We met with Distinguished Research Fellow for the Institute for Strategy, Resilience, and Security at University College London, leading economist Dr. Steve Keen, to talk about analyzing economics through physics and chaos theory, unorthodox thinking in economics and so much more. Enjoy!
"But of course, COVID's come along, and that's completely changed everything. And I think we will have a financial crisis because of COVID, because the powers that be, advised by mainstream economists, aren't even paying any attention to the level of private debt, and that is making everybody incredibly financially fragile."” – Dr. Steve Keen
Leading economist Dr. Steve Keen offers insights into unorthodox thinking in economics, analyzing economics through physics and chaos theory, the contrarian views of Hyman Minsky, and he predicts the immediate future of the world economy in the light of COVID-19. Honorary professor and Distinguished Research Fellow for the Institute for Strategy, Resilience, and Security at University College London, Dr. Keen talks with Dr. Jed Macosko, academic director of AcademicInfluence.com and professor of physics at Wake Forest University.
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(Editor’s Note: The following transcript has been lightly edited to improve clarity.)
Jed Macosko: Hi, I am Professor Jed Macosko at Wake Forest University and AcademicInfluence.com, and today we have a wonderful guest coming in from England, and his name is Professor Steven Keen. He’s gonna be talking to us a little bit today about how he got interested in the field of economics, starting…
Maybe could you start from when you were a younger person, maybe a teenager, how did you get interested in all of this, Professor Keen?
Steve Keen: Well, I had 6 years of lousy physics teachers, Jed, at a catholic school. I actually taught myself. I could actually derive Einstein’s special relativity in primary school, because I taught myself calculus and read the books and loved it.
And then I got six consecutive years of a very well-intentioned Maurus brother who couldn’t teach physics to save his life, and I got bored to death over time, and that’s why I didn’t become a physicist.
But in year 11, we had a truly brilliant lay teacher called Tim Keating, no relation to Australia’s once prime minister, Paul Keating, but a brilliant teacher who explained things like Rostow’s theory of growth to us, which was a feedback system. And I thought that was marvelous. I swallowed the whole neoclassical can of worms at that stage, as well, and believed all the usual neoclassical staff.
Jed: Of course, our audience won’t understand what neoclassical economics is, but that’s okay, you can explain it later.
What is neoclassical economics?
Steve: Yeah. Supply and demand. The belief that everything comes down to supply and demand and the intersecting curve analysis, plus equilibrium, plus a view of the world that money is a veil over barter, all that sort of stuff. And I got to university and none of that was… We just got the same stuff I got at high school, and…
Jed: And where were you at the university? Were you still in Australia or…
Steve: Oh yeah. I’m now in Thailand now. I moved out of London and Amsterdam, where I had a flat, really because of COVID. So I made the move here six months ago, and it’s probably the best thing I’ve done, because I’m living in a country with the same population as the UK and a total case count less than the daily increase in the UK.
Jed: Wow. That’s amazing.
Steve: It’s completely eliminated COVID. There have been three… In the last 115 days, there have been three cases where people got into the community with the disease, zero follow-through from those, so it’s actually successfully eliminated COVID. That’s why I moved here.
Jed: Wow, amazing. So you spent most of your career in Australia, and it’s only in recent times that you went to England and now Thailand.
Steve: Yeah. No, I was… I did my undergraduate degree in arts and law, in fact. What I wanted to do was engineering and economics, there’s no such combination. So I was advised to do arts and law and major in economics, and master, I did mathematics and unfortunately two years of psychology.
I wish I had done two years of maths and one year of psychology, if at all, ’cause I regarded psychology a bit of a waste of time, frankly. The mathematics was very useful.
But anyway, so I did mathematics with my touch of engineering there, and then I continued to do my law degree, never actually practiced as a lawyer, ended up doing school teaching, working in overseas aid, working for a government body involved in trying to get trade unions and management to work together, running conferences on journalism with the journalists in China and Southeast Asia, and then finally went back and did my master’s and PhD at the University of New South Wales; my undergrad was at the University of Sydney. And in the master’s and PhD, I began developing both my critique of mainstream economics and my own alternative approach.
