284 - Steve Keen: The Economics of Global Warfare

29:17And I think this episode will be coming fresh on the heels of an episode with Timothy Snyder of Yale and Toronto, who I spoke with about general geopolitics, but also tyranny. And one question I asked him about was conspiracy theories. And he said that at a time when power is really concentrated in the hands of a few, it is much more, it's to be expected that people will start thinking more conspiratorially. And so, I'm not asking you a conspiracy theory question, but I'm wondering, what is the economic benefit, if there is any, for the United States and Israel to be getting into this war with Iran?

30:14because everything you're saying sounds pretty terrible. And I'm wondering if this is really just a case where it's individual egos being in power, making something happen that is really just not economically good for these countries at all. I think it's mainly the latter. It's very bad for these countries. But at the same time, you're seeing Trump saying he loves the inflation. Why does he love the inflation? Because his friends sell oil. So higher prices for oil means hire money for his friends. And of course, he managed just always to get his cut of that sort of thing. So there is a way in which they're in a conspiratorial sense.

30:50It's not in the interest of society in general, but it's certainly in the interests of some of the uber wealthy to imagine, oh, we cut out Saudi Arabian oil. We cut out Iranian oil from the global market. We're still selling. We're going to do nicely out of this. Thanks very much. So that's certainly, there's an element which they would look at the prospects of losing supply from the Middle East and say, oh, great, we'll make a profit out of that. So I think there is that type of conspiracy going on, and it's brain dead in one sense, because it doesn't see the consequences of that for the rest of society, which then undermine the wealthy in the first instance.

31:30Well, maybe now would be a good time to pivot slightly to talk more about the economics of Trump and the United States in our position more broadly. And Trump's tariffs, trade deficits have been a major topic of this term. I don't know what you think would be the best way to start talking about this, whether it would be more interesting to hear what the standard take on tariffs and trade deficits is and where you disagree with that more generally, or to just hear about how you would evaluate Trump's policies? Well, let's go for the theoretical side, first of all. Talking about Trump gets to be boring.

32:19The basic position of economists is the theory of comparative advantage. And that said, the economy should specialize in what they're comparatively better at. Not the ones you're absolutely better at, but the ones you're comparatively better at. And that's bullshit. The person who gave us that theory was Ricardo in his Principles of Political Economy back in 1817. And Ricardo, I wouldn't quite call him a con artist, but Sean Pater said that Ricardo was somebody who really didn't care about the interconnectedness of everything. He wanted to get short, simple explanations for things which would lead to the outcomes he wanted to have.

33:01So in the case of the argument about comparative advantage, he gave this numerical example of Portugal versus England and said that England is like England takes, say, 80 people, say 120 people to make a certain amount of wine and 100 people to make a certain amount of cloth. and then Portugal takes 90 to make a certain amount of wine and 95 to make cloth or something. They weren't the exact numbers, but in the case of Portugal is absolutely better at making both, but England is relatively better at making cloth and therefore England should specialise in cloth and Portugal should specialise in wine.

33:48There'd be more of both and we trade the surplus and everybody comes out ahead. That's the basis of the theory of comparative advantage. Now, the example that Ricardo used was simply in terms of labor. So you move workers from wine production to cloth in the UK and from cloth production to wine in Portugal. But you can't make wine just with labor, nor can you make cloth just with labor. You've got to have machinery as well. and ricardo discussed uh the question of moving capital from one industry to another and he pulled the con job and i'm the first person to see this it'll be something which uh is a surprise for most people so i haven't got that quote handy at the moment but i'll find it quickly for you give me a section to find this yeah while you're looking it up does the the con job you discovered arise from your attention to system dynamics?

34:47No, it raises my attention to language. Because I've always seen through the theory of comparative advantage on the basis that it presumes you can move labor from one sector to another, but ignores the fact you need machinery as well. And of course, you can't change a winepress into a spinning jenny. OK, so if you decide to have specialization in one sector or another, you're ignoring the fact you've got you maybe you can move the move the workers from one sector or other, but you can't move the machinery. And I've always been aware of that. I'm guessing it goes beyond just machinery. You also have to take into account the inputs to the labor and whether they're easily acceptable.

35:31Well, they do take into account. OK, so this is the example from Ricardo. He says, so you have to produce the wine and sorry, England may be so circumstance that produce the cloth may require 100 men and wine 120. Then Portugal, 80 for producing the wine and 90 for producing the cloth. He said, well, there would be advantages for Portugal to export wine in exchange for cloth. And then he goes through and talks about a few more examples. and finally says, the difference in this respect between a single country and many is easily accounted for by considering the difficulty with which capital, so he's now talking about machinery or finance, capital moves from one country to another to seek a more profitable employment and the activity with which it invariably passes from one, what should I say next?

36:26What should be the next word? It should be industry, shouldn't it? because he's talking about changing from cloth to wine. He says province. Okay, so at this point, Ricardo is pulling a Swifty. He knows he's pulling a Swifty because he's ignored the fact as well as moving the labor, you've got to move the machinery. And he starts giving an explanation for it that gets to the point where he should say industry or in his terminology, words he used at the time, he would have said branches of trade rather than saying that he says province. Now, of course, you can move a machine from one province to another, or you can move money from one province to another.

37:05That's got bugger all with moving machinery from producing wine to machinery producing cloth. And he got away with that for over two centuries. I'm the first person to notice it. Noticed it about six months ago. So elsewhere in the principles, he says how difficult it is to move dedicated machinery from one sector to another. and said often when you, if you have a, he said an advanced economy is often in a worse situation than a backwards economy because an advanced economy has lots of specialized machinery which cannot be moved, whereas the developed countries have less of that and can therefore move working capital, money that you use to pay workers' wages easily.

37:48But he literally says at one point he acknowledges you cannot turn a winepress into a sheep dip, a winepress into a spinning jenny. But fundamentally, that's what the assumptions of neoclassical economics do. They took this Ricardo's idea of reallocating existing resources and made that into the whole basis of economics. As if you could, you can reallocate workers. It takes a bit of labor training, but you can turn a vineyard on into a shepherd. Not impossible. You cannot turn a winepress into a spinning journey. So there's going to be capital written off in that process. and it's really not a question of the existing resources you get.

38:30It's whether you produce new resources, whether you make, if you're looking at England, you're producing more spinach ennis. Portugal, you're making more wine presses. Does the change, the financial consequences of the trade development enable you to produce more of those at the right time or not? It's a question of investment and that's completely ignored by the mainstream. And this is why they get, they come up arguing for something which as if it's always unconditionally increases welfare. That's the attitude that economists have to free trade. And with this case, it depends upon what happens with the investment rates in the different countries.

39:08So it's a conditional question, and it doesn't relate to existing resources. It relates to investment and creating new resources. So there's just a con job at the heart of conventional economics. And I didn't expect Ricardo to be conscious of that, but I was amazed to find this word when I went back to reject literature before I started working on my critique of MMT on trade. And I found that Ricardo was quite happy to pull a con job, but he wasn't happy to stick his neck out and pretend that you can move a wine press to make it into a spinning jenny. He wasn't going to make that stupid a comment.

39:53But he got away for two centuries now with people not noticing, apart from me, about six months ago, that he's using provinces for geographic movement, where he's really talking about moving capital goods from one industry to another. So leaving Trump out of this for the moment, what are the just general implications of this for, I mean, trade deficits today? Well, for trade deficits, well, for trade in general, it seems to me that trade doesn't necessarily increase welfare. The argument that neoclassicals have that free trade will necessarily make things better. That's wrong. So you can part of, say it's no longer unconditional.

40:37And it's not a case of moving existing resources. It's a case of creating new ones. That's what's going to give you any benefit from trade, if at all. So it throws that argument out the window. And it also throws out so much else of mainstream economics because they keep on pretending that you can easily move capital from one sector to another. No, you can't. So it's very destructive of conventional thought on what maximizes output from economists. And in terms of trade deficits and trade surpluses, it comes down to saying that it's sensible to run a trade surplus because that trade surplus creates additional money that you can use to invest in expanding your industries.

