Lex Fridman Podcast #303 – Steve Keen

Lex Fridman Podcast #303 with Steve Keen: Exploring Economic Theories

In episode 303 of the Lex Fridman Podcast, economist Steve Keen joined the host, Lex Fridman, for an insightful conversation. Keen, known for his criticism of mainstream economics and his unique integration of ideas from Karl Marx to John Maynard Keynes, delves into various economic theories, offering a critical perspective on capitalism, Marxism, and the intricate mechanisms of the economy.

Exploring the Foundations of Marx’s Philosophy

Keen begins by discussing Karl Marx’s economic theories, particularly the tendency for the rate of profit to fall in capitalist systems. This concept, central to Marx’s critique of capitalism, suggests that diminishing profits would inevitably lead to a workers’ revolt and the rise of socialism. Keen notes that Marx envisioned this transition first occurring in advanced economies like England, contrary to what happened historically with the Bolshevik Revolution in Russia.

The Soul and Tools of Economics

A significant part of the discussion revolves around what economics should aim to achieve. Keen argues that economics should explain how human civilization has elevated itself above basic environmental constraints through the exploitation of high-grade energy sources. He criticizes the current state of the field, which often overlooks these aspects, focusing instead on abstract models that don’t adequately represent the complexities of real-world economics.

The Role of Money and the Flawed Foundations of Neoclassical Economics

 Keen criticizes the neoclassical economic theory, particularly its oversimplified models and reliance on equilibrium. He argues that these models fail to represent the dynamic, non-equilibrium nature of real-world economies. In discussing the role of money, Keen highlights a common misconception in economics: the irrelevance of money, or the ‘money illusion.’ He asserts that money, contrary to neoclassical thought, plays a crucial role in the economy, especially in terms of demand and the creation of new money through banking and government activities.

Schools of Economic Thought – From Physiocrats to Modern Theories

The conversation then shifts to various schools of economic thought. Keen gives a historical overview, starting from the physiocrats, who viewed agriculture as the source of all wealth, to Adam Smith’s labor theory of value in classical economics, and then to Marx’s revolutionary ideas. He also discusses the emergence of neoclassical economics as a defense of capitalism, focusing on subjective value and marginal utility.

Steve Keen’s Critique of Marx’s Labor Theory of Value

Keen delves into Marx’s labor theory of value, pointing out its limitations, especially regarding the role of machinery in production. He argues that Marx failed to recognize that machines, like labor, can create value, a point that undermines some of Marx’s predictions about the development of capitalism and socialism.

Exploring Innovation and Economic Dynamics in Socialism and Capitalism

 In the second part of the podcast, Steve Keen and Lex Fridman delve into the reasons behind the lack of innovation in socialist systems compared to capitalism. Keen points out that socialist economies, focused on volume production without innovation, eventually lagged behind capitalist economies, which thrive on innovation. This gap, Keen argues, was a significant reason for socialism’s failure to keep up with capitalist societies.

Capitalism’s Demand Constraints vs. Socialism’s Resource Constraints

 Keen discusses the contrasting nature of capitalism and socialism. Capitalism, according to Keen, is ‘demand constrained’, where numerous companies strive to capture market share, leading to a cornucopia of goods even for lowly workers. In contrast, socialism is described as ‘resource constrained’, leading to limited choices and delayed product availability, contributing to public dissatisfaction and, ultimately, authoritarian measures to maintain control.

Marxism, Stalinism, and the Future of Capitalism

The conversation shifts to the historical impacts of Karl Marx’s ideas, particularly how they influenced Stalinism and whether Marxism’s vision for a utopian society is feasible. Keen suggests that we are already experiencing the limitations of capitalism and need to consider alternative systems that better address current global challenges.

China’s Unique Blend of Political and Economic Systems

Keen gives an interesting perspective on China’s blend of centralized political control with diversified economic control. He posits that China may be better positioned for future societal stability compared to Western capitalist societies. This segment delves into the complexities and potential advantages of China’s political and economic structure.

The Ecological Crisis and Capitalism’s Limitations

 A significant portion of the conversation focuses on the ecological crisis and capitalism’s inability to address systemic issues effectively. Keen criticizes the lack of long-term planning in capitalist systems and the inadequacy of current economic models to predict and mitigate the impacts of climate change.

Climate Change: Scientific vs. Economic Perspectives

Keen and Fridman discuss the differing perspectives on climate change between scientists and economists. Keen criticizes the oversimplified models used by economists to predict the impact of climate change, arguing that these models fail to capture the complexity of ecological systems and the potential catastrophic consequences of climate change.

Understanding Economic Models and Climate Change

In the final segment of his conversation with Lex Fridman, economist Steve Keen discusses the critical role of economic models in understanding and addressing climate change. He criticizes the oversimplification and inaccuracy of certain models used by economists, emphasizing their inability to realistically capture the complexity of ecological systems. Keen underscores the urgent need for more comprehensive models to effectively predict and mitigate the catastrophic consequences of climate change.

The Future of Capitalism in the Face of Ecological Crisis

Keen explores the future of capitalism amidst the looming ecological crisis. He highlights the limitations of capitalism in addressing systemic environmental issues and suggests the necessity of alternative systems. Keen also touches upon the potential advantages of China’s unique political and economic structure in maintaining societal stability.

The Intersection of Economics, Technology, and Politics

The discussion extends to the intertwining of economics, technology, and politics. Keen describes his software, Minsky, which models economic dynamics using system dynamics, emphasizing its uniqueness in incorporating financial flows. This tool, according to Keen, allows for a deeper understanding of macroeconomic trends and the potential for forecasting economic crises.

Human Intelligence, Collective Behavior, and Technology

Keen reflects on the dichotomy between individual human intelligence and collective behavior, particularly in the context of technological advancement and economic systems. He stresses the importance of systems thinking to counterbalance the often destructive nature of collective human actions.

Personal Insights and Philosophical Musings

 Keen shares personal insights, ranging from his views on love and human relationships to the existential contemplation of life and death. He touches upon the philosophical aspects of economics, the human condition, and the potential future of humanity, including the exploration of space and the role of AI and robotics.

Conclusion

In this enlightening conclusion to his interview, Steve Keen offers a comprehensive and thought-provoking analysis of economics, technology, and human nature. His insights reveal the complexities of our economic systems, the challenges posed by climate change, and the potential paths forward for humanity in a rapidly changing world.