Jed: And did you get into a PhD program in economics, or was it in a different field?
Steve: Oh, yeah.
Jed: Okay. So, even though you had such a different career, you had done so many different things, you were still able to apply and get into an economics program because you had taken enough economics classes as a college student.
Steve: I’d done three years of undergraduate economics, and actually 40% of my arts degree was economics.
Jed: Oh, okay.
Steve: I would have done a bit more economics had I done an Australia Economics degree but not an enormous amount more, so yeah. Yeah.
Jed: Okay, perfect. And so you started already as a grad student critiquing mainstream economics, and that’s what we really wanna know about, because that’s your thing, you’re debunking economics, you’re debunking the mainstream.
Obviously, not everybody agrees with you. So tell us what you say and what they say in response to what you say.
"…I basically say neoclassical economics does everything right in a planet or a universe that doesn't exist."” – Dr. Steve Keen
Steve: Well, I say the world is a non-equilibrium system, far from equilibrium, driven fundamentally by energy at one extreme in terms of the role of… There’d be no production without energy, and yet, economics hasn’t incorporated that energy into its framework virtually at all.
And it’s a monetary system, and they also exclude money from their analysis, so I basically say neoclassical economics does everything right in a planet or a universe that doesn’t exist. And we need a theory of economics that is consistent with the laws of thermodynamics, they contradict it, and we need one which acknowledges money and which handles non-equilibrium dynamics, none of which they can cope with.
Jed: Okay, so now, that sounds very radical, and I’m sure, I mean, we just interviewed Paul Krugman, you’re not holding your breath for a phone call from Sweden, because nobody’s really taking this really seriously. What do they say in response to the fact that you bring up energy, and you bring up money, which, as a physicist, I think, “Well, that makes a lot of sense,” but clearly, this is not what other economists think is true.
So why do they throw those things out so readily? Don’t they have at least some rational critique of… I mean, play the devil’s advocate here as best you can; what would they say why you don’t fit into their little worldview?
Steve: Oh, their usual argument is they can’t understand the mathematics. I look at the mathematics and say, “Your stuff is garbage, guys.” To give you an example of that, there’s a course put out by, I think it’s Sargent, Thomas Sargent, who’s one of the leaders. I think he’s one of the ones who got a false Nobel prize, and he’s one of the leaders of what they call the new classical approach to economics.
And he has two textbooks, Macroeconomics and Advanced Macroeconomics, those are the things you can find online. They spend about four pages discussing a bit of differential equations. The remainder, including the entire advanced book, is all in terms of difference equations. They don’t even seem to appreciate differential equations.
Now, if you can imagine a field of… Endeavor like economics, not understanding the fundamental tools of dynamic analysis, not using them, that’s the state of economics. So I have very little respect for the profession. I’ve got less respect as time goes on.
Jed: Who would you say, in the normal academic sphere of economics, is the best mathematician that you’ve come across?
Steve: Oh, in the normal sphere of economics?
Steve: Well, he’s dead. Richard Goodwin.
Jed: Okay. So, did you get to interact with him at all when he was still alive?
Steve: Yeah, yeah. Richard developed a model which is basically a predator-prey model. Or it’s the same class of models as predator-prey, in 1967, and it was putting into mathematical form a verbal model by Marx in Chapter 25 of Volume 1 of Capital. It actually has completely contradictory elements to what people think is Marxism. So, for example, in the model, the capitalists are the prey and the workers are the predators.
Jed: That’s very different.
Steve: Mathematically big. And there’s no necessity for the wage to rich, what Marx called Labor III, none of that is there. So he was the best mathematician. He wrote a set of books, Chaotic Economic Dynamics.
So he’s probably the best person in bringing complexity theory and chaos theory into economics, but of course, he’s a minority, and most of the people who would be listening to this are mainstream, would have to go and check Wikipedia to find out who Richard Goodwin might have been.
Jed: Where did he work? What university?