41:27So trade surpluses, and this is something that Keynes claimed, trade surpluses benefit the country running a trade surplus and damage countries that are forced into a deficit because the sum of all exports and imports is zero. So countries are running a trade surplus, get more funds to invest and develop more rapidly. And that's, and of course, MMT has this, frankly, stupid argument that exports are a cost and imports are a benefit. So they're completely wrong on that front, whereas they're quite right about government spending. And so when the United States consistently runs a trade deficit, what's actually happening in terms of our money and industrial capacity and our debt?

42:14The trade surplus sends overseas money that's being created in America. And this is something I've had an argument with Warren Mosler on this front. He waves his hands about and says that it's just a case that they get bonds and a foreign currency. That's all that happens. When you do the accounting properly, and of course I have done the accounting properly, you can show that the exports will boost the domestic money supply of the exporting country and reduce the money supply of the importing country. and the companies, because it's companies that export, not countries. The companies that get the export get higher revenue, which means they can invest more and potentially maintain their lead over the countries where the importing is taking place.

43:02So this is what's been happening with America ever since its trade deficit started. It had huge trade surpluses, of course, when it became the reserve currency for the planet because that was in the aftermath of World War II and America was the only major economy that hadn't been bombed. So it had a huge capacity to produce goods for exports and that's what it did in the first 20 years or so after World War II. But from the late 1960s on, it's been running a trade deficit and one of the reasons for that is if you reserve currency, your currency gets overvalued. People need your currency not just to buy American goods and services but to buy goods from anywhere else on the world.

43:44So you have a monetary demand for the American dollar over and above the demand that exists for other countries' currencies, which is mainly for trade. And that means the American dollar is overvalued. And that suits the finance sector, fine. The finance sector, insurance and real estate, they do very nicely out of a very good dollar because they're the ones who can supply the dollars. So they end up dominating financial transactions around the planet. But the manufacturing sector gets a handicap. So let's just say the overvaluation due to being the world's reserve currency is, say, 30%. So American manufacturing prices end up being 30 % higher than comparable manufacturing systems elsewhere in the world.

44:28That means that America can't compete in manufacturing. So the goods and services start being made in other countries. And this, I think, ultimately leads to the decline of the country because the reason you become an empire is because you build a manufacturing capability that the countries don't have. You make weapons they can't make. You invade and dominate them, and then you become the dominant country on the planet. That then means your currency gets overvalued if you're stupid enough to make your currency into the reserve currency. So then in that case, having dominated the world by having a new manufacturing system that enables you to invade other countries, the whole, I'm thinking everything right back to the Spanish and the Portuguese and the Dutch empires.

45:15But they get an advantage initially that gives them the capacity to become militarily dominant. Their currency then becomes the currency for international trade. It gets overvalued. The vassal states, the ones that's defeated, start building manufacturing capability. And at some point, they build the ability to defeat the empire. And so they become the dominant country and repeat the same mistake. So I think being a reserve currency is a huge mistake for a global hegemon. And America's going through that right now. And we got this, in the case of the war with Iran, the classic part of that is that a huge part of that war involves precision weapons.

45:57And those weapons require rare earth minerals to be refined and used for magnets and all sorts of guidance. The so-called rare earths are extremely hard to refine. And does America produce them? No, China does. So America is probably going to be unable to restock its weapons after the war runs the weapons down because China is refusing to sell those rare earth minerals to America. And so we're going to see America being unable to rebuild its military after it's wasted the weapons fighting Iran. So this is a classic instance where America is shooting itself in the foot in the short term by trying to win a war using weapons that it can't replace because it doesn't have the manufacturing capability to produce them anymore.

46:52i i'd like to come back to the dollar but there there are a couple more questions i had about tariffs and correct me if i'm misremembering or or stating what you just said but one of the benefits of running a trade surplus is that you can then invest these proceeds in helping to rebuild or just to build industry. But Trump sort of presents tariffs as a way of bringing manufacturing to the United States. And is that something that they can do in principle while you're running a deficit or are they, that's not how they function in practice? Most countries that have managed to run industrial lives have run tariffs to protect domestic industry while they do it.

47:44It includes America. Michael Hudson's PhD thesis was America's projectionist trade takeoff. So America banned the import of many British goods, and therefore you had to make them with American industry. And over time, American industry became more effective at making those goods than the British. So at that point, Americans became fans of free trade. So you get this pattern happening globally that countries will protect their industries and then force those industries to rapidly industrialise to become better than their rivals. So this has been part of the whole process of development over time.

48:25Now, Trump, I mean, the way he's going about it is crazy because it isn't just a case of putting up barriers. It's also what you do to encourage your domestic manufacturers to take up the slack that you've created by effectively banning or making more expensive foreign goods. And none of that is being done by Trump. And in fact, he's trying to encourage foreign manufacturers to come in in a lot of those cases. So his own approach, as usual, is cock-a-hoop crazy. But the basic idea of industry policy and of using tariffs to reserve some of domestic demand for domestic industry, That's been a part of every successful industrialization program.

49:07And the argument that free trade is better for industrialization is simply wrong. Well, one last question about tariffs, and maybe here we're getting into territory that's slightly more philosophical. But in the United States, the courts, Congress, Trump had been battling over Trump's tariff powers. And I'm wondering if it makes sense to you to have the tariff powers or trade policy in general be part of executive power and under Trump's control. Or I guess this is an ideological question about how you think government should be best organized. Well, it's got to be national. This is the reality about policies like tariffs.

50:02They're a national policy. And if you look at countries that have successfully done this, like Singapore, for example, or Malaysia, and then obviously China, Japan, Korea, Germany in the immediate aftermath of World War II, they all had policies to try to fill in the holes in their own manufacturing system. and tariffs were a major part of it. They weren't the only part, but there were all sorts of restrictions to try to reserve domestic demand for domestic producers. That's a huge part of the success of industrialization. There's also an extent to which demographic issues favor protection policies and industrial policies.

50:48So, for example, one of the reasons that there was the demand for vehicles, for example, in Japan after World War II, went to Japanese manufacturers rather than American, whilst the Japanese couldn't afford to buy American cars, and they couldn't afford to buy motorbikes. So that's where I think it was Honda who first attached a, actually, in fact, I think an engine out of a fallen B-52. There's so many tiny engines. And what's the bomber called the B-42? I keep on forgetting. That sounds about right to me, but I'm not. I have to live with it. I've got it wrong. I get it wrong. But the bombers themselves had so many motors that there were motors all over Japan that could be used, rescued and repaired and used for a secondary purpose.

51:36And attaching those motors to bicycles is where Honda came from. Now, so that, of course, means that the situation your country is in gives you an advantage because you've got a market that you can fill and nobody else can. And then you start refining that product and start exporting it. And then you fill a niche that doesn't exist in the country you're selling into. So, for example, one of the reasons Japanese cars became so dominant in America was Americans didn't make small cars. They made so-called mid-range and executive cars. They didn't make the small ones. So, therefore, the Japanese stuff started filling that particular part of the market.

52:13And then the funds from that enabled Japan to develop higher quality vehicles. So they've transformed the manufacturing sector over time through a combination of industrial policy and just their own circumstances, meaning that they could exploit a niche in the American market that the American producers were ignoring.

52:36When you're thinking, I mean, you're a full-time economist. You're thinking about economics all the time. Are you thinking about it from an Australian perspective or an American perspective? And what I mean is, are you spending your sort of like your free time thinking about, oh, what Australia could do better with their policy or what the United States could be doing better with their policy? I'm thinking more about how do you actually describe and manage a capitalist economy? Okay. That's the main framework. Because none of the conventional theories fit the real world. The neoclassical is completely irrelevant.

53:18The Marxist is wrong as well. Post-Keynesian is realistic, but the Post-Keynesians are using antiquated mathematical techniques for most of their models, and I'm trying to drag them out of that. So a lot of my work says, let's find a realistic basis for economics, and let's use the right techniques for modeling a dynamic system like the economy. And that's far more what I do than think about particular countries. Are you interested in it more as an abstract intellectual exercise or because you would like those who run countries to take interest in your work and then implement it? Well, I'm just looking for a sensible foundation for analyzing the economy, because this is the frustration that I felt as a young economist was that the neoclassical theory was clearly bullshit.

