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Debunking Economics and Why Bitcoin Will Fail With Steve Keen

Peter McCormack
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Debunking Economics and Why Bitcoin Will Fail With Steve Keen - WBD044 Peter McCormack

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Interview location: Skype
Interview date: Monday 29th October
Project: Debunking Economics

Steve Keen is challenging modern economic theory which led us into the 2008 crisis. With his two books: Debunking Economics and Can We Avoid Another Financial Crisis, Steve outlines the inherent flaws in the capitalist system which are required to make them work.

Bitcoin is often praised by proponents of Austrian Economics, but Steve believes that Bitcoin will fail due to flaws in the protocol design. In this interview I talk to Steve about why the 2008 financial crisis happens, the flaws in the current capitalist model and what Steve like and dislikes about cryptocurrencies.

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TRANSCRIPTION

Peter McCormack: Hi there Steve, how are you?

Steve Keen: Very good. I see we’ve got the technology finally in order.

Peter McCormack: Yeah, we did. So, my podcast is about Bitcoin and cryptocurrencies. I often have people with some kind of economics background on the podcast, who are usually pro Bitcoin. Somebody came to me recently and said I need to speak to Steve Keen, because he has a much broader opinion on what’s going on in the economy, and you’ve also been starting to talk about Bitcoin and crypto currencies as well.

Peter McCormack: So, welcome to the show, but for people who don’t know you, could you please give a bit about your background?

Steve Keen: I like to describe myself as an anti-economist. I’m a professor of economics, and I’ve been a critic of the mainstream since I was 18 years old, when I led a student revolt at Sydney University, over the teaching of economics there. A successful student revolt. My basic background is I’m working in complexity theory, non-linear dynamics, building models of the economies, a complex system, and I’ve got a strong background in the history of economic thought, and knowledge of economic analysis over time, courtesy of writing a book called, well not courtesy of, actually writing a book called Debunking Economics. That’s my main claim to academic notoriety, and as somebody who was calling the financial crisis before it happened in 2007.

Peter McCormack: You won an award for that, right? The Revere Award.

Steve Keen: Long story, yeah. There’s a group called the World Economic Review. That was formed roughly in 2000, as a follow on from a student protest in France, what they call post-autistic economics. Typical French, they had no idea how to carry on the political campaign, but an American PHD student, living in England, called Edward Fulbrook, put it on and carried it going forward.

Steve Keen: The first thing he did was to devise a Dynamite Award for the economist that had done the most to blow up the global economy. That of course went to Alan Greenspan, and then subsequently we talked about a version, another one, to recognise those who called it. I’m part of the committee, but I wasn’t part of the voting process, obviously. We called that the Revere Award, and we had three winners, by popular acclamation. It came out as myself, Nouriel Roubini, and Dean Baker.

Peter McCormack: Nouriel has been vocal about crypto currencies recently.

Steve Keen: He makes me look polite.

Peter McCormack: He does.

Steve Keen: I like Nouriel, we’re good friends. We don’t see each other very often, but we both appreciate each other’s work. He doesn’t hold anything back, does he?

Peter McCormack: He certainly doesn’t. The shame is, is that he’s so aggressive in his opinions, that actually some of the things he says are incorrect and they get lost amongst things he said that are of value. It would be great, I think it’d be great for him to come on one of these Bitcoin podcasts, but he seems to not want to engage.

Steve Keen: He’d probably be willing. He’s a decent bloke. You know what it’s like, every institution on the planet get its trolls, and he’s been trolled by enough Bitcoin advocates to basically tile the entire universe with the same brush. Nouriel and I have decent conversations, he’d probably be quite willing to have a chat.

Peter McCormack: Maybe you can facilitate that one to happen then, because-

Steve Keen: Yeah, yeah, I wouldn’t mind. Just let me know, and I’ll post a note to him.

Peter McCormack: You did predict the crisis of 2008, but at what point did you realize there was a problem? How far back did this go?

Steve Keen: The long answer is back to the middle of 1992, when I was doing my PHD. My PHD was trying to build a mathematical model of Minsky’s financial instability hypothesis. I successfully did that sometime in 1992. I wrote my first paper about it in August of 1992, and I submitted that to a journal. For various reasons, it took three years to appear. That was Minsky’s fundamental question is why has it not happened again? It being the financial crisis of the Great Depression. If it hasn’t happened again, what are the elements of the post-War period? He’s writing in 1982 when he wrote this. That means we haven’t had a crisis, so why did we have one in 1929? Why had one not occurred by 1982?

