly, is value here as it must

mean the effect of the uncertain expectations or subjective valuation?

Uncertain expectations or subjective valuation.

Okay.

But he's okay with that?

Because he could move between different levels, because he's 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 non commodity.

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.

It was the only thing that matters is human labor, not labor.

How do you measure what's the role of the 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 the 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 the 1857, he was visited by a guy called Otto Brow in his home in Chelsea.

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

of Right.

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

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

And 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, but Hunter S. Thompson.

He comes to you in a dream after you take your first, or whatever, then of course we've

evolved.

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

Well, Marx suddenly, his writing style in the middle of a book called The Grandresa,

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 Carl Marx is human after all.

He's human.

He could be involved.

I would love to have a beer with Carl for a while, for Carl.

He's Carl to you.

He's Mr. Marx to me.

Hang on.

Maybe Carl 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 dialects comes in the form of, but

foreground and background.

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

What really?

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 are inside concrete 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.

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, I'm quite literally laughed at.

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

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

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

I was learning, 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?

Like, why do you think?

It wasn't a good thesis.

It was, 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.

When 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 as the towering

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

He ended up writing 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 wrote love poetry to Genevon Westhalen, his first published works were pretty much

in poetry.

And 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.

Why do 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 part of the 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 here, yeah.

That's here.

Okay.

So this is interesting.

You went, chronologically, right through his work, 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 Guindresa,

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 values, 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?

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

Exchange value is the objective thing.

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 focused on exchange value, objective.

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

So Marx, coming from the Riccatiian 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 Riccato 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.

And 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, when he's 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 he actually writes, does this have significance in economics?

Question mark.

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

Yeah.

It changed him completely.

And from that point on, his writing was completely different, but he still had this idea from

the Riccardian 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 Grand Risa, and 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 in really in a colloquial style,

that the use value of a machine significantly greater than its exchange value, you actually

have to out the word is.

It's used, this is obviously 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 lives out the word is.

It also has to be contemplated that the use value 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.

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

the machine is, whether it took 100 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 steelman his case?

Can we go to the mind of Marx in thinking if a machine costs 100 bucks, it can't be

ever more or more value than 100 bucks.

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 are 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 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 them the means of subsistence

for the worker, but the worker will work a 12 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?

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

Now what I, 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, using the same logic, they can both be a source of surplus, which is

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

late 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.

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 batting 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, would it have to come about, or is it a good thing for it to come about?

He had assured, 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 you rather than being rewarded like Jeff Bezos gets enormous fortune, you

get what you need, not what you want, necessarily, all what all needs is fulfilled.

It was 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, okay, there's 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 link, if we

can explore a high level philosophical concepts of socialism to like the dreams of utopia.

So what, first of all, what is socialism?

That's another loaded term.

It is a socialism, particularly in America is a very loaded term, and 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.

That's a total parody of the word.

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

No private ownership for the means of production.

What is the means of production?

Machine 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.

What actually was done under Gold's plan under the Soviets and even with a collective farms

as well.

You no longer owned your land.

The state owned the land.

You worked on the land.

And this was supposed to be utopia.

Right.

Now it did 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?

Fascism, so called national socialism.

It's also a kind of socialism.

Yeah, but there was no public direction.

So the state would tell factories what to do with a still 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 direction versus ownership.

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

Yeah.

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 versus the ownership by private.

That rules out the Nazi period to 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 Kornay.

And Kornay 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.

And 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 a economy which is incredibly primitive, Russia.

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 when the Mensheviks and the Bolsheviks.

So the Mensheviks and Hymen 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 become 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 Janos was actually analysing.

He started from a primitive feudal economy, very little industrialisation, 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 properly 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 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.

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 650cc Japanese motorbike.

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

So I was there when...

I got a Cossack.

I like it.

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 sakes rag over this thing, which is tied on a wooden base.

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

It was exactly the same as Steve McQueen and Great Escape.

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

It had a bicycle seat.

And that's how they coped.

They 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 burns 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 John Oskarne saw.

So why did socialism not innovate?

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

things take off his shoe and 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, there's 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'd 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 Eastern 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.

And then Shavik's 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 what is beyond capitalism?

I think that beautiful phrase 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 then I've actually seen an 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 we get in resource constraint applies.

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

100 underground bunker.

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 the contradiction.

I thought...

Are you thinking, you know, classical about scarcity?

Yeah.

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 then 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.

Like paintings, rare wines, et cetera, et cetera, he said, 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 a capitalist economy.

And that is not about scarcity.

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 made us think about and Austrians think

about as well is non reproducible.

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 they 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 the whole other planet, civilization, that we don't quite understand, like 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.

Well, 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 those that utopian might be imposed upon you for the needs of a 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 don't 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.

The bathroom break?

Yeah, the bathroom break.

That would be great.

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

We needed to take a break as 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 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, to 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.

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

of Karl Marx?

I think of 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

socialism, then it might not have happened.

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

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

If he's an economist, who was maybe, can we take it a little tangent, who was Heimann

Minsky?

Yeah, Heimann Minsky was the person who developed analysis of capitalism based on financial

instability.

He was actually the PhD student of Joseph Schumpeter and an Austrian economist as well,

his name I've forgotten temporarily.

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.

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 its 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 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 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.

Good day, Graham.

We're still good mates.

Good 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.

He goes up to another Aboriginal mate and says, good day mate.

He says, how are you doing?

Oh, not bad.

What have you been doing recently?

Oh, not much.

When are we going?

Not too far?

Not too soon?

Yeah.

Whereas 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.

Another mate of mine comes to the Australian language.

If I call you a bastard, that's a compliment.

Yeah.

I mean, tonight the word, 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.

But actually pompous?

Yeah.

No, that's unfortunately the downside of that, because 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 stuff.

Yeah.

Yeah.

But you just can't be like, Karl Marx and Australian accent would just not come off.

That is a very good point.

You would not be able to pull off the beard.

That's right.

Yeah.

I mean, I just, yeah, it's fascinating that the accent determines, you know, 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 in your work, but it sounds like you're always

having fun.

Yeah.

And look, this poncho has got a lot of Australian mates here.

He spent, what about, how long in Australia?

Year and a half.

And he's got all these mates who replace Aussie rules football in Austin.

You should join them one day.

I will.

It's actually rough.

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.

Easy now.

Easy now.

Sorry.

Sorry.

Not me to offend the rugby fans in the audience.

Well, okay.

So it's too simplistic.

It's too simplistic.

It's, I mean, there's skill in it.

I've seen some really skillful rugby union and rugby league plays in my day, but fundamentally,

if you hit somebody hard enough, they go down.