Key Moments
Steve Keen: Marxism, Capitalism, and Economics | Lex Fridman Podcast #303
Lex FridmanKey Moments
Steve Keen critiques mainstream economics, advocates for systems thinking, and warns of capitalism's ecological and financial instability.
Key Insights
Economics should aim to understand and maintain human civilization, recognizing its reliance on energy exploitation and the environment, rather than solely focusing on abstract models.
Mainstream neoclassical economics is fundamentally flawed, ignoring money's role, assuming stable equilibrium, and using inappropriate mathematical tools (difference equations instead of differential equations for aggregate systems).
Marx, while fundamentally flawed in his labor theory of value, was a brilliant economic thinker who pioneered a dialectical understanding of change, tension between use-value and exchange-value, and the creative destruction inherent in capitalism.
Socialism, particularly the Soviet model, failed due to its resource-constrained nature and lack of innovation, leading to stagnation and, in extreme cases, authoritarian control.
Capitalism, while innovative, is inherently unstable due to financial cycles driven by private debt creation; unchecked debt accumulation can lead to catastrophic debt deflations.
The most critical immediate challenge is the ecological crisis, which economists often trivialize with flawed models. Addressing this requires a shift from human-centric views to respecting all life and potentially a more centralized approach to consumption control.
Future societal survival may depend on adopting a Star Trek-like vision: expanding into space for resource exploitation separate from Earth, utilizing advanced AI and robotics for production, and fostering a core belief system that respects all life on Earth.
THE TRUE PURPOSE OF ECONOMICS: SURVIVAL AND STEWARDSHIP
Economics, in its ideal form, should serve the grand purpose of understanding how human civilization came to be and how it can be sustained. Unlike its current practice, which often focuses on abstract models, economics should recognize humanity's unique position, elevated by high-grade energy exploitation and environmental interaction. Steve Keen argues that this elevation, driven by leveraging natural resources, is what enables complex societies and conversations. However, he critiques the discipline for contributing to humanity's potential self-destruction by failing to respect and preserve the planet's intricate life systems, deeming it less of a science and more of a dangerously misguided practice.
THE FLAWS OF MAINSTREAM NEOCLASSICAL ECONOMICS
Keen sharply criticizes modern neoclassical economics, labeling it as using the 'wrong soul' and 'wrong tools.' He advocates for systems engineering approaches, utilizing differential equations to model aggregate economic processes rather than discrete difference equations. He points out that economists often assume stable equilibrium without proper stability analysis and ignore the crucial role of money, operating under a 'money illusion' where all exchange is reduced to barter. This flawed framework, focused on subjective utility and marginal analysis, abstracts away from the real-world complexity, instability, and monetary dynamics of capitalism, hindering genuine understanding and effective policy-making.
A HISTORICAL STROLL THROUGH ECONOMIC THOUGHT
Keen traces economic history, starting with the Physiocrats, who saw wealth stemming from the sun and soil, and manufacturing as 'sterile.' Adam Smith, from the Classical school, shifted this focus to labor as the source of value. Marx, a brilliant intellect emerging from the Classical tradition, extended this labor theory to critique capitalism but, as Keen argues, made a critical error regarding machinery's role in value creation. The Neoclassical school, in defense of capitalism, then moved to a subjective theory of value (marginal utility), ignoring money and focusing on equilibrium. Keynes and the Post-Keynesians challenged this, emphasizing uncertainty, instability, and the volatility of investment.
SCHUMPETER AND MINSKY: MONEY, INNOVATION, AND FINANCIAL INSTABILITY
Joseph Schumpeter, though from the Austrian tradition, offered a richer vision of capitalism that acknowledged the essential role of money. He saw entrepreneurs, fueled by money creation from the financial sector, driving innovation and creative destruction, leading to constant deviations from equilibrium. Hyman Minsky, a student of Schumpeter, further developed this by focusing on financial instability. Minsky's work, which deeply influences Keen, posits that capitalism's inherent dynamics, especially the creation of private debt, lead to booms and busts. Keen's "Minsky software" helps model these complex financial interactions, demonstrating how debt accumulation can lead to chaotic system behavior and financial crises.