Steve Keen: He said to answer this question, it’s necessary to have a model of the economy, which can generate depressions as one of its feasible states. Now that rules out, completely rules out conventional economics, Neo-Classical theory. They literally enforce the belief that there’s a return to equilibrium at all times in the models, even though mathematically, the equilibrium of the model is unstable. They just completely leave out the financial sector. They assume a stability of the economy. You can even see where they write about it, right now they’re talking about including the financial sector, when they talk about financial frictions. As far as I’m concerned, the financial system is a lubricant, not a friction. We can gather some interesting analogies there.

Steve Keen: I built this model in ’92. The most remarkable feature about it was that it did generate the possibility for a great depression, but the most remarkable thing about it was that before the Great Depression occurred, it generated what was later called the Great Moderation. In other words, if you looked at the cycles in employment and a proxy for inflation, which I had in that model, they diminished before the crisis hit. That was not a prediction of Minsky’s. Minsky did talk about stability as destabilising, but he didn’t say before the crisis occurred, everything will start to look better. That’s in fact what happened in the model, and it was a manifestation of a thing called the Palmer and Manorville Route to Chaos, which was first discovered in fluid dynamics back in the 1960s. It turned up in my economic model, and that’s what I finished my statement, my economic paper on it.

Steve Keen: I was aware that a period of apparent moderation was actually a bad sign, not a good one. That was the background. Then for various reasons, I wrote a book called, I wrote Debunking Economics in 2000 and 2001. Became completely consumed with finishing up … 1999/2000. Became consumed with fighting the Neo-Classicals over some of my critiques of Neo-Classical theory for the next four years. When I was about to get down and write sort of my magnum opus in economics at the time, if you like, by sheer chance I got asked to do an expert witness on predatory lending in Australia. In writing my expert witness case, I only had nine days to get it done, my mistake, I thought I had two weeks, I had nine days. In writing it, I wrote this throwaway line about how the private debt to GDP ratio had been rising exponentially. Then as an expert in an Australian case, even though you’re paid for by one of the sides, you’re employed by, technically, the court. You can’t use hyperbole. Anything you say must be supportable by evidence, or you can’t say it.

Steve Keen: I thought, “I have to strike the word exponential out. I’ll check the data and see what it’s like.” I hadn’t looked for several years, about six years in fact since I’d last looked at the data. When I looked at the data for Australia’s private debt to GDP ratio in 1963 through to 2005, it fitted a simple exponential with a correlation coefficient of 0.9912. I said, “So much for needing to remove the word exponential, but holy shit, what’s going on here? What’s the American data like?” That’s the only other one I could find rapidly. That gave me a correlation coefficient from 1952 to 2005, of I think about 0.97.

Steve Keen: I said, “Holy shit, there’s a crisis coming. Somebody has to warn about it.” At least in Australia, I’m that someone. I got on the airways the next day, courtesy of my good friend in the ABC, Steven Long, who’d been hassling me for months to say something about private debt in Australia. I said, “Look, I don’t have the data.” I rang up the next day and said, “Let’s talk.”

Peter McCormack: Is it all forms of private debt, or was the main catalyst mortgage debt?

Steve Keen: It’s all forms of mortgage debt, but the mortgage, that is the ice cream, a very thick layer of ice cream on the cake. You can get a financial crisis just out of corporate debt, and we had that back in 1987, when you look at the fluctuations in Australian corporate debt, and American for that matter, of course.

Steve Keen: What happened after 1987 was, pretty much globally, but certainly American, Australia, it just sort of sticks out like a sore thumb. The banking sector had pushed as much debt as they could manage onto the corporate sector. Even though the corporate sector gets caught up in euphoric expectations, with lunatics like Alan Bond being a classic instance of that. He’s dead now, isn’t he?

Peter McCormack: I don’t know.

Steve Keen: I think he’s still alive, but I’m not sure. Anyway, Alan Bond, Christopher Skase’s definitely gone. Even though you get Ponzi type personalities in business, and Ponzi type euphoric expectations as well, generally speaking, the business sector is making a calculation about further future cash revenues, and there’s a limit as to how far they’ll go.

