Demetri Kofinas: What's up everybody. Welcome to another episode of Hidden Forces with me, Demetri Kofinas. Today we speak with Steve Keen. Steve is Professor of Economics at Kingston University in London and one of a handful of economists to correctly anticipate the global financial crisis of 2008. Professor Keen is [00:00:30] also the popular author of Debunking Economics, as well as his most recent and timely book, Can We Avoid Another Financial Crisis? In this episode, we tear up the textbook of contemporary economics. We dispense with equilibrium, embrace irrationality, internalize externalities, and drop assumptions about the world that do not comport with the reality we experience in our daily lives. We begin our history of economics with the physiocrats, enlightenment thinkers [00:01:00] of the early 18th century who concerned themselves with the question of productive work and where stuff comes from. We move to through the classical period of economics, exploring the philosophies of Adam Smith and David Ricardo. We stop to question the assumptions of the Newtonian-minded neoclassicists of the late 19th and early 20th centuries, who saw fit to squeeze a complicated world into a set of simple models. Where did our ideas of rational [00:01:30] preference, utility maximization, and market equilibrium come from? And how have these ideas been debunked by the events, insights and theories of the last 100 years? What was the role of John Maynard Keynes and his Keynesian revolution? Where did he and the Austrian Friedrich von Hayek meet? And where has the evolution of economics taken us since? What is the role of banking in the economy? How was money created, and how does it circulate? What is the role of credit? [00:02:00] How might this almost godly instrument of wealth creation now be the source of global instability and financial distress? Finally, Steve and I explore the landscape of the modern economy. We look at China, with its ghost cities and massive state-directed banking system. We explore Australia, Canada and South Korea as possible sources for the next financial crisis. And we examine possible solutions for society and the individual. As always, you can gain access to [00:02:30] reading lists put together by me ahead of every episode by visiting the show's website at HiddenForces.io. Lastly, if you're listening to the show on iTunes or Android, make sure to subscribe. If you like the show, write us a review. And if you want a sneak peek into how the sausage is made, or for special story lines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram @hiddenforcespod. Now, let's get right to this week's [00:03:00] conversation. Professor Steve Keen, I'm so excited to have you on. I was just telling you that the last time that you were on my show ... I mean, I did see you in New York recently when you were there, and I've seen you a number of times since Capital Account. But the last time I actually 1 had you on my show was, I think, in the summer of 2012. And you were in-studio in Washington DC, I believe. And we actually had you answer comment feedback [00:03:30] to the audience at the end of the show with [Lauren 00:03:33]. So I remember all of that. And so it's wonderful having you on, and I'm very excited about it. Steve Keen: Well, it's great to be here. The trouble is the story I was talking about is one I wish actually wasn't still here, but it looks like it'll be with us for the next two decades. Demetri Kofinas: Right. That deflation, the black hole. So we're going to talk about this. So this is what I was thinking about, 'cause I don't want to get caught in the weeds. But since I've got you here, and you're really good with this, I do want to spend part one of this interview, I want to do it sort of going through giving people an understanding of [00:04:00] the evolution of economics and economic thinking. So the way I'm thinking about it, there was the classical period, classical economics, and then there was neoclassical economics, then there was the Keynesian revolution, then there was this Keynesian neoclassical synthesis. And the way I see the classical period was, this was a time when the economics was really primarily a philosophical idea. And then with neoclassical economics came along with the need of the industrialists to sort of [00:04:30] standardize and create systems around which they understood and were able to price goods, etc. But you know what? Instead of me talking, why don't you lay that foundation out for the audience so that we can sort of understand what is the progression of economic thinking from the time of Adam Smith to today? Steve Keen: Well, in fact, I'm going to go back about 30 or 40 years earlier, because that's where I think economics should have started, with a group called the physiocrats who were based in France. Adam Smith actually went across to study with them. [00:05:00] The classic thing that seems to happen in economics all the time ... we talk about don't throw out the baby with the bath water. Economics tends to throw the baby away and keep the bath water and then try to keep the bath water alive. So if you look at what the physiocrats were arguing as early as the late 1600's, in fact, what became called the Physiocratic school, actually started off by saying the question, "Where does stuff come from?" And the basic answer was, "Stuff comes from the sun," in the sense that agriculture gets this free radiation [00:05:30] from the sky. And you plant a seed in the ground, and it turns into several cobs of corn with maybe 10,000 times as much corn as you actually put in the soil. They called the agricultural sector the productive class. And so that's where all wealth comes from. And then they referred to manufacturing as the sterile class. Now, they were wrong about the ability of manufacturing to actually produce more stuff than you put into it, because manufacturing uses energy. It just happens to be solar energy that landed on [00:06:00] the planet about 90 million years ago, got absorbed by an animal 2 that turned into a fossil, that became a coal and we then burned it later. It is fundamentally ... in both cases we're exploiting fundamentally solar power. Demetri Kofinas: Organic life, yeah. Organic matter. Steve Keen: Yeah. Demetri Kofinas: And so what you're saying is to clarify, you are taking it back to a period about 100 years before Adam Smith where the fundamental dilemma, the philosophical problem that was meant to be addressed, was "where does stuff come from?" Steve Keen: Yeah. Demetri Kofinas: Where do things come from that we consume and use and that factor into [00:06:30] our economic life? Steve Keen: Now the funny thing is, Adam Smith ignored that stuff. He just basically said "No wealth comes from the specialization of labor." As I've just recently argued, this is talking about some new research of mine, the whole idea of labor without energy or capital of that energy is a farce. Labor without energy is a corpse. Capital of that energy is a sculpture. They actually are ways to harness energy, and that was completely forgotten, not just in the neoclassical school, which I criticize, but also the classical school itself. And then we went through all the other [00:07:00] permutations, the neoclassical synthesis, the so-called Keynesian, which was actually Samuelsonian, and now we get to the modern day. And literally I've just done the work, and I say we should go right back to the physiocrats, put energy the center of our thinking, and then include all the stuff about finance and class that the classical school talked about, and pretty much throw away virtually everything the neoclassicals have done because unfortunately the main purpose of their theory had, when they first devised it, was to [00:07:30] neutralize the threat to capitalism caused by Marx, turning the classical school against capitalism. And the ideas they chose as a foundation, understandable back in the 19th century, turned out to be mathematically impossible of turning into decent theories. Demetri Kofinas: So, Steve, just to interrupt. And I'm sorry. Steve Keen: Yeah. Demetri Kofinas: I want to structure as far as I can forward, because you have such a strong knowledge of this, and you've talked about it so many times. And I want to see if we can do the best possible job with this one. Steve Keen: Yeah. 3 Demetri Kofinas: So when [00:08:00] you mention the physiocrats, and when we're talking about stuff, what you're really addressing, it sounds like to me, is you're saying they were on top of this notion of externalities. And I say it, because we refer to it in neoclassical economics as externalities, things that are actually very important, which are nonrenewable perhaps, are- Steve Keen: Yeah. Demetri Kofinas: The resources of the earth, and you're saying we need to bring that back and to incorporate that into our economic models.