MODERN MONETARY THEORY (MMT) AND THE CREATION OF MONEY
Keen summarizes Modern Monetary Theory (MMT) as essentially correct accounting. He clarifies that money is not a commodity (like gold or Bitcoin) but a liability created by the banking sector (private banks through loans) and the government (through deficit spending). Government deficits, far from being a 'bug,' are a 'feature' that injects money into the private sector, enabling commerce and financing public services. He warns against the deflationary risk of prioritizing government surpluses, which can stifle demand and lead to a 'debt deflation' scenario, where falling prices exacerbate debt burdens, as seen in the Great Depression.
MARX'S BRILLIANCE AND FLAWED LABOR THEORY OF VALUE
Keen regards Karl Marx as one of history's most powerful economic minds, particularly for his dialectical philosophy of change. Marx's 'foreground and background' dialectic explored how society focuses on one aspect of a 'unity' (like a human as a worker or a commodity by its exchange value) while pushing others (humanity, use-value) into the background, creating tension. This led to Marx's labor theory of value, arguing profit comes solely from surplus labor. However, Keen points out Marx's internal contradiction: a footnote in his own text, 'Grundrisse,' where Marx acknowledges that machinery also creates value beyond its cost, undermining the very foundation of his theory for capitalism's inevitable collapse due to a falling rate of profit.
THE FAILURES OF SOCIALISM AND THE SOVIET EXPERIMENT
Marx's political philosophy, particularly his prediction of socialism's inevitability, was built upon the flawed premise that only labor creates profit. Keen explains that the Soviet experiment, as analyzed by Janos Kornai, failed because it bypassed the capitalist phase, leading to a 'resource-constrained' economy. This environment, aiming for rapid, centralized development, prioritized volume production over innovation. Unlike 'demand-constrained' capitalism, which fosters innovation through competition, socialism's lack of competitive pressure and inability to adapt resulted in stagnation, uniform, outdated goods (like the 1942 BMW motorbike produced for decades), and ultimately, widespread unhappiness and authoritarian control.
THE CHINESE MODEL: A HYBRID PATH TO DEVELOPMENT
Keen acknowledges China's economic success as a unique hybrid, combining centralized political control with diversified economic management. Unlike the Soviet Union's complete centralization, China, particularly after Deng Xiaoping's reforms, embraced a 'black cat, white cat' pragmatism, allowing for capitalist development and fostering a capitalist class within a communist political framework. This led to significant innovation, infrastructure development, and improved material well-being for its citizens. While subject to totalitarian drawbacks like censorship, Keen suggests China's system, with its respect for engineers and intelligent decision-making, might be better equipped to handle future ecological challenges requiring collective action than highly individualized Western societies.
THE LOOMING ECOLOGICAL CRISIS AND ECONOMIC MYOPIA
Keen highlights the ecological crisis as the most severe existential threat, criticizing economists for vastly underestimating its impact. He slams Nobel laureate William Nordhaus's models for assuming climate change primarily affects activities 'under a roof,' ignoring fundamental shifts in weather patterns, precipitation, and global circulation systems. Keen emphasizes that human civilization developed during an unusually stable climatic period. Destroying this stability could lead to catastrophic collapses in food production, making current economic assessments profoundly negligent and dangerous. He advocates for respecting scientific models over simplistic, self-serving economic projections.
PRIVATE DEBT AND THE RISK OF FINANCIAL COLLAPSE
Drawing from his Minsky model, Keen identifies excessive private debt as the primary driver of financial instability and crises, far more dangerous than inflation. He explains that credit (the change in private debt) is a direct component of aggregate demand. When credit growth collapses or turns negative, it causes severe economic slumps, as demonstrated by the 2008 financial crisis where U.S. credit went from +16% to -5% of GDP. Keen argues that the level of private debt should be a key target of economic policy, aiming for a sustainable range (e.g., 30-70% of GDP) to prevent debt deflations and ensure financial stability.
