Steve Keen: Economists Have Left Out Energy!
Steve Keen: Economists Have Left Out Energy!
Over the past decade, the world’s central banks have distorted the price of money by bringing interest rates to record lows.
With credit so cheap, asset prices have risen dramatically as companies and governments have borrowed to the hilt.
And now with the “Everything Bubble” threatening to burst (perhaps in mid-bursting already?), we’re suddenly realizing that the phantom asset price gains were ephemeral, while the debts are permanent.
How will the economy cope with dangerously overleveraged nations, industries and households? Not well.
To discuss this massive problem and propose some potential solutions is Steve Keen, professor of economics at Kingston University in London and author of Debunking Economics:
The basic idea behind a modern debt jubilee is we’ve let far too much private debt accumulate by allowing the financial sector to exercise the rights of being able to create money without exercising the responsibilities that should come with it.
What they’ve done is do the brain-dead thing of funding asset bubbles because it’s easy to just give somebody money to buy a house. That causes the price of the houses to go up. And then you get nice large bonuses on that. And when the bubble bursts, who cares? You’ve already moved onto another company or you’ve taken out so much it doesn’t matter to you.
It’s been incredibly irresponsible lending not for producing physical infrastructure but for speculation on the price of assets which your own lending is causing. And then of course we’ve had all these people who used to be decent engineers and physicists becoming financial engineers, which is absolutely disastrous for our capacity to build our way out of the ecological crisis we’re facing.
Steve Keen: Actually, it goes way, way back because my interest in economics when I was an undergraduate student, when I was a school student and they asked me what I wanted to do in a vocational course. I said I wanted to do economics and engineering. There is no such combination so I was pushed into economics major instead. But I did engineering mathematics in my first year. So, I’ve always had a background in engineering and physical sciences and physics. It was only six years of lousy science teachers at a Catholic boys’ school that ended up turning me into an economist rather than a physicist. So, that’s not uncommon. I think it’s quite a lot of economists actually end up that way. But I was heavily influenced by the Limits to Growth which I saw as a bit novelist study of the actual interacting feedback systems that determine our physical economy and our ecology. And horrified to see economists like Northouse, specifically Nordhouse demolishing the credibility that incredible study. And I’m denigrating people like Jay Forester in the process. So, I’ve always wanted to bring energy in and I’ve always been dissatisfied not just with how economists ignore energy completely, so mainstream economics and post Keynesian for that matter. Both model protectionist involving labor and capital with no energy. But even people who try to bring energy intended to add it as a third factor of production.
And that never jived with me because if you are using a neoclassical what’s called Cobb-Douglas production function you have labor, capital and energy as three independent inputs. You can set up the parameters so that energy has zero role or if you set it up according to what’s called the cost share theorem which the–the coefficient was raised to a power these different independent inputs to give you constant returns. If you double inputs, you double outputs. So, a sensible constraint on a mathematical model of production.
If you set according to the share of energy in the GDP, you get a sick coefficient for energy at about .07. Now, that means if you do the mathematics of a Cobb-Douglas production function–if you cut energy by 90% GDP would fall about 10 and that just was complete nonsense to me. So, I was always trying to bring it about to say I wonder what this brings this in a fundamental way and the simple insight I got, which is within 10 minutes I turned it into an explanation, both what made the complex function appear to work and what was the weakness as well--labor without energy, is a corpse. Machinery without energy, capital without energy is a sculpture. Both need energy to turn, to create. And so, what you have is rather than energy is independent input to the on an equal footing with labor and capital. Energy is an input to both labor and capital, without which they can’t function. And then you get a much more realistic picture where energy plays a critical role in the production of anything. And of course, we are having energy you never convert according to the second law of thermodynamics you can never convert all the energy into work, unless you live in a part of the universe which is at absolute zero. There is no such place. Therefore it all has waste being generated. So, once you have energy as an essential input into production you also say should I waste energy which fundamentally takes the form of waste matter in our production system. Of course, essentially–importantly but not essentially–only being C02.
You have a direct link between economics and ecology. So, that was something I did about three years ago, and I’m now following that argument to rewrite economics from the ground up so it starts with energy as the fundamental input and fundamentally sees GDP as useful work.
Click the play button below to listen to Chris’ interview with Steve Keen (59m:55s).
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– Peak Prosperity –
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