Steve: He was at Cambridge for a while. And I think he was also in Siena. He finished up at the University of Siena in Italy. But a very gifted mathematical modeller. And his work, I’m extending his work.
Jed: You’re at the University of Kingston, right? That’s where your appointment is.
Steve: I was. I was there for about three years. I left in about 2017, 2018. That’s the typical sort of place that a non-orthodox person can get a leading position at, because the mainstream couldn’t be bothered with the low-ranking universities. So, people like myself get positions at Kingston and similar universities.
Jed: ’Cause Kingston is just happy to have you teach their Introductory Economics classes and you can do that. You can teach the things that maybe you don’t necessarily believe are true.
Steve: Oh no, I taught my own stuff to those students. I rubbished the mainstream.
Jed: Do you think that they went away from your class, scratching their head, like, “Wait a minute. This is not what I learned in my O-levels and A-levels.”
Steve: Yeah. They enjoyed it.
Jed: Did they? Okay. Good.
Steve: Yeah. I would like to work with stronger students. So, there were a handful of students who were outstanding in the Kingston cohort. You always get somebody who’s… But the average level are, obviously, below places like Cambridge and Oxford, and they’re not going to reproduce the profession. Which is the great pity, that you teach people who aren’t necessarily going to push your approach any further.
Jed: Yeah. And yet, you have a lot of influence, according to our algorithm. So, you are making inroads. Maybe, our algorithm doesn’t distinguish between famous and infamous. [laughter] Yeah. But, that said, you really are making some inroads.
And what did you do after you left Kingston in 2017, 2018? Have you taken a new position?
Steve: Well, no. This was the usual… This has happened to me twice now. Because non-orthodox economists only get substantial positions at low-ranking universities, and the government is advised by mainstream economists, all the departments are headed by mainstream economists, all the ideas come out of economic theory, there’s been a push to make the higher education market more like a market over time. So in 2012 in Australia, they deregulated the numbers that were imposed to control the number of positions that each university could offer.
Australia had a system where you put five preferences down, and then… You know, one, two, three, four, five. And students would have an idea of where they were going to score, so which university they might not be able to get into.
So with a set of quota systems, we got about 120 people giving my university, which was then the University of Western Sydney, the first preference. When this change was made, what it basically meant was the other universities offer as many positions as they like, but they didn’t offer STEM positions because they’re expensive to teach. Offered lots of humanities positions, and economics in terms of how it’s taught, fits into that category.
So the numbers of first preferences at Western Sydney went from 120 to 16 overnight, which destroyed my program there. And then, at Kingston, I arrived, and they’d done the same thing one year later. But they have a much more sclerotic system at Kingston… I mean the UK; there’s all sorts of things about students pre-committing and having to withdraw and all this sort of jazz.
So, a slow bleed occurred. We started with 140 in the first year, we finished with 70, and that was better than every other Humanities Department, which had even more of a plunge for the same reason. Students vacated for the higher-ranked universities. So, at the time that was happening, I’ve developed a software package called Minsky, which is a system dynamics program. Have you seen it, or ever heard of it?
Jed: No. I’m raising my eyebrows because I was wondering if it’s named after Marvin Minsky or if it’s just by chance?
Steve: No. I know of Marvin. I worked in computing for 15 years, so I was a software reviewer for a couple of leading Australian computing magazines, and I also coded.
Jed: But it was just coincidence that you named it Minsky?
Steve: His name is Hyman Minsky, H-Y-M-A-N. Hyman Minsky is the economist whose views most accurately predicted the financial crisis in 2008.
Jed: Interesting. So, if I had watched the movie, The Big Short, would he have been mentioned in that movie?
Steve: No. I’ve actually met everybody in The Big Short, as it happens.
Steve: But no, he was actually mentioned in a couple of… You’ll even find Paul Krugman talking about him.
Jed: Really? Okay.