Steve Keen: Literally, as soon as Australian banks, Australia had a recession back in ’89, starting in ’89, and literally as soon as that recession began, against my expectations, that’s when the banking sector started to take off its lending to the household sector and mortgage debt. I thought they’d take a couple of years to get over the shock. Mm-hmm (negative), as soon as they couldn’t lend to Bond and Skase anymore, they’re out there hawking it to the mortgage sector.

Steve Keen: What you had was from that point on, this is Australia’s case, mortgage debt, household debt, was something of the order of 25% or 30% of GDP, it went to, as we now know, 120% of GDP. Households got caught up in believing house prices will rise forever, and that doesn’t give you the same limitation that the business sector has ultimately, of where’s the cashflow coming from?

Peter McCormack: Wow, okay. Okay. Look, I’m going to quote you now then, relating to that, because what you said in 2008, what you said about 2008 is that, “In 2008, conventional economics led us blindfolded into the greatest economic crisis since the Great Depression.” Why does this happen? Where are the flaws in the current economic models? How is this allowed to happen? Who benefits from it?

Steve Keen: It isn’t even who benefits, it’s who’s stupid enough not to think about the real causes? Nobody benefited from the model of Ptolemaic astronomy. There wasn’t somebody making a fortune out of epicycles. There was an entire intellectual priesthood dedicated to building extremely complicated models of the universe, assuming the Earth was almost the centre of the universe, and that all the planets and stars, and the sun and moon, orbited the Earth on perfect circles, which occasionally were perfect circles on perfect circles, etc., etc. You spend one and a half millennia developing stuff like that, and some bastard called Copernicus comes along and tells you you’re actually wrong, the Earth is not the centre, it’s actually the sun that’s the centre, you’re going to persecute him.

Steve Keen: Now, the same thing applies in economic theory. They began in the 1870s, mainstream economics began effectively as a counter-movement to Karl Marx, because Marx had turned the previous classical school of economics into a critique of it, rather than a defence of capitalism against feudalism, which is the way it was used by Smith and Ricardo. There’s an underground thing called, back in those days, it didn’t actually have a name, but we call it Neo-Classical economics today, that took over in a matter of a decade. They developed mathematical models of the economy reaching equilibrium back then. That became the mental structure for mainstream economics ever since. They don’t have any real knowledge of their own history. That’s where it came from.

Steve Keen: As part of that, to make it easy, so they thought, to work out how equilibrium might be achieved in a whole range of markets at once, they decided to leave out the complication of the monetary sector. Now, in fact, it turned out to be impossible to prove what they wanted to prove, that these markets would actually reach equilibrium through a tatonnement process, but they stuck with the abstraction, so called, of leaving out the banking sector.

Steve Keen: It started coming back through sheer realism in the 1910s and 1920s. A range of orthodox economists, including for example, Pigou, who was actually the guy that Keynes critiqued in the general theory, he understood that banks created money. Irving Fisher learned that the hard way. It was widespread knowledge, and after the second World War, the American economists in particular reinserted the old barter knowledge, where banks don’t matter. They built models where banks are effectively what they call intermediaries, not actually originators of loans and money, but intermediaries between borrowers and savers.

Steve Keen: They’ve driven away any consideration of the financial sector. Their models, including the ones which the absolute halcyon, we finally got the model of the capitalist economy, they completely left out money, banks, debt, and non-equilibrium processes. Now, you leave that stuff out, you can’t see anything coming. In terms of what they benefited from, they dominated the profession. They still do. Their benefit was that they were the economic, the recognised process of economics.

Steve Keen: The financial sector benefited quite nicely, because what they effectively were saying was, “Don’t look at the financial sector. You don’t have to worry about that.” Well, that suited the financial sector just fine. They also benefited from all the deregulation proposals that the financial sector put forward. Economists were completely in favour of that, because of course, getting rid of regulation makes systems work better. The benefit was indirect, rather than direct.

Peter McCormack: For example, obviously I’m based in the UK, when Margaret Thatcher deregulated the, was it the mortgage market?

Steve Keen: Yeah, that’s really quite important, dramatically so in the case of the UK. I was stunned when I first saw the data for the UK house private debt levels. It’s quite shocking.

Peter McCormack: Can you explain what deregulation of the mortgage market meant for the economy, and therefore what the impact was?