54:18Let's use a technical term for it. And therefore, I needed an alternative. But I read Marx and I was critical of Marx as well. I saw great advantage in Marx's logic, but I think the conventional Marxian theory, the labor theory of Iadis was completely wrong. So I was looking for some sort of realistic foundation. And that applies to the post-Keynesian school in general consists of people who convert from neo, they fall out with neoclassical economics and look for a realistic alternative. and then being very empirically driven and trying to build theories which are based on empirical reality. So that's really been what my all focus has been on that objective.

54:59And I think I've got a complete theory now, and it's based on the work of many, many post-Keynesian economists. But it comes down to wanting something realistic because you can't analyze the system you're in with an unrealistic theory. But that's what we're doing. And that's one reason why there's such angst over economics. You've got people with rival theoretical perspectives, none of which are correct. Are you using the word realist in any sort of a technical sense? Because the word, I mean, it has a colloquial meaning, but within philosophy, the term is used like 20 different ways, depending on whether you're talking about philosophy of math or science or what have you.

55:48um it is a it's it's a it's a loaded word obviously because everybody thinks they're doing something realistic as well as ideology even in the word but i'm saying if it doesn't make empirical sense don't use it and okay okay for example one of the classic areas where neoclassical economics is full of unrealism is the theory of the supply and demand curves you know If you're not an economist, you've still seen supply and demand curves somewhere in textbooks. When you look at the empirical data on what it argues is the supply curve slopes up. So to get more output, you've got to pay a higher price and the demand curve slopes down.

56:28A lower price means higher demand. And that's what gives you the idea of reaching equilibrium. When economists went and the explanation they give for the rising supply curve is what they call diminishing marginal productivity. And the idea is that there's what they call fixed resources and variable resources. You produce output by combining the two. And if you want to produce more output, you've got to add more and more variable units to a fixed amount of fixed units. So at some point, you start getting less output per unit. And therefore, that means diminishing productivity per worker, which means rising cost per unit of output.

57:05And that's a fundamental part of neoclassical theory. Now, there have been 71 surveys that have been done, and all 71 have found that's a myth. It just isn't realistic. Most firms have constant or falling marginal cost of production, as it's called. And that means they can't even do what neoclassicals think is profit maximized, according to the way they talk about profit maximization. Because what they claim is you maximize profit by equating what they call marginal revenue. So the change in revenue you get from each additional item sold, equate that to marginal costs. And when you get the two marginals being equal, the total revenue or the total cost are as far apart as they can be.

57:43And to produce any more than that amount will cause you less profits. And that's garbage. It's bullshit. Reason being that firms don't have rising marginal cost. They also don't let their prices fall. They have list prices. So if you want to buy a Ferrari or a Toyota or whatever else you're buying, you pay it all this price or you walk out. They have trivial discounts, but mainly speaking, the prices are given. The variable costs are given in fall with output rather than rising. So every unit you sell gives your extra profit. And the basic profit maximization strategy of real world firms is sell as many bloody units as possible.

58:21That's real world profit maximization. And neoclassicals can't cope with that because that means the welfare assumptions they make about the economy, that capitalism maximizes social welfare, only work if firms produce until marginal cost equals marginal revenue. Once you show that that point doesn't even exist in the real world, then their welfare arguments in favor of capitalism disappear. here. So realism says you can't use marginal cost and marginal revenue for determining price. That's wrong. You've got to work out a different theory, which is consistent with the facts. And the facts are that firms have constant or falling cost per unit of production in terms of variable costs, and definitely falling cost per unit in fixed costs.

59:10So the real strategy of a profit maximizing firm is to flog as many units as it can. And that means that there's evolutionary competition. They don't compete over price. They compete over product differentiation. So all this stuff, just being realistic, looking at the data, looking at the structure of the economy, ends up with an economics that's completely different to mainstream economics.

59:38one of my favorite quotes is actually an economics quote even though i'm not an economist and even though the person who made it was not an economist and that was the the late myrmecologist eo wilson who i mean spent his life studying ants and other insects but when asked about communism he said great idea wrong species and i take that to be a comment on on realism and you just spoke a bit about neoclassical economics what are the main unrealities of marxism because i take it that Somebody like Rick Wolf would probably dispute that they're unrealistic. So it'll be interesting to hear what they are.

1:00:37Okay. Well, the main unrealism in Marxism is the labor theory of value. The argument that profit only comes out of labor and that prices reflect relative labor values and that therefore there's what they call the tendency for the rate of profit to fall. That's all garbage. And the reason the person who proved it's all garbage is Karl Marx. okay and this is what irritates me that most marxists don't realize this so i did my my original master's thesis is on uh re looking through going through marx trying to find the point at which he developed an alternative to the labor theory of value and for those who want to check it up that's on page uh in terms of the penguin edition it's page 267 of the grundresa If you go to marxist.org, it's page, if you download their PDF of the Grand Risa, it's on page 196 to page 197.

1:01:35And what happened at that point was Marx, if you look at the classical school thought, Smith and Ricardo and so on, they never had an explanation for profit. So Smith would talk about what he called that early and rude state of society before accumulation of capital fundamentally. He said that things will exchange at their labor value. But once you have stock as accumulated in the hands of industrious persons, that's Smith again, in other words, there are capitalists, something must be given for profits. And then you've got to also pay the landlords or something for landlords as well. Now, Marx looked at that and in Ricardo as well and said, you haven't explained where profit comes from.

1:02:14So his initial explanation for profit was that there's this peculiar commodity called labor power, where you pay for the commodity, but you get this magical substance called labor instead. So labor power is the capacity to work, and that comes down to a subsistence wage fundamentally. So capitalists hire workers for a subsistence wage. That's the value of labor power. but then let's say it takes six hours, this is Marx's own numbers, six hours of labor to produce the means of subsistence for a worker. Then the labor contract doesn't stop at six hours, it goes to 12 hours a day back in Marx's day, six days a week.

1:02:54So the worker works for 12, but reproduces their own means of subsistence in six hours. So the additional six hours is surplus value, and that's the source of profit. That was Marx's logic. So he did explain profit in a way that neither Smith nor Ricardo had done before him. But as it happens when he was writing the Grundrisse, which is the rough draft of Capital, he had a friend, I think it was Otto Abreu, dropped in with a copy of Hegel's Phenomenology of Right, which was Marx's own copy. Marx had lent it and 13 years later it came back. And Marx starts rereading Hegel in the middle of writing the Grundrisse, which the Brindisi who's rereading all the classical economists so he can write the critique of capital that he thought would be necessary to give an intellectual basis for the revolution he expected to happen that year.

1:03:47Of course, it didn't happen, but you had the revolutions in Europe starting in 1868 and so on. So he's rereading Hegel and he comes up to this issue of where does value come from? And he's starting to talk in Hegelian terms again. Now, Marx, he also did a PhD in philosophy. I imagine you're aware of that. But once he got created with The Economist, this is back when he wrote Economic and Philosophical Manscripts of 1844, he pretty much started forgetting, not forgetting his philosophy, not using it actively anymore. He became the main exponent of Ricardian thinking at that time. But after 13 years of doing it, suddenly he's got a copy of Hegel again.

1:04:32suddenly starts talking in terms of Hegel's dialectic. I'm going to ask you a question here. Can you describe the dialectic for me? No, because I do not do continental philosophy at all, and I haven't read Hegel in I don't know how long. Okay. Well, the thing is, most people get it wrong, because what they say is the thesis is, the dialectic is thesis, antithesis, synthesis. Have you heard that expression before? I have heard that. Yeah. It's got fuck all to do with Marx and Hegel. It's not Marx or Hegel at all. It's fixed. particularly to continental philosophers, that was Fick's approach to the dialectic, not Hegel's or Marx's.

1:05:08Marx's is what I call foreground-background tension. So the idea in Hegel, and if you read through Marx, and I've read everything Marx ever wrote on economics, he never uses the terms thesis antithesis. I hate the phrase synthesis. It's a real tongue-tangler. He never uses it except when he's abusing Proudhon. Okay? He attacks Proudhon in both the poverty of philosophy and also the Grand Risa. Instead, he has this idea of foreground and background intention. And that returns to his writing. While he's reading the Grand Risa, he's writing the – reading Hegel, while he's writing the rough notes.