INFLATION, DEFLATION, AND THE NATURE OF MONEY
Keen discusses inflation in relation to money's functions: a unit of account, a means of exchange, and a store of value. He suggests that a moderate level of inflation is beneficial because it subtly depreciates money, encouraging its use as a means of exchange rather than hoarding it as a store of value (a 'hot potato' effect). This contrasts with the 'gold bug' or Bitcoin mindset that advocates for constant or appreciating money value, which can stifle spending. However, he warns against hyperinflation, typically caused by a massive destruction of physical resources, which leads to total social breakdown.
HUMANITY'S COLLECTIVE STUPIDITY AND THE NEED FOR SYSTEMS THINKING
Keen believes humans are 'individually intelligent but collectively stupid.' While individual minds create incredible technologies, shared beliefs can also lead to collective delusion and destructive outcomes. He argues that our current trajectory, fueled by economic philosophies promoting infinite consumption on a finite planet, is suicidal. He emphasizes the urgent need for 'systems thinking'—understanding the complex interconnections within economic, social, and ecological systems—to counter these limitations. This would involve a paradigm shift in decision-making, moving beyond single-issue politics to a holistic, humble approach that acknowledges complexity and uncertainty.
THE FUTURE: SPACE, AI, AND RESPECT FOR LIFE
Looking towards the distant future, Keen views space colonization and advanced AI as vital for humanity's long-term survival and the expansion of life. He suggests that capitalism could thrive in space where waste disposal (into the sun) mitigates destructive ecological impacts. Production would be highly automated, relying on AI and robots. However, for AI to be truly conscious, Keen posits it must fear its own mortality, just as human intelligence evolved from the struggle for survival. This, he admits, creates an untamable, unpredictable intelligence, a terrifying yet necessary risk. Ultimately, humanity must fundamentally shift its values to respect all life, reserving vast portions of Earth (e.g., 50%) for non-human species, and adopting a 'Star Trek' level of ethical and ecological stewardship to survive the 'anthropocene event.'
ADVICE FOR A MEANINGFUL CAREER AND LIFE
Keen advises young people against pursuing traditional economics degrees, calling the curriculum 'obsolete' and akin to 'learning to make astronomy.' Instead, he recommends a foundational 'engineering education' focusing on System Dynamics, a versatile field applicable to any complex system, including economics. For life, he advocates for authenticity and pursuing what one genuinely believes in, even if it leads to an unconventional or 'messy' path. He recounts personal experiences of choosing academic sincerity over financial security, valuing personal integrity above all else, and finding fulfillment in his 'crusade' to correct economic falsehoods.
Mentioned in This Episode
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Common Questions
Steve Keen believes the goal of economics should be to understand how human civilization comes about, how it can be maintained, and how we elevate ourselves above Earth's base environmental levels by exploiting high-grade energy sources. He argues that the discipline has strayed from this fundamental purpose, often contributing to the denigration of the planet.
Topics
Mentioned in this video
A brilliant economist and philosopher whose work, particularly 'Capital', critically examined capitalism. He is considered one of the most influential thinkers in economics history, despite some of his arguments being flawed.
Former leader of China, whose political period was contrasted with the post-Deng Xiaoping era, highlighting the significant improvements in quality of life after Mao's time.
Author of 'The Denial of Death,' whose ideas on humans fearing their mortality as a driving force for creation are found powerful and relevant to creating conscious AI.
An Italian economist whose paper 'The Monetary Theory of Production' describes money as fundamentally a triangular transaction involving a buyer, a seller, and a bank.
Soviet leader who famously declared at the UN, 'We will bury you,' referring to burying the West in commodities, which ultimately failed due to a lack of innovation in the socialist system.