Steve Keen: In the UK’s case, you mainly have what are called building societies, financing people borrowing money to buy a house. Building societies actually are intermediaries. A building society is an institution that will be formed in some local area, let’s say Manchester. It’ll have a pool of people who put their money in, and the money goes into term deposits, which are stored in a bank. They’re not stored by the building society itself in its own accounts, it’s not allowed to have deposit accounts. You put your money in, you lose access to it for some time, but you know that’s the case and you get paid in income interest streams out of it.

Steve Keen: The building society then lends out again to people in the local area to build a property. What that means is you have put part of your money aside, which you have been doing it to get the interest rate return or you’re hoping to buy a house yourself later down the track. You’ve lost access to that money for a defined period of time. There’s no at call deposits for a building society. You can pull your money out, but it’s complicated. You get a check drawn on the bank, the building society banks, rather than cash from the building society itself, or a deposit transfer from the building society. No money is created. That’s absolutely essential.

Steve Keen: Then when Maggie deregulated the mortgage market in 1982, that let the banks into it. What the banks do is, you come along with the idea, “I’d like to buy this property in Manchester,” let’s go back to Manchester prices in 1982, and they say, “I want 50,000 pounds,” let’s say it’s a good place in Manchester. The banks says, “That’s a great idea. Here’s 50,000 pounds, we’re putting it into your deposit account. Simultaneously we record an asset for ourselves. You owe us 50,000 pounds.” What that’s done is that creates money. Your demand for the house is not coming from somebody else having less demand, by putting their money aside, not being able to buy anything, you’ve added to demand and the person you buy that place off, gets 50,000 in newly created cash, partly which they put back into the asset market themselves to buy a property somewhere else. Partly they’ll use to go shopping and furnish their new property. What you get is a positive feedback between the level of mortgage debt and the level of house prices. That’s when the ship was cast aside from its moorings in 1982.

Steve Keen: It’s incredible, when you look at the data, just what that did. At the time Maggie did that particular change, the level of private debt in the UK was roughly 55% of GDP. At its peak level, between 1980 and 1982, was 73% of GDP. By the time Tony Blair and friends lost office, it was 193% of GDP.

Peter McCormack: That’s insane.

Steve Keen: America had these ups and downs all the way through its history, going back to as far as I can take it back, which is 1834. The UK data, which was assembled by the Bank of England after the crisis, showed that the peak level of private debt had never exceeded 73% of GDP between 1880 and 1980, and then when Maggie comes along, ’79 she’s elected, all the deregulations take a while. The big one, the main thing was the mortgage one in ’82, not the big bang in ’86. From that point on, bang, you’ve just got an incredible increase in the level of private debt. I’ll send you a chart to back that up. It was gob smacking. To me, it’s still the most amazing chart that I’ve built to show the credit dynamics of a capitalist economy.

Peter McCormack: This is why we’re now at a stage where many young people can’t even afford to buy a house, because the house prices have accelerated so much.

Steve Keen: Yeah, my good mate Josh Collins, Josh Ryan Collins has put a book out on it, called Why Can’t I Afford A House. I highly recommend that, it’s a very short read by Polity Press. In fact, I’ve got a copy over on my table over there. I’ll wave it in front of the camera later for you to have a look at.

Peter McCormack: Wow, okay. You also said that little has changed since the crisis of 2008. The US is potentially heading for a new financial crisis in 2020. One of my previous guests talked about a potential bond crisis. Are you seeing a similar potential threat?

Steve Keen: No, I don’t. My characterisation of what happens after a financial crisis depends on what happens to the level of private debt. If you have sustained high level of private debt after a crisis, and the crisis is caused by the rate of change of debt, which is credit, that’s what creates new money, so a new loan creates new money, and people then spend that new money. The new money causes new demand as well. You get an economy dependent upon a high level of credit based demand.

Steve Keen: In America’s case, which is the one I know best, the peak level of credit was roughly 15% of GDP. You imagine that much of a boost to a demand above and beyond the turnover of existing money. By 2010, that was -6%. You had over a 20% turnaround, and that was not the largest. The largest was Spain, which went from +40% to -20%. Now what that gives you, an enormous swollen aggregate demand, which starts off in asset markets normally, cascades through the whole economy, causes a total slump. In the aftermath, people are trying to pay their debt down. What I call Fisher’s Paradox can apply. That is that as you pay the debt down, as much as creating new debt creates additional demand, along with additional money, paying existing debt down destroys demand and destroys money.