1:05:53And the rough notes, literally, he's taking notes in the British Museum, I think it was. it wasn't intended for publication. So he's rereading Hegel and rereading Ricciardo and so on. And suddenly this set of lines comes up to him. This is a quote from a footnote in the Gwendresa. It is not value to be conceived as the unity of use value and exchange itself. In and for itself, is value as such the general form in opposition to use value and exchange value as particular forms of it? Does this have significance in economics? And he goes on for a while, but he finally ends up saying, rather than having an explanation for where profit comes from, from the unique characteristics of labor, he says in the capital, and you can find this in capital, that profit comes from characteristics that labor shares in common with all other commodities.

1:06:46And that is that the buyer exploits the use value and pays for the exchange value. Now, the exchange value of labor is the cost of means of subsistence. The use value of labor is its capacity to produce goods for sale. They're incommensurable in Marx's philosophical logic, and therefore there's a gap between the two, and that's the source of profit. And that works perfectly well for labor, but it also works well for any other input to production. The capital is just exporting the use value, the input and paying the exchange value. When you look at that, it means labor is no longer the only source of profit.

1:07:23any input to production can be a source of profit. And it ends up being, I end up with an energy-based theory of production as it happens, because energy is the major input. So that ends up being a reason that I reject the labor theory of value, but I regard Marx as the most important economist at the same time. Why does it make him the most important economist at the same time? Because here you go, the explanation of where profit comes from that makes sense. Because the adding up approach that the classical school had, the meritocratic approach the neoclassicals have, they're all invalid. They just don't make mathematical sense or logical sense.

1:08:06This one does. It says that capitalists exploit – Marx talked about two circuits in capitalism, what he called the circuit of commodities, where you have a commodity, you sell it. and you buy other commodities with it. So you get change from something which is of no use value to you but use value to others, and then you buy with that product, you buy the things that are valuable to you. So a worker has a commodity called labor that they can't use themselves. They don't have any tools and factories in their backyard. So they've got to sell that commodity, and then they buy goods and services to stay alive.

1:08:43That's the CMC circuit. But the circuit of capital, as Marx calls it, is MCM plus. And that means capitalists buy inputs with using money. They combine that in the production process. They produce different commodities as a result of that. And they then sell them for a larger amount of money. And the explanation of where that profit comes from, Marx made the labor theory of value. When you look at this, it's not true that labor is the only source. And therefore, you don't get the tendency for the rate of profit to fall. You don't get the inevitability of socialism coming out of that. Now, that was such a shock to Marx when he realized that.

1:09:21And there's a point at which he does actually realize it. I'll just actually find a phrase that I know which shows this.

1:09:36okay um so he then when he first discovers that he's cockahoop he applies it to labor the use value of labor is the 12 hours of of work the exchange value was the six the gap between the two is six hours that's surplus value in the same sense that he had with his previous argument where he's working in terms of the labor being a unique commodity now when he gets this general analysis, he has to apply it to capital. And he does it for the first time to a machine on page 308, the version of the Grundrisse you can get from marxist.org. And then I'll just read this whole paragraph out. This example attains the significance only if you see in a smaller capital, which employs more labor and less material than machinery, but yields a higher percentage on the total capital, blah, blah, blah.

1:10:26It also has to be postulated, brackets, which was not done above, that the use value of the machine significantly greater than its value, i.e. that its devaluation of the service of production is not proportional to its increasing effect on production. Now, what he's allowing there is the use value of the machine exceeds its exchange value. And that's a general rule. But then when he gets to capital itself, he finally, because he wants to hang on to the tendency for the rate of profit to fall, he says in capital that the use value of a machine is identical to its exchange value. That contradicts his own philosophy.

1:11:04And this is a common thing I find economists of all persuasions, well, left and right, tend to do. They've got a teleological aspect of their thought. I presume you know what teleology means. Yes. Yeah, most people probably don't. I imagine your readership does. You believe the system has a purpose. So the neoclassicals believe the purpose of capitalism is to maximize utility. and if they find any results from their own logic that contradict that, they'll contradict their own logic to hang on to the teleology. Same thing for Marx here. He described himself as a scientific socialist. He was going to explain not just why socialism was better, which was what all the other socialists did, but explain why it would actually inevitably have to happen.

1:11:47He saw himself as the scientific socialist and with his piece of logic, he undermined his own claim. Now, rather than being able to wear that, He contradicted his own logic to hang on to still being the scientific socialist to explain why socialism had to come about. This is one of the reasons I come back to saying with realism, when I find something which a piece of logic that contradicts the result you'd like to have, throw away the result you'd like to have and accept the logic. And Marx himself said that with his own PhD thesis. See, McLennan, if you haven't read The Condit of Philosophers, you might not have seen McLennan's work, but McLennan republished Marx's early papers and including his doctorate.

1:12:29And in the doctorate, he pointed out that, as he said, a philosopher may actually end up contradicting his own logic. In that case, it's the purpose of his followers to correct his own logical errors. Now, Marx made a logical error. None of his followers have taken that into account. I have, and I want to get rid of the labor theory of value from Marxian economics. Of course, Marxists are so wedded the labor theory of value, they don't want to hear my arguments. I very much appreciate the theoretical digressions. For our remaining time, I'd like to turn back to some of the concrete aspects of what's going on today.

1:13:16And I began by asking about these big picture narratives that the mainstream is missing. And there are a number of world spheres that we haven't touched on yet. We began by talking about the war in Iran and the big thing that mainstream economists were missing was the role of energy in production. And I'm wondering, what are the main narratives that the mainstream is missing when it comes to the war in Ukraine? Oh, in Ukraine.

1:13:54I'm more focused on what's happening in Iran right now because Ukraine is crucial for food output. It's a major wheat producer. But it's not as critical as the Strait of Hormones in terms of enabling the whole production system to function. So I feel a bit out of my depth in commenting on the Ukraine war there and what the main trim is missing. um there i mean to me what if i had to look at the ukraine conflict and say what are the consequences for europe the consequence for europe is paying far more for energy because it's buying american stuff rather than using the russian the the nord the the the nord pipeline was probably destroyed by ukrainians and that's meant that Europe has lost access to cheap Russian energy.

1:14:47America is no friend of Europe anymore. It certainly was at the time of World War II, but it's not certainly under Trump. It's anything but that. And they're being ripped off by the Americans right now. The Americans are doing very nicely selling liquid natural gas to Europe at a much higher price than they were paying to the Russians. And European industry is going backwards very rapidly, especially German industry. So if Europe wants to take care of itself, then it should make an accord with the Russians because Russia is the nearby and cheapest source of energy that it needs at the moment. America is on the other side of the Atlantic Ocean.

1:15:27It's charging a huge price for what it's substituted for the Russians. So to me, what they're missing out is that if Europe is going to survive economically, it has to reduce the cost of energy. And the best way to do that is have a rapport with the Russians. And that means seppling the Ukraine war somehow. I think, in my opinion, I reckon Putin overstepped the mark by trying to invade the whole country. I was expecting him to invade the Donbass, and that would have been quite justified at the time, given the extent to which the Ukrainians were provoking conflicts there, and that NATO was extending itself past the boundaries where it promised not to go when the Soviet Union was first dissolved.

1:16:12So NATO's expansionism, I think, led to that conflict. And it was American expansionism. It's largely behind it. So I would rather see Europe pull out of the mindset that NATO amounts to and make a rapport with Russia. I mean, one little fun thing, by the way, it's just showing how much journalism has declined over the last 30 or 40 years. Did you see the article in the New York Times saying, what does it mean to have NATO without America? How can you have a North American treaty alliance without America? They didn't realize it stood for the North Atlantic Treaty Alliance. Organization, you know.

1:16:51So America's the rogue here. Russia has been provoked into the actions it's taken by the expansion of NATO. So I think that's what Europe is missing out on. They end up being compliant and they're helping out the Americans when the Americans are screwing them at the same time. So for me, for long-term sustainability of Europe, one thing the Europeans have to do is make a rapprochement with Russia. it sounds to me like you're very much in line with rick's beliefs about europe that it's kind of gasping its dying breaths is that yeah pretty much yeah and do you venture much into sort of the analysis of individual people when it comes to these conflicts so do you speculate much on Putin's motivations?