Steve: Yeah, Paul made the mistake of reading Minsky’s worst book. But Minsky has a very nice little book called ‘Can It Happen Again?’ which is a collection of essays, and I highly recommend that to anybody who wants to get a well-grounded analysis of the monetary nature of capitalism. I think that’s the reference.
Jed: Okay, well, now that we’ve understood what you’re saying, what people say in criticism of what you say, which boils down to, “We don’t understand Keen’s math.” [chuckle]
Steve: They don’t say… They don’t even look at my math. They claim I don’t understand theirs.
Jed: Right, right. That’s what you’re saying that their critique boils down to. So I think we’ve got a handle on what you’re saying they’re saying, and what you’re saying you’re saying. Now, the proof is in the pudding.
Are we due for another financial crisis of the scope of 2008? And go on the record and say what you think’s gonna happen, and a prophet is proven by whether it happens or not. So tell us what’s gonna happen, and a year from now, then maybe people will give you a little bit more credit. So tell us what’s gonna happen.
Steve: The red book behind me actually answered that question. You can see the title of ‘Can We Avoid Another Financial Crisis?’ And I argued that we’re not gonna have another financial crisis like 2008, because what we have is an excessive level of private debt.
That’s what caused the crisis. This is completely… The mainstream completely ignores private debt in its analysis, so it wasn’t even looking at what I said was causing the crisis. But in the aftermath of the crisis, America went from a debt level, a private debt level, in the 1940s of about 50% of GDP, to 170% of GDP, and then filled the 150%. And it’s now flat-lining at about that level. And what that means…
Jed: Okay, so you’re saying that that 150 rather than 170 is what’s gonna protect us from a 2008?
Steve: No, it’s not gonna protect you at all. You’ve still got the disease. You’re still disabled.
Jed: Okay, but you just said that we’re not gonna have another crisis of the level of 2008. That’s what I heard you say.
Steve: No, what actually drives a crisis is too much credit beforehand and too little after. So if you look at the debt, the amount we owe is dollars. The debt we take on each year is dollars per year credit. Okay? That’s how accountants define it, that’s how I define it.
So credit was positive for the entire duration from 1948 to 2008, every year. And with the rate of change of debt being positive for all that time, and faster than the rate of growth for most of that time, the debt ratio rose from 50% to 170%. When the crisis hit, credit was equivalent to 15% of GDP that year. So the change in debt in 2007 was equivalent to 15% of America’s GDP.
Now, according to the mainstream, and I’ve modeled their stuff in my software, and they’re right, if their model’s right, that has no effect on the macro economy. One little problem. Their model is wrong. And it isn’t me who told them that. Well, I’ve certainly told them, they just didn’t bloody listen.
The Bank of England told them and the Bundesbank told them. So in my model, credit plays an essential role, and I’ll give you a correlation coefficient to make the case in a moment. But our credit went from plus 15% of GDP in 2007/8 to minus 5% in 2010, and that’s why we had a serious downturn.
"But of course, COVID's come along, and that's completely changed everything, and I think we will have a financial crisis because of COVID, because the powers-that-be, advised by mainstream economists, aren't even paying any attention to the level of private debt, and that is making everybody incredibly financially fragile."” – Dr. Steve Keen
Steve: Now, to have that happen again, you’d need to have credit being extremely high, and since we’re at 150%, credit has never risen by more than about 4%-7% per annum, and it’s often flatlined and been close to negative ever since 2008.
So without a high credit bunch, you won’t get a large boom, and you won’t get a bust afterwards. But of course, COVID’s come along, and that’s completely changed everything, and I think we will have a financial crisis because of COVID, because the powers-that-be, advised by mainstream economists, aren’t even paying any attention to the level of private debt, and that is making everybody incredibly financially fragile.
So as soon as the government flows are cut off, you’re going to see people falling over financially. So you will have a financial crisis, but it’s COVID-caused, not another repeat of 2008.
Jed: Okay, so you’ve gone on the record to say that we are gonna have a COVID-caused financial crisis. Do you give it a year, six months, before it kicks in, or when will we start seeing it?