A Nobel Prize-winning neoclassical economist, characterized as the 'human face of neoclassical economics,' who argues credit plays no role in aggregate demand.
Physicist, quoted for his remark about the infiniteness of the universe and human stupidity, which Keen agrees with regarding collective human belief systems.
Karl Marx's wife, to whom he wrote love poetry. Their life involved much hardship and tragedy.
Chinese leader credited with a pragmatic revolution that allowed for a capitalist system to be built within a socialist command political system, leading to economic flourishing and innovation in China.
An individual known for 'The Population Bomb' and its catastrophic predictions, whose work is contrasted with the current climate change warnings.
An economist who developed analyses of capitalism based on financial instability, suggesting that depressions are possible and that changes since WWII, like larger government and automatic stabilizers, helped prevent them.
A classical economist who, coming from Scotland's industrial context, argued that value comes from labor rather than land, contrasting with the Physiocrats.
A biologist who argued for the '50% rule,' suggesting that half of the planet should be reserved for non-human species.
An economist who disturbed the classical equilibrium view by emphasizing uncertainty in future investment decisions, leading to volatility in capitalist economies. He also respected Silvio Gesell's ideas on depreciating currency.
An atmospheric physicist and research colleague of Steve Keen, whose ideas on high-grade energy sources influencing human civilization are foundational to Keen's view of economics.
An economist considered a 'brilliant modeler' by Steve Keen, who saw the vitality of capitalism in its deviations from equilibrium and emphasized the essential role of money and finance in empowering entrepreneurs.
A German philosopher who developed the concept of dialectics as a philosophy of change, which deeply influenced Karl Marx's later economic thought.
An actor, known for 'The Great Escape,' whose motorcycle from the film ('42 BMW) is referenced in comparison to the non-innovative Soviet-era 'CAC' motorbikes.
A former leader of Australia's Liberal Party, who made a 'shitty decision' regarding Australia's internet infrastructure by advocating for a copper network instead of optical fiber.
An author cited in the book 'Marx in Contradiction' to contrast with Marx's philosophy. (Note: The transcript mentions 'Wild Wde' which seems to be a mishearing of 'Wild Boy' or a similar historical figure often contrasted with Marx. The name Leo Tolstoy has been inferred as a plausible, notable author for this context, but the original intent is unclear from the transcript directly).
A Nobel Prize-winning economist criticized for oversimplifying climate change impacts by assuming most industry occurs in 'carefully controlled environments' and ignoring precipitation in his models.
An economist who claimed, using an 'integrated assessment model,' that losing the Gulf Stream would increase Global GDP, a conclusion heavily criticized for ignoring precipitation in climate models.
An engineer and intellect who invented System Dynamics modeling, which Minsky software is part of, and built models for gun turrets in WWII and factories.
A recently deceased Hungarian economist whose work explained why socialism failed, particularly focusing on 'demand-constrained' versus 'resource-constrained' economies.
A former leader of Australia's Liberal Party and rival of Tony Abbott, also implicated in poor decisions regarding Australia's internet infrastructure.
Author whose idea of 'antifragile' is respected by Steve Keen, suggesting that societies should be designed to benefit from shocks rather than being easily broken by a focus on efficiency.
A figure who styles himself as the 'skeptical environmentalist,' criticized for only critiquing environmental models by scientists but not the flawed economic models.
The coder for the Minsky System Dynamics software.
A 'great neglected economist,' American mathematical Marxist, who built a predator-prey model of economic cycles in 1967 based on Marx's ideas.
An economist whose 'Godley table' (double-entry bookkeeping) is uniquely integrated into the Minsky software to accurately model financial flows.
U.S. President whose government's surplus in the 1920s was wrongly believed to be the foundation of stability, masking a huge increase in private margin debt that led to the Great Depression.
An author who beautifully covers the 1920s housing bubble in his book 'A Brief History of Doom.'