1:17:49A bit. I mean, I've been more on Trump's, because Trump has obviously got narcissistic personality disorder. And I had a relationship with somebody with that disorder, had plenty of side benefits. That's why it lasted as long as it did. But I realized that if somebody like that gets in power, we're in deep shit. And so the long-term advantage of that relationship was me being able to interpret Trump's behavior realistically and know what he's likely to do next. So I see him as a madman, as wanting to get attention. And the large part of the war was people will be talking about me. It's ridiculous that that's a motivation for things like blowing up a primary school full of young children.

1:18:33He wants to be talked about, but that's the mentality of Trump. Putin, I mean, I know that Putin's rise came out of the collapse of Russia, which the American State Department was trying to cause because they never wanted to stop trying to defeat Russia. So even after the Soviet Union collapsed, they still hoped to see Russia collapse as well. And the rapid transition that they encouraged, and Yeltsin was enough of a fool to fall in for it. That led to the rise of Putin because Putin made himself the strong man. And I think it was the Chechnya rebels. I can't really remember. But he suppressed them very brutally.

1:19:15And that made him a strong man. He then took over like a strong man for Russia. And one thing he did was he sort of centralized the corruption. So rather than having low-level mafia affecting your stall, you know, when you're selling stuff in the Red Square, this is stuff. Peter Turchin talks about this because he was a child in Russia at the time. He's somebody you should definitely have on the show. Sorry, can you say the name again? Peter Turchin, T-U-I-C-H-I-N. Okay. He's a systems dynamist working in history. And he's a Russian background. So he said he remembered being a child and going to stalls in Russia and then a mafia type would come over and heavy the shopkeeper to hand over money.

1:19:56Well, Putin centralized all that stuff. So you had the major oil companies and resource companies and so on. He got a cut out of that. And it meant the corruption got centralized at the top level rather than permeating society at the bottom level. And it was actually easier for people to live with that than it was with low-level mafia corruption that occurred after the collapse of the Soviet Union. So Putin has a background in the Secret Service. He's happy to use brutal methods to hang on to power there. So I'm aware of all that. But I think at the same time, having watched the way he's behaved within the bureaucracy, he knows the bureaucracy extremely well.

1:20:38And he's able to scare the hell out of people to get them to do what they should do in a lot of parts of the Russian bureaucracy. So he's been a more effective leader than any American leader in the meantime, and he's built up the capacity of Russia as a raw materials exporter. But at the same time, yeah, he's somebody who's used to work on the Secret Service, and they use Secret Service methods, and I'm not going to go to Russia. While that still happens, I'm certainly not going to go to America either right now. But, you know, there is certainly ways in which individual personalities become dominant and cause enormous problems.

1:21:18But I think a huge part of our problems come out of neoclassical economics and accepting that as a description of the real world and then doing what it advises when it's a completely false description of the real world. it's interesting one of the things that i got most pushback for in recent memory on an episode is michael saying that he felt that russia's invasion of ukraine was at the time justified based on the provocations that you mentioned and a large percentage of the listenership was or our audience was very unhappy with that. So it's interesting to hear you echo that sentiment. Well, I think the Donbass would have been justified.

1:22:13That's what I was expecting. Try to invade the bloody Capitol. I think that was just the same sort of mistake that Trump made, being persuaded by Netanyahu that you knock off the top leadership in Iran and bang, the people will come back and revolt and join you. So if you look at what was, and I've seen some documents published in the Russian media, where there were hagiography about Putin solving the Ukraine problem, reintegrating Ukraine with Russia, as if it would be easy, and not realizing there'd be resistance. Now, there's all sorts of questions about the nature of the resistance and whether Ukrainians are fascist, etc., etc.

1:22:52But certainly, if you go and try to take over the entire country, you're going to get resistance back. They didn't expect the level of pushback they got from the Ukrainian military when they first attempted the invasion. Now they're stuck in a quagmire. And my feeling is they were justified, but they overplayed their hands. And now we're paying with the consequences of that. Now, with the war in Iran, you said that a lot of it could be better explained by an appeal to trump's personality and to the increased wealth of a few rather than to economic benefits for the country and when i spoke to timothy snyder i believe that he stressed that he thought you could explain a lot of the war with an appeal to putin psychology and this belief he has that he is restoring a historical Russia to its past state.

1:23:59And I'm wondering if you explain that war with an appeal to psychology or more to general economic or political? I think more of NATO's military adventurism. I mean, Ukraine had nuclear weapons, and then it agreed to hand them over to Russia

1:24:22and in the belief that it would be the power that it gave way in terms of having nuclear weapons and controlling them, in response to that it would get various benefits. Well, that's another double cross in that sense because getting invaded isn't exactly a benefit of a compromise where you give up the power like nuclear weapons. Nobody would have invaded Ukraine if they could have threatened nuclear response. So in that sense, Ukraine got screwed by the whole proposal. If you go back far enough in time, Kiev was the capital of what we would now call Russia. So I can understand there are elements of Ukrainian and Russian politics and history that are intertwined with each other.

1:25:10But equally, there are separate elements. It's got its own different language. It's got a different culture. You could regard it as part of Russia, but at various times it wasn't, and other times it was the dominant part of Russia. There's a danger in going too far back on that sort of thinking because you then think, well, that's the case here. Ukraine's been part of Russia. We can reintegrate it. Nobody's going to complain. But you've had 30 or 40 years of it being independent. Of course they're going to complain and fight back. So I think it's personalities and big objectives like trying to reunify Russia and rebuild the old Russia certainly explain part of what Putin has done.

1:25:54But the stuff that NATO continued, it didn't respect the idea it needed for a neutral buffer between the NATO nations and Russia. And was always trying to get Ukraine to join up, was always trying to get Lithuania and so on to become part of NATO. And that, you know, Russia is the country that's been invaded by Europe, not vice versa in history. and every European that's done it has failed of course the classic being Napoleon but Russia has a reason to be trepidatious about invasions from Europe and parts of Europe have a reason to be trepidatious about invasions from Russia like Finland for example so there's plenty of history of this bad behaviour between the two countries and predominantly I'd blame Europe for invading Russia or encroaching on Russia but there have been past elements in the opposite direction.

1:26:51I think the prelude to this war was another European strobe NATO attempt to encroach on Russia and what we really should have respect for the idea of having a neutral buffer between the two countries and when those countries broke away from the Soviet system then they should have become neutral and that should have been respected but it wasn't and it's not just Putin who's responsible for that, it's also NATO and the political powers in Europe. I want to transition to the East, but before then, you raised this familiarity that you have with narcissistic personality disorder, and it helps you understand Trump better.

1:27:35I'm curious whether there are any facets of his personality that you find particularly comprehensible to you that are not to others? Or he's lying. It's easy to understand he's lying. Yeah. Because a narcissist doesn't lie to persuade you. They lie to persuade themselves. So what happens with a narcissist is they'll make some claim and then things don't work out the way they expect. So they deny that they made the claim. Now, everybody else knows they made the claim, but it's their own mind they're trying to get sorted out because narcissists can't admit they've made a mistake to themselves, let alone anybody else.

1:28:22So when you hear Trump saying stuff, saying, that's outrageous. We know that's stupid. But he says, he's not trying to persuade you. He's trying to make up an interpretation of the history that makes him always correct. That's what they're doing. So when, you know, Trump's lies are just, you know, legendary, but he's lying to himself. And he's persuading himself. And that's what you're saying live. At the same time, this is incredible grandiosity. So if they're not the center of attention, they're going to find some way to make themselves the center of attention. And it doesn't matter if that means burning a fucking house down.

1:28:57They'll burn the house down. So people are talking about them. Why did you burn the house down? Oh, they're talking about me. so there's a joke about dogs and cats which i often think of in these circumstances and if you say if you have a dog you say bad fido good fido and the dog goes and you say to a cat bad alfred good alfred and the cat just goes there he's saying alfred okay but okay so in that sense they just want to be the center of attention and you give give the give a narcissist particularly a malignant narcissist, the most powerful officer on the globe, he's going to do everything with it to make sure people are talking about him.