Steve: I think we’re already seeing it, to some extent. The crazy thing is, people don’t realize how battened down American workers are. So you had Trump giving, what, $1,200, or effectively $600 a week to some people as a salve; they would have thought it was pretty trivial, but at least it’ll help. A lot of American workers don’t earn that much.
So in fact, what you saw in the early stage of the crisis was, because of government money, an increase in the income of people who were unemployed. Okay? Now, you get some crazy effects like that coming out at the extent to which the government supports the system or not, and the area the mainstream is wrong on, is how they analyze what is the impact of that government debt. And while they ignore private debt, they obsess about government debt, and they’ve got it, here’s an Australian expression, arse about tit. Totally backwards.
Steve: What matters… It’s a good one, isn’t it?
Jed: The cart before the horse, right? The cart before the…
Steve: I prefer arse about tit, but no that’s just my crude nature. Because government debt… Private debt, you can’t print your own money. If you get in debt to a bank, the bank can foreclose on you.
If you don’t get credit to rollover your position, you can fail because of that reason. And credit is far larger than government spending, in terms of the deficit that the government runs. People freak when the deficit hits 3% and 5% of GDP. Well, as I said, back in 2007, credit was 15% of GDP, and they were ignoring it.
So they ignore the major factor and they obsess about government debt, and you would have heard of what’s called modern monetary theory, possibly? Have you heard of that?
Jed: I’m a physicist. I haven’t heard of any of these things. I just know what Paul Krugman told me in the last interview. [chuckle]
Steve: Yeah. Yeah, well, Paul was sort of half way on modern monetary theory. But what modern monetary theory is is fundamentally a system of accounting, looking at what the monetary flows are in an economy.
And when you look at it, and this is something I’ve only confirmed myself recently by using my Minsky software, which has been built to do monetary modeling… In fact, if I can share a screen, I might show it to you, on that point. Is that feasible?
Jed: Yeah, we just have to ask Rich to do that, and he will gladly allow you to share your screen. We’ve done even stranger things. One time I went into a second life world with an anthropology professor, so I was transformed into an avatar, and we filmed the whole thing, it was absolutely crazy. So if Rich is paying attention, I’m sure he’ll turn on screen share, allow you to share your screen, and you can go till your heart’s content.
Steve: Okay, I’ll just actually… I wonder which one I should bring up. I’ll bring, actually, because we’re talking to a physicist in this particular case, I’ll just actually bring up my model of Minsky’s financial instability hypothesis, a very simple model. But that will give you an idea of the sort of approach that I take and why that differs from what the mainstream does. So are you familiar with system dynamics at all?
Jed: Yeah. Oh, yeah. As a physicist.
Steve: Excellent. Okay, what software do you use?
Jed: I don’t personally do it, but as we learn at the undergraduate and graduate level, we have to learn about system dynamics.
Steve: Okay, okay. Well, this is Minsky, and this is building a flow chart model. So you have the amount of capital coming in here, divided by capital output, gives you GDP, divided by output labor ratio gives you employment, divided by population gives you an employment rate.
The hypothesized relationship between the rate of change of wages and the employment rate, which can then give you the wage level, which gives you wages, which you subtract from GDP to get gross profit, subtract interest to get net profit. Net profit divided by capital gives you a profit rate, which tells you the level of which capitalist are going to invest or not.
If they invest more than profit, then they have to take on debt, which means they’ve got to pay interest, which is where this comes from. You then subtract the investment from depreciation, you’ve got capital, and you’ve got a closed loop. And if I run this system with a low level of capitalist desire to invest, then it behaves the way neo-classicals… Actually, that’s too low, I’ve actually made it negative debt turning up; I’ll make it positive just slightly. Okay, this is a very simplified model I’ve done.
Jed: And is this a program we can access freely on the web? Or do we have to pay for it?
Steve: Yeah, it’s open-access, if you know SourceForge, I imagine?
Jed: Yeah, we know SourceForge.
Steve: Okay, it’s on SourceForge.
Jed: So we look up Minsky, and something like Minsky and Keen on SourceForge, we can find this?