Steve Keen: If you’re trying to reduce your ratio of private debt to GDP, by simply paying the debt down directly, you also reduce the denominator, as well as the numerator. In the Great Depression, that’s actually what caused the debt blowout in 1929 to 1932, because the rate at which people were paying credit down was of the order of 10% per annum, but the rate GDP was falling at was as high as 25% per annum. You look at the ratio of private debt to GDP in America in the Great Depression, it went dramatically up from ’30 to ‘32/’33, why the level of debt was falling.

Peter McCormack: Right.

Steve Keen: Now, what happened after that, it’s a long story, which we’ll get into I’m sure. That means that just relying upon bankruptcy processes or debt repayment processes can actually make a debt deflation worse. In the case of America, because such a huge stimulus was thrown at the economy, twice the scale, actually three times the scale of what’s called the New Deal back in the 1930s, that huge boost in demand made people stop deleveraging. In America’s case in 2007, the level of debt was about 160% of GDP. Given the momentum, it peaked at about 170% in 2008/2009. It’s since fallen to 150%. Now, that’s still well and truly near the maximum level the country’s ever carried. What you have is in the aftermath, the debt stopped falling, people are borrowing money once more in America. Credit demand is positive again, but it’s positive at a relatively low level. I think it peaked at about 7% of GDP, and it’s currently now about 5% of GDP.

Steve Keen: What you get is, if you’re going to have a crisis, you’ve got to jump off a very big cliff. The big cliff is how fast credit’s growing at the time, and how high the debt ratio is as well. In America’s case, the debt ratio is still high, but the actual little cliff their jumping off is quite small, of the order of 5% or 6% of GDP. If you go back into deleveraging again, you’re not going to have a 21% fall in demand, you’re going to have a fall of the order of say 10% of demand. That’s still significant, but it’s not a crisis on the scale of 2007.

Peter McCormack: Right, okay. Too much private debt is a problem also because it creates inequality?

Steve Keen: That’s one of the things which is completely, again, an emergent property of the model that I built back in 1992, because what I added … I took a model, which was a model of an economy just capitalist and workers, done by Richard Goodwin back in 1967. I added into it effectively bankers, by having debt, which capitalists would borrow, borrow money to finance building factories. It was all productive investment. The third social class, and the third social class makes its money by charging interest on the level of debt.

Steve Keen: What turned up as an emergent property of that model was that even though I had capitalists being the ones who were borrowing the money, and borrowing it specifically to invest, so it wasn’t Alan Bond or Christopher Skase speculative behaviour, it was genuine proper investment behaviour. Even though the capitalists were doing the borrowing of the money, it was workers who paid for it, in terms of a lower income share. This is what’s called an emergent property of a complex system. It’s quite simple when I finally worked it out, I wrote it up in my book, Can We Avoid Another Financial Crisis, totally verbally.

Steve Keen: That is you have a system which is driven by the rate of profit. The rate of profit determines the level of investment. Even if you feed in a very stylized idea of a linear relationship between the rate of profit and the level of investment, it tells you let’s say a level of profit saved, like a 7% rate of profit, which might be a 20% share of GDP going to the capitalists, that’s the level at which capitalists are willing to invest everything they earned. Above that, they invest more than they earn, so they’ve got to borrow money. Below it, they invest less than they earn, so they can pay some of their debt off. That’s your point of reference. The economy will get back to a set rate of growth, a set level of investment, at that point when you return to that, let’s say 20% of GDP being income for capitalists.

Steve Keen: You cite in a slump, in a slump capitalists aren’t investing, worker share falls, banker share is being reduced as well, if capitalists can afford to pay their debt down. Then when their share gets past the 20% of GDP level, they start to invest more than they’re earning, ultimately causing a boom. They’re also causing themselves to have to pay more money to bankers to finance the debt they’ve taken on. Ultimately, the boom hits. You have, in my model, you just have increasing wage costs. In the real world, you have increasing raw materials cost as well. Bankers costs are also going up, because you’re paying interest on a rising level of debt.

Steve Keen: That gets to the point where the capitalist return falls below that 20% level, well below. They stop investing. The economy slows down. Workers start to get higher unemployment and lower wage change coming out of that. You pay your bank debt down a bit, but by the time you get back to the stage where the share of income has risen the capitalists back to their 20% mark, wages have fallen as part of GDP, but you haven’t got rid of the debt you’ve accumulated, all of that debt. The debt level rises, and the next time you go into a boom, you’ve got a high level of banker’s share, the same level of capitalist share, and a lower level of worker’s share.