1:29:35And that's what he's done. People who thought he wasn't going to bomb, he's going to get us out of wars. No, he started wars and he claims he's presented wars. I mean, you don't try to sort that out by looking at the facts. You say, what is he doing in his mind to make it look like he's always been right?

1:29:59Would you say that the sorts of predictions about him that you're able to make are more of this general sense? Like you can predict, oh, he's going to get us into more wars because that will get people talking about him. Or have you made more specific predictions about what he's going to do that have turned out correct? More the former, but certainly like in the latter, when the MOU, the memorative agreement came out, okay, and I was asked about it. I said, look, it's going to be torn up in a couple of days, okay, because, again, he's doing a pump and dump. So he has made a fortune out of, well, he didn't make a fortune out of real estate speculation.

1:30:45His dad did. But he's always been somebody who's strong arms. So what he does is he makes some outrageous claim and then backs off it. And we're now seeing that in terms of stock market behavior. He's declaring the war is on and declaring the war is over. And being 15 minutes before, there's mysterious trades that when the war is going to be back on, people pile in on the buy side for oil. And when he says it's over, they pile in on the sell side just before the announcement. Furious that. So he's ripping off the system and his family is profiting enormously out of him being president. Of course, the danger they now face is as soon as he ceases being president, they're going to be in deep shit.

1:31:30But, yeah, I can certainly look at that behavior. And the only way that I think this war is going to end is if Iran starts to destroy the facilities of the Gulf states that America is taking out of its own. And then at that point, the one thing that Trump can rely upon is that UAE and Kuwait and so on will let them continue using bases to continue hammering Iran. If they instead say, no, you've got to leave, then the war effort becomes impossible. But Trump will continue doing pump and dump as long as he can get away with it. And I think that means to me the only resolution of this war is going to be that Iran, as a Muslim country, and the Arab states, as other Muslim countries, different branch of the same religion, have got to come together and decide this is a Muslim part of the world and we're evicting America.

1:32:29That, to me, is the only sensible resolution of this conflict. But at the same time, that's the last thing Israel wants. They want to separate them. They're obviously, for good reason, terrified of a powerful Iran. They thought that the Americans being in the Middle East and encouraging them to this war would lead to breaking up the Iranian system. The Iranians were clearly prepared for them. That hasn't happened. So Israel will continue trying to disrupt this. And that's when you've got to – I mean, I really have a lot of respect for the Iranian negotiators because they have said things like we won't – the settlement terms have to include that Israel stops bombing Lebanon.

1:33:13And then what are the Israelis? Do they bomb Lebanon? So the Israelis are forever undermining the stability of the region. And the Iranians are quite aware of that and insist that any agreement isn't just about stopping the attack on them. It's stopping Israel's attack on Lebanon and on Gaza as well. So, yeah, it's a weird time to be alive because if you try to sell this as a movie script, nobody would accept that it's too outrageous. Yeah, especially my next question, I was going to ask, I mean, what you make of his unprecedented and brazen incursions into Latin America. And I mean, do you interpret what happened in Venezuela, what's happening there as a function of his personality?

1:34:04Or are there deeper economic benefits for us? There are deeper economic benefits there as well because, I mean, Venezuela is a major producer of heavy oil, obviously. And there's part of the mentality. I mean, Americans have got this classic capacity to combine believing, saying they believe in democracy with trying to strong arm the rest of the world and dominate the essential resources for production. And from their point of view, the essential resources for production are fundamentally as oil. So they want to dominate oil-based parts of the world. And, you know, you would have seen all the talk about having five countries they wanted to subjugate and Iran is number five on the list.

1:34:45So I can see that that that sort of real politic we need. We want to dominate the resources. We don't. We're the strongest country on the planet militarily. We're going to invade and do it. I think that's part of the mindset. And Venezuela being the world's major source of oil now and admittedly very heavy oil. So it can't be used for a lot of the manufacturing processes or refineries in America. But this belief they can just invade and rip the resources off and call it democracy, that just seems an incredibly American thing. So that's the real politics side of it. But equally, believing that you can just go in, take out the leadership and lock.

1:35:25And Maduro is still locked in a cell somewhere. We don't know where he is. Apparently, he's in a solitary confinement 23 hours a day. This is literally an illegal war invading another country and stealing its leader and his wife. Just outrageous behavior, war crimes. But that's not – you can get away with it because the so-called checks and balances in the American system are bouncing checks. Yeah, it's amazing how many sort of unprecedented things are happening. and yet there isn't enough time to talk about all of them. So I don't even know when the last time I heard Maduro's name was. I know, I know, yeah.

1:36:12I mean, if somebody's talking about invading Cuba now, I mean, that would just be totally outrageous. Cuba's not a threat to anyone. And the reason, I mean, Cuba's a mess for its own reasons as well as for the blockade. But to go and attempt to repeat what he's doing in Cuba, I'm sure there'd be plenty of Cuban Americans in Florida who like the idea, but it's just another bloody outrage. And anybody who thought Trump wasn't going to start wars, I mean, you never trust a narcissist. This is another thing I did learn. Whatever they say they're going to do and what they end up doing are two completely different things.

1:36:48So anybody who's foolish enough to believe Trump's pledges before he got elected deserves what they got. Why is this the case for a narcissist? Does this go back to their capacity to lie to themselves? Oh, yeah, absolutely. Yeah. I mean, a narcissist never makes a mistake. OK, that's absolutely given. So if they do make a mistake, they've got to change history so that there isn't a mistake. And also they want attention. The main thing they want to be spoken about. So if the economy was ticking over nicely and there were no military conflicts in the rest of the world, then Trump might get warm feelings from everybody, but nobody's talking about him.

1:37:33Oh, shit, well, let's start a war then. Well, let's fuck up part of the economy. Oh, they're talking about me. Now, that's great. I mean, it literally is that bad. One particular example I'll give is that one of the many times my narcissistic partner did something like that. When I called her out, she came out of the room. She was hiding at the time, smiling because, hey, we're talking about. They're talking about me. This is the mentality. I'm being talked about. I'm the center of attention. The world revolves around them. And I have no idea of the medical issues that go into somebody or, you know, family raising issues that go into somebody being a narcissist.

1:38:13I just experienced one at one point in my life. And you just find they have to be the center of attention and they can never make a mistake. And therefore, they'll do stuff to make themselves the center of attention. If that leads to a catastrophe, they didn't make a mistake. You misinterpreted what happened.

1:38:36You mentioned this list of five countries, and I'm wondering what the other ones were. Well, Iraq, obviously. Okay. Invading Iraq, Syria, Libya. Okay. I'm not sure the fourth one, but certainly Iran was one of the countries they wanted to invade. So any country with a different political system with oil. That's pretty much it. Okay, that makes sense. Okay. Well, with our remaining time, I'd like to turn to China. Okay. And what would you say that Western economists most misunderstand about China? You wanted to finish this quickly, did you? Yeah. Sorry, no, they misunderstand everything about China.

1:39:29to me i mean in a fundamental sense the most important thing i just about china is run by engineers okay not economists not lawyers the dominant people in the chinese communist party are engineers and actually they're engineers actually engineers a large number of them okay including z uh i think it did chemical engineering i've forgotten the actual degree but he's you know they've all got training in practical applied sciences yeah and therefore when they approach a problem. It's how do we achieve an outcome? It's not what's the politics of this as much. So that means there's, and also the Confucian background of China.

1:40:07If you look at the dominant religions around the world, you know, Catholicism, you know, you got to go pray about, pray if you're Catholic, got to do good deeds if you're a Protestant, you've got to be balanced if you're a Buddhist, and you've got to be rational if you're a Confucian. So to some extent, the ideology of the country makes people have a practical orientation. And that's come to the fore, of course, after Deng's rise. And they'll set up the system so they can experiment with different approaches, different policies in the rest of the country and see what happens. That experimental, let's get things done attitude, I think is the major reason why China's been so much more successful than other countries.