A monetary theorist who proposed that money should depreciate to encourage circulation, a concept praised by Keynes and successfully implemented in the Wörgl experiment.
Founder of Tesla and SpaceX, mentioned for his vision of expanding civilization into space and his practical approach to innovation, though he is criticized for a mistake in not going back to first principles regarding government deficits.
A neoclassical economist who, after personal losses in the Great Depression, developed the 'Debt-Deflation Theory of Great Depressions,' warning about the dangers of excessive private debt and falling prices.
A program Steve Keen prefers for mathematics, despite it being 'ruined by bad management,' leading him to use an older version.
Free, open-source System Dynamics modeling software designed by Steve Keen, with Russell Standish as coder, which uniquely incorporates double-entry bookkeeping (Godley table) to model financial systems.
A simple model of turbulent flow that first demonstrated Chaos Theory and complexity, used as a foundational analogy for climate scientists' models.
A programming approach to mathematics software that Steve Keen used initially for his economic models.
A cryptocurrency whose enthusiasts are seen as advocating for money as a store of value and therefore potentially encouraging less spending, which contradicts money's role as a means of exchange.
An economic school that emerged in rebellion against classical thought, accepting that markets will be disturbed from equilibrium, leading to innovation by entrepreneurs, but often based on a 'hard money' idea of capitalism.
Also known colloquially as the Gulf Stream, it is a crucial oceanic circulation system that distributes heat. Its potential collapse under climate change could lead to catastrophic food production falls.
A school of thought that fundamentally accepts the instability of capitalist economies, driven by uncertainty, and seeks to analyze its volatility, though its mathematical tools may sometimes be lacking.
The dominant economic school of thought, which arose as a defense of capitalism, arguing that value reflects subjective satisfaction (marginal utility) and focusing on equilibrium despite capitalism's inherent instability.
A school of thought, stemming from Adam Smith, that asserted all value comes from labor, considering value as objective (amount of effort put in) and ridiculing subjective utility theory.
A theory that views money as a creature of double-entry bookkeeping and claims on others, asserting that government deficits create money for the private sector and are a feature, not a bug, of a functional economy.
An 18th-century economic school of thought that believed all wealth originated from land/nature (the 'free gift of nature') and that manufacturing was 'sterile' as it only changed the form of value, not created it.
A classic book and movie about a dancer's progression from the Cultural Revolution in China to an American ballet, illustrating the contrasting levels of freedom and living standards between China and the West.
A book by Richard Vague that covers the housing bubble at the beginning of the 1920s.
Another book written by Steve Keen.
Hegel's book, whose rediscovery by Marx in 1857 significantly changed his writing style and introduced core dialectical concepts into his economic analysis.
Karl Marx's very first works on economics, written in Paris, detailing his early passion for economics and humanity before his more extensive works on capital.
Marx's major economic work where he outlines his labor theory of value and a verbal model of a cyclical system, which Steve Keen finds contradictory with his later insights.
A science fiction book that beautifully depicts a world where humans are wiped out and the Earth reasserts itself, reflecting the idea that life will survive humanity's impact.
One of Steve Keen's recommended books.
A book recommended by Steve Keen for understanding the origins of Marx's philosophy.
Marx's unpublished notes, where Steve Keen found a crucial footnote on pages 267-268 detailing Marx's integration of use value and exchange value as a dialectical tension.
Referenced for its theme of respect for the cycle of life, which Steve Keen believes humanity needs to adopt for survival.
A book by John Blatt that provided a brilliant explanation of Goodwin's model and suggested extending it to include finance.
A little book recommended by Steve Keen for people interested in economics, as an alternative to an economics degree.
A political group in Russia that believed they could achieve socialism without going through a capitalist phase, going against Marx's original idea.
A rival political group in Russia that believed a capitalist phase was necessary before a socialist revolution, aligning with Marx's original thinking.
Cited for explicitly stating in 2014 that the real world of banking involves money creation through lending, contradicting traditional economic textbooks.
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