Steve Keen: Now you repeat that process by several booms and slumps, and you finally get to the point where you have a crisis like we had in 2008. A fundamental part of this process is rising inequality, with more of the money going, the economy’s money going to bankers, and less going to workers. Capitalists getting much the same level, until the crunch hits. At that stage, reduction in wages and reduction in raw materials’ costs is more than outweighed by the exponential rise in debt servicing, and you have a crisis like we had back then.

Steve Keen: Rising inequality was actually an essential part of the model, in terms of how I built the model. It was not something, again, that was in Minsky’s theories, verbal theories.

Peter McCormack: Are those problems then compounded with quantitative easing, in that it’s giving more money to the companies to invest and inflating the valuation of shares in companies beyond what they deserve?

Steve Keen: Totally. I wrote a piece about two years ago, which I’m happy to share with your readers, called The Faustian Bargain of Quantitative Easing. Imagine what you’ve got here, the crisis hit and literally I’ve spoken to Central Bank chief economic staff, and actually the Chief Economist, who actually happens to be a good friend of mine in the Bank of England, and a few of the others around the world. They had no damn idea the crisis was coming. They were completely surprised by it. They thought they understood the economy and they thought it was looking fantastic for 2008.

Steve Keen: The crisis hits them in the nether regions, it’s a complete shock. They have no idea of what to do. They didn’t even know why the crisis occurred. They’re blaming the wrong factors. They’ll blame the financial sector, because you couldn’t not blame the financial sector, but they’d blame intermediation costs and all this sort of crazy stuff, rather than the level of credit.

Steve Keen: They did the one thing they knew how to do, which was throw money at the financial sector. If you think about the relationship the Central Bank has with the real economy, you and I don’t have a relationship with the Central Bank. In the American economy, American legal system actually prevent the Federal Reserve having any accounting relations with the non-financial sector. There was a loophole, and that was actually eliminated by Glass-Steagall. The people that they have bank accounts for are financial institutions. The one place they can pump money quickly is into the financial institutions.

Steve Keen: Their theory was, “We pump the money in, that will boost share prices. That will cause what they call a wealth effect, and the wealth effect would then mean the economy boom. The rising asset markets will counteract the decline in the economy.” Now, that was really great news for anybody who owned shares. Shit house news for those who don’t. They always say we’re a share owning democracy these days, that’s total crap. The ownership of shares is massively concentrated. You take the top 5% of the population, you’ve got 90% of the share ownership, or something of that nature.

Steve Keen: If you boost share prices, you’re boosting the top 5% of the population. The more extreme you get, the more you’re boosting them. It added to the inequality that was already caused by the boom that led to the crisis in the first place.

Peter McCormack: Therefore this inequality is probably leading to societal problems. Actually, do you think the Brexit vote and the election of Trump is a reflection on this social inequality?

Steve Keen: Totally, totally. Again, I make a lot of these cases in my Debunking Economics as well. What you have is a system which … The model that the Neo-Classical economists built completely leaves power out of the process. The model that they call perfect competition, all these non-pejorative words they use to describe their models, perfect, there’s optimal, that etc., etc., etc. Perfect competition has no power. A worker is just as strong as an employer in the bargaining process to determine a wage. Total nonsense, but that’s what they build. They’ve left power out completely.

Steve Keen: What they’re trying to do is they’re trying to turn the real world into a model they’ve built in their textbooks, because they believe the textbooks describe the perfect world, which gets rid of government, gets rid of trade unions, maybe gets rid of monopolies one of these days, and that’s going to be a better place for everybody. In fact, in the real world what it means is workers get screwed, manufacturing moves offshore, countries like the UK, which fall for this stuff, get completely de-industrialised. Third World countries do pretty nicely out of it sometimes. What you get out of that is a resentment of the ex-working class and the ex-middle class, who are being shafted by the system. If you come along and tell them, “Look, if you vote for Brexit you’ll lose all this,” and they look around and say, “I could lose all this? Yeah, that looks like a good idea to me.”

Peter McCormack: Right. Do you know what was quite interesting as well, because I did have a read of your article, the one based on Minsky’s work.

Steve Keen: Oh yeah, Finance We Need to Make Break Down.

Peter McCormack: Yes, and I will share that out in the show notes. It’s a long read. I’d probably need a couple of days to really digest it in detail and ask you, but what was quite interesting that came out was something that you quoted that Minsky said. That, “Capitalism is inherently flawed. It has to have flaws to function as a capitalist system.” Therefore, what is the alternative?