1:40:48And they learned from the failure of the Soviet Union. And part of that was that the Soviet Union was great at heavy industrialization, but hopeless at producing consumer goods. And the reason was they followed Marx's reproduction schema as reinterpreted by an engineer called Feldman. And Feldman basically argued that we should simply industrialize or work on the make the goods and services in the capital goods sector and ignore consumer goods. Because as you produce more capital goods, you get more capacity to produce consumer goods. And at some stage, you'll overtake them and eliminate the West.

1:41:28That was when Khrushchev said, we will bury you. He really meant we'll bury you with a high level of commodities being produced for the working class than you do in your own countries. That failed for a whole lot of reasons. But one of them was that, you know, Russia was the Bolsheviks are trying to jump straight from feudalism to socialism, bypassing capitalism in the meantime. So they're taking a feudal country and trying to rapidly leap past. And what it meant was, following Marx, they built the means of production. They didn't focus on the consumer goods so much. But it meant that every sector they needed to industrialise, they didn't have enough resources for them.

1:42:06So there was rationing of inputs for all the five-year plans. And the easiest way for each factory to cope with the objectives of the five-year plan, combined with the fact that they were being rationed in terms of the inputs they got to achieve the plan, was to produce last year's goods, not to bother innovating. So there was no innovation in the consumer sector in Russia, and that's a large part of where the collapse came from. And Kornay, have you ever heard of Janos Kornay? I haven't. Okay, Janos, brilliant Hungarian economist, a very neglected thinker. And he wondered why do capitalist economies grow more rapidly than socialist?

1:42:46What's the reason? And his argument came down to the socialist economies, what he called were resource constrained. So he didn't have resources to fulfill the plan. So therefore, each sector just produces last year's goods to minimize waste. That is inevitably what happens when you try to innovate. And therefore, you get growth coming out of population growth, but you don't get much growth in terms of technical progress. Whereas capitalism is demand constrained. So you have booms and busts in capitalism and workers get lousy wages. But to try to get sales for your capitalist enterprise versus your rivals, you have to do it by innovating.

1:43:30So you're going to innovate with new products and therefore the rate of technological growth or change in a capitalist economy is much higher than it was in Soviet Russia. Now, I believe, I don't know for sure, but I believe that part of the research the Chinese Communist Party did once Deng was in charge is what caused the failure of the Soviet Union. It was a failure to innovate in the consumer sector. We have to make sure there's innovation in consumer goods as well as producing the means of production. And that's what they've done dramatically. So the level of capitalist-style innovation in China is just breathtaking.

1:44:08And that's one reason why they've continued the rate of growth that they achieved early on. And their capital income has been growing by about 8 % per annum. And that's unheralded. Never in the history of humanity has any part of the world grown that rapidly and for that sustained a period. And consequently, Chinese people have a dramatic increase in their standard of living. And therefore, they've got a level of loyalty and allegiance to the leadership there. And it isn't that they are kowtowing to the communists. What they've set up is a management system that means that the bureaucracy is, generally speaking, responsive to people's needs.

1:44:49And the consumer sector, there's rampant competition and dramatic innovation. And China's people are benefiting out of the highest rate of technological change in consumer goods in history. And none of that's aware to neoclassicals. classicals. They all think it's about maximizing. It's all about deregulating and letting the finance sector do what it wants to do. China's literally suppressing the financial sector. They don't want to be dominated by the finance sector. I think a lot of the problems that America experiences is because it lets the finance sector dominate. And all the policies you get in America aren't about serving the American people.

1:45:29They're about serving the American financial sector.

1:45:34I wasn't expecting this answer. It's super interesting. And then given your systems dynamics, like engineering approach to economics, is there something, I mean, do you admire the Chinese experiment, if I can call it that? Yeah, I do. I do. I mean, I saw it firsthand in 1981, 1982. Long story, but in a previous life, I worked for an overseas aid organization, and I persuaded them to run a set of seminars with journalists from other countries in the belief that these seminars would get people to realize what the issues they were leaving out of journalism at the time. So I took a bunch of Australian journalists to China in 81, 82.

1:46:13And we were there during the trial of the Gang of Four. It was literally being broadcast out of loudspeakers all over Beijing when we were there. And we were taken to see all the attempts to re-industrialize. And every last one we saw, bar one, I thought was going to fail. So, for example, we got taken to see a furniture factory in Sichuan province. And they raved about their increase in sales. And they said, well, where do you sell most of your goods to? Oh, we sell 80 % outside Sichuan and 20 % inside Sichuan. How did you manage to achieve the sales outside Sichuan? Quote, unquote, we sent out propagandists, otherwise meaning advertising executives.

1:46:55Well, where are your main sales to? Oh, we mainly sell to a state enterprise in Shanghai. So they were set up as a trial commune. They were selling 80 % of their output to a state enterprise in Shanghai. Therefore, only the 20 % they sold domestic within Sichuan was likely to succeed. so that this is going to fail. That's their overall pattern. We got to the Shenzhen Free Trade Zone and we were actually there literally as they were laying the concrete for it. In fact, the company that was laying the concrete was an Australian company called CSR. We had a wonderful Aussie barbecue with the boss of it and his very Northern Beaches wife at the time with all our Chinese friends and the other journalists together.

1:47:38And we had the approach of the Free Trade Zone explained to us. And what they said was they were trying to attract mainly American industry. In fact, they mainly managed to attract Chinese diaspora to come back and set up in the free trade zone, exploiting really, really low wages, of course, much lower wages for Chinese workers at the time than other countries and also, of course, than now. And they had a rule that any company had to have a Chinese partner and within five years the Chinese partner had to own half the business. Now, I thought, under what conditions are people doing that? What's obviously making the huge reduction in their labor costs for their production processes.

1:48:19So, pardon me. This means they're building a capitalist class. And they're also making sure that if the capitalists find the wages have risen too much and want to leave the foreign capitalists, they've not got domestic capitalists who are going to hang around because they're Chinese. And so I thought this is going to work. And it worked beyond anything I ever thought was possible. but the extent to which this program meant that China could industrialize really rapidly and focus on the practical sides of an advance, rather than ideology being the focus is practical. How do we get to be the richest country on the planet as fast as possible and to share that around so that the people in general benefit?

1:49:03And of course, as much as they'll talk about oppressing various ethnic minorities and thought control and so on. The reality is on the street for most people, they're living with fabulous infrastructure, low cost, free access to education and health. And then if there's a reduction in the amount of labor available, they're handling it by reducing the retirement age rather than making people work longer. So I think they've been extremely successful. And the one thing I wouldn't want to see is a dynasty developing there, which has happened to a lot of communist countries. The dominant leader, their son or their daughter becomes the next leader.

1:49:48I wouldn't want to see that happening in China. But to the extent to which they enable the innovations to still occur at the state level while they focus upon building the national infrastructure they need, I think they've done brilliantly. And in terms of countries that I think are likely to survive global warming, it's about the only country that I think is going to be able to potentially hold its social system together as global warming destroys the productive capability of the planet. This might have a very simple answer, but why are you opposed to there being a dynasty in China? Because dynasties do end up with the sorts of results that people satirize and call communists.

1:50:33to you. It's not that you have, it's just that you have somebody you can't criticize. I've heard enough about Zee on that particular front, but equally what I've seen from Zee is he's been cleaning up some of the excesses that occurred in the Dung period and certainly also in the survival of the 2008 boom, which had produced far too many houses and they had to rationalize the housing system. So I, and then Dung's, Zee's family was actually involved in the Sichuan free trade, Sichuan industrialization experiment as well. So, you know, I just don't want to see dynastic behavior. What we need is a leadership where you can't even say who the leaders are, because you then get a collective decision making process going.

1:51:22So for example, can you tell me who the president of Switzerland is? No. Yeah, there isn't one. Okay. There's a ruling group. And I think that's a better situation. And like the Chinese Communist Party is a filtering system as well. You've got to have a decent level of education to be able to get inside the system. You've got to have a decent level of skill and performance to rise up through the system. So it ends up being a filtering system to choose people who make sensible decisions. And I don't want to see that disappear because of a dynastic impact on the top. I don't want to see a mad king.