Steve: And you’ll find it. Yeah. Now, this is a theory stylized model I’ve done for students with no technical change and no population growth, so it exaggerate… How familiar are you with fluid dynamics? So you know what’s called the…
Jed: Actually, I have never taken a class in fluid dynamics. My father is a chemical engineer, so he has to not only understand that but teach it. So whatever I know, it’s just from picking up from him. [chuckle]
Steve: Okay, well, it’s what’s called the Pomeau-Manneville route to chaos, and they call this intermittent route to chaos…
Jed: Can you say that a little slower because…
Steve: Sorry, yeah, I speak too quickly. Pomeau-Manneville, two French physicists. And they, in exploring Lorenz Model, they found this bizarre behavior where the system would go through a period of declining turbulence leading to laminar flow, and then suddenly you’d get an outbreak of turbulence once more.
And it turns out my model of Minsky actually fits in that particular class, intermittent route to chaos. So I’ve exaggerated here, what you have is an enormous period of stability in the economy. These are all the cycles and the growth rate. They dampen down.
And then after a very long period they start to rise once more. And if you look at the income distribution, I’ve got capitalists borrowing money with the firms who are borrowing to invest, so they’re the ones who are investing, but their share of income doesn’t change.
As the banker’s share rises because of the rising level of debt, workers share falls. So this is actually saying that workers pay for the high level of debt even though they’re not borrowing it.
And ultimately, you go through this laminar period where you get a period of stability, and then you have a breakdown on the other side, and that’s what’s developing there right now. So that’s developed, and that is the model I had in my mind when I wrote my expectations that the financial crisis would occur back in 2006. So from 2006 on, I was warning of a financial crisis.
Jed: Very cool.
Steve: Okay. So that’s Minsky at one level, but the main reason I’ve designed Minsky… Sorry, pardon, yeah?
Jed: No, go ahead. I just was making sure that the interview doesn’t go too long, because if it does, then we’d like to do two different interviews just to keep it a little bit shorter. But this is fascinating, and I’m glad that people can try out what you were just showing by going to SourceForge themselves.
"People say, &quoy;Where's the money gonna come from if you run a deficit?" The answer is, it comes from the deficit itself; the deficit creates the money."” – Dr. Steve Keen
Steve: Yeah, and the reason why I’ve designed Minsky is to enable this sort of model to be built. I know it looks pretty horrible on a screen like that, but this is elementary bookkeeping of the financial flows in a simple capitalist economy.
And what I show using it is that modern monetary theory is correct, and the important… I won’t try to… ’Cause it is gonna get too long if I go into that in detail.
But the punchline of MMT is that the… People say, “Where’s the money gonna come from if you run a deficit?” The answer is, it comes from the deficit itself; the deficit creates the money. The question then is, how is that later financed? Do you finance it by effectively an overdraft for the treasury at the Central Bank? Or do you finance it by issuing bonds? And neither of those actions actually create money.
"So what you get out all of this is, the paranoia people have about government debt is false. But that's the paranoia economists have got."” – Dr. Steve Keen
So all the worries we have about bond vigilantes and so on, are simply false, because the money is already being created by the deficit itself, and then it’s a question of what is that money backed by? Is it backed by a loan from the Central Bank in terms of allowing the treasury to have a overdraft, or is it by bonds? And if it’s issued by bonds, the bonds are purchased using the asset side of the money created by the deficit in the first place.
So what you get out all of this is, the paranoia people have about government debt is false. But that’s the paranoia economists have got. Their blasé attitude about private debt is also false. So I’m turning the whole apple cart upside down.
Jed: Wow, that is fascinating, and I really do appreciate. Now, you said that the bottom line of, was it, did you say MMT or something like that?
Steve: MMT stands for Modern Monetary Theory.
Jed: Oh, MMT. Okay, MMT, got it. Well, thank you so much, Professor Keen, for sharing this with us today, it was absolutely fascinating. It was really fun to learn such a different take on economics. So thank you for coming today.
Steve: You’re welcome.
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