1:51:55For example, imagine if somebody in Z's family gave birth to somebody who resembled Donald Trump. That wouldn't be good. It is funny. I wonder if it's just because I'm born and raised in the United States, but for my entire life, I've been sort of trained subtly and not so subtly to really dislike and be afraid of China. So it's so funny to hear you and sound almost like you're rooting for them. But I've spent, I've lived a not long time, a couple of months in China. And I've been in like fourth tier cities. I mentioned that on the Piers Morgan show a couple of days ago. So I've seen what it's like for ordinary people.

1:52:40And God almighty, because I walked along the bank of the border with a river in Shanghai in 81, 82. On one side of me, I think it's the north side, you had Russian and French buildings. On the left-hand side, the south-southern side, you had paddy fields and lousy old industries. And then you go back, I saw it in 2017. I haven't been there since then. It's almost like Walt Disney that took over the place. Incredible high-rises, incredible architecture, effective public services. It was remarkable. And so most people, that's what their lived experience is, the plenty that's been generated by the Chinese system and the fact that it's focused on improving the facilities that ordinary people get to enjoy.

1:53:30So rather than having gated estates and expensive cars, which is the American extreme, and then shithouse public service, you have really excellent public services, and people can enjoy being on a train, on a bus. You don't enjoy trains and buses in America. You survive them. So it's a remarkable country. And if you haven't been there, I highly recommend a visit. I don't often hear people talk about global warming and its effects on the economics of the future, even though, of course, it should be a very big topic. And you mentioned that China is particularly well disposed to navigating this future.

1:54:16And why is China so well suited to this? Partly because of the opium wars. Okay. Now, can you explain what the opium wars were? Absolutely not. Sorry? Absolutely, I cannot explain what the opium wars. Okay. If you know that happened, though, don't you? Yeah, I do know that they happened. Okay. What do you think they were about? My guess is that they had something to do with opium. Yeah, but I think most Americans would think those bloody Chinese were trying to sell opium outside in other countries, and we stopped them. Well, I think that didn't we give them opium, or we tried to ensure that they became addicted to opium.

1:55:00Exactly. The war was to continue selling opium to the Chinese, despite the fact the Chinese flora just tried to keep it out. And that just destroyed the whole country. It was a humiliation for China. And the reason that it was done is because particularly the English were the first colonial powers to invade China. They were running a huge trade deficit with China because China – we used to call crockery China, okay, because the Chinese stuff was so much better than the European. That was the name that the Europeans used for crockery. So China was accumulating a huge trade surplus, lots of gold and silver going to China as a result in those days of gold and silver-backed currencies.

1:55:45And eventually the English got sick of fleeing their treasuries depleted. So they said, we've got to find something else we can sell. I will sell them opium. And then when the Chinese tried to block the opium sales, they invaded and subjugated China. China remembers that. Those two things that comes out of that. There was a time when they didn't need anything from the West, and the West subjugated them when it got the chance. So we can't trust the West. So I think kids in China learn about the opium wars the same way kids in America learn about the Civil War and the War of Independence. So it's in the background of mind of every Chinese person.

1:56:23And when they look at the situation, they say, we can't rely upon the West and we need to be self-sufficient. So I think that's the direction they're going in, trying to be able to produce everything they need domestically and not need the West. And that means, of course, they've got to industrialize dramatically as well. So that mindset is part of what's there too. So in terms of global warming, that means that they're now reducing their consumption of coal. So the carbon dioxide up from China is falling, even though they're building more power stations with coal. They're building so many more with nuclear and solar and wind and tide that they're reducing their carbon intensity now.

1:57:02And I think they're a jet figure to get down to zero themselves because they know they can't trust the West to do it. They know the cooperative agreements in the West aren't worth the paper they're written on. So they'll be aiming for becoming a zero carbon economy as soon as they can. I imagine by 2035 or 2040 is probably their planned objective there, ahead of what the West did they do with Paris, which the Paris have already breached. That was supposed to be 2050. Bullshit, it'll never happen. So China will be able to keep itself going with non-carbon based energy. They're trying to make their food self-sufficiency work.

1:57:38work. They're currently a major importer of soybeans in particular and meat. They're trying to make it that they can produce all that domestically. So it means when the global system starts to collapse because of global warming, and it will, the global production system, if you're relied upon imports, you're screwed. China is going to be less relied upon imports than anybody and probably spend more time making its resources resilient against the damage the storms will cause at that time. So I think in that sense, I regard China as the only major country that's got a hope of surviving what global warming is going to do.

1:58:14Well, the last thing I'll ask about for today is another of the elephants in the room. And that's AI and the competition between the United States and China. How do you see the AI wars, for lack of a better term, playing out and more particularly playing out for the economics of the two countries? Well, I mean, America is going to go through a boom and bust. It's going through a boom right now because there's so much spending on AI data centers and so on that that's a huge part of the investment push in America. But the typical thing when you get a new technology like AI, every company that goes in has the ambition of being the only company at the end of the whole process.

1:58:58So you get massive overinvestment. That causes a boom and follows up with a slump later. When the slump occurs, that's when the technology tends to permeate society. This is pretty much Sean Pater's theory of economic booms and busts. So I expect America to have a bust at some point when, I mean, it looks like the costs versus the revenue of AI are completely out of sync. So the costs are about 10 times the revenue, roughly between five and 10 times the revenue at the moment. So there's got to be lots of bankruptcies coming through and there'll be a slump in America because of that. Also, the Americans, typical of bloody Americans, have gone for brute force.

1:59:36So that's where all the data centers are coming from. As much energy as necessary, we'll just use the energy and get the answers. The Chinese seem more focused on reducing the energy costs involved and potentially having AI you can run on your own machines rather than using a data center. And I think that is just part of their overall orientation to avoid energy use and to be, again, produce stuff which can mean local self-sufficiency. But I've got a feeling it means Chinese AI is going to beat American AI. So you get the worst of both worlds coming out of this. America goes for a Berman bust and then it ends up being China that's got the better AI at the end of it anyway.

2:00:16and therefore potential exports of AI around the rest of the world. America starts losing out to China. It only is going to be successful domestically if it restricts access to the Chinese AI and they'll do it on ideological grounds. But it sounds to me like you don't see it as something that will be profoundly transformative for the economics of either country. It is. It's possible. But it's also the energy needs that make a real problem. I mean, data centers in America are drastically increasing its energy use right now and running out water resources as well and increasing carbon dioxide output from the American economy.

2:00:57These are all fairly disastrous situations to be in. And if you do get like a nine out of if nine out of 10 AI companies fail in the end, then maybe 90 percent of that energy capacity is unnecessary and will go for losses itself. So I see this being America doing its usual story, shooting itself in the foot. But I do see AI as potentially transformative. This is the real issue. AI can replace a large number of clerical jobs. And a large part of why Marx was wrong about revolution in the 19th century was if he thought there'd be a tendency of two social classes, the proletariat and the bourgeoisie and nobody in between.

2:01:39In fact, there was dramatic expansion in the middle class because all those large corporations as well as the government needed large bureaucracies. So we got a huge diversity of new jobs being generated and the revenue for that as well going to people. So you didn't have the miserization marks expected at that time. But if you get AI developed to the stage where clerical jobs can be replaced by computers, then 70 % of the employment in Western countries can disappear. And then you've got the remaining part that's manufacturing and agriculture. If AI has got to be built into robots in that case.

2:02:20But if you can get a robot that takes a part of any unskilled job, then the workers don't get any positions anymore. and therefore you have a real social dilemma because you have a population of unskilled workers that can no longer get income. So the only way to survive that is universal basic income or universal high income, as Musk calls it. And that's much easier for China to bring about than America because America is so, you know, bugger you, mate, you know, the let the devil take the hindmost type attitude. If AI displaces jobs, they'll sack the workers. In China, if AI displaces jobs, they might retire some of the workers or reduce their retirement age.

2:03:03And the Chinese are not going to be worried about having to give people money to stay alive, because that's partly what socialism is about. So I think in terms of coping with the social impact of AI, again, China is far ahead of America, and the social impacts of AI in America are likely to be extremely negative. Whereas for China, it'll manage to hang on to the positives of it. Well, Steve, I know it's quite late in Amsterdam now. I'm incredibly thankful for your time. And I'm already looking forward to listening to this again, because there was quite a bit there. And a lot of it was very heavy.

2:03:42So thanks again so much for talking with me. You're welcome. Okay. Thank you.