Steve Keen: The alternative is recognising you’ve got a flawed system. I think one of the great weaknesses of the human species is we have this belief of a perfect world, and you find it in every … Every culture has its Valhalla. Every society has this ideal world where everything happens perfectly, a bit Garden of Eden, etc., etc. It’s something in our psyche that wants something perfect. What economic theory, Neo-Classical theory promised was a perfect world on this planet. You get sucked into this belief in perfection.

Steve Keen: What Minsky is saying is get used to it. The real world is not a porcelain doll. The real world’s going to have pimples. In the case of the financial sector, what Minsky actually said, if you elaborate that quote, what he said was, “Capitalism is inherently flawed, being prone to booms, slumps, and crises. These flaws are due to characteristics a sophisticated capitalistic economy must have. Such a system will be capable of generating signals that induce an increased desire to invest and of financing that investment.” That’s the real link.

Steve Keen: You want capitalists. The good thing about the capitalist system is innovation and change. You want them to want to be investing. When they do it, the income distribution signal will change to make it worth their while, or looking like worthwhile to invest. They’ll get euphoric about those expectations, as Minsky argued. They’ll extrapolate forward good times and see fantastic times in the future. Then to do it, they’ve got to borrow money. When they borrow money, they accumulate debt, and the process of both borrowing money adds to demand, accumulating debt adds to a lock on the system, that when that inter distribution turns against them again, they’ve accumulated additional debt and you can be in a serious crisis.

Steve Keen: You recognise that mechanism exists and you say, “What other mechanism can we add to counter it?”

Peter McCormack: Has globalisation made this more of a complex problem to solve? It almost feels like any large Western government headed into a financial crisis means all large Western governments likely will. Therefore, it feels like they’re almost all playing a game of chicken.

Steve Keen: Yeah, and it does help, because one of Keynes’ not recognised statements was once to say, “Above all else, let finance be national.” In other words, he did not want to have international transmission mechanisms, that could transmit a crisis in one country to other countries, or transmit euphoria in one country to other countries. That’s exactly what we’ve got, we’ve got a system where banks operate on a global footing. That means that the contagion of the American bubble, the subprime bubble, spread through the entire planet because people were buying CDOs and CDSs and everything else globally.

Steve Keen: Then when the American system collapsed, even if there wasn’t a comparable bubble in other countries, and of course in many cases there was a comparable bubble, again, because of that sharing of expectations, and the feedbacks, and the monetary factors linking many, many economies together. That contagion can cause a collapse. The first company to go under was British, was the AIG. They had bought so many of the CDOs, had them on their books, they were the suckers of the Big Short. You can’t clean that out easily. You get a total mess. As a result, when the Federal Reserve did its rescues of the American financial system, it also rescued large segments of the UK system and the Australian system.

Steve Keen: It makes it even worse when you allow these internationalised, deregulated finance. One of the first reforms I’d do, which again follows in Keynes’ footsteps, would be to abolish that international financial links, and to put in the way of that, a monetary system which is non-national, not the American dollar, something like the Bancor and restrict the level of trade surpluses and trade deficits. Prevent finance from becoming anything other than a national endeavour.

Peter McCormack: Okay. Referring back to 2008, we’re two days away from the 10th anniversary of the release of the Bitcoin white paper.

Steve Keen: Oh, okay.

Peter McCormack: It came out the 31st of October, 2008, my 30th birthday.

Steve Keen: Happy birthday.

Peter McCormack: In a couple of days I’m going to be 40, so kind of depressing.

Steve Keen: Maybe not happy birthday.

Peter McCormack: I’ll be out in Vegas, so hopefully I can have a good time. It was seen as a response to the financial crisis. I’ve looked through some of your work and it seems like you’ve been talking about Bitcoin and crypto currencies for some time now. I’m going to try and focus mainly on Bitcoin, rather than lots of crypto currencies. I do understand you’ve talked about your point before about you can’t just create new currencies. We’ll stick with Bitcoin for now.

Peter McCormack: My first question is what is Bitcoin to you? Well, I’ve got a couple of questions. What is Bitcoin to you, and how has your view on Bitcoin changed over the time you’ve been exposed to it?

Steve Keen: I know that the header in the first Bitcoin is about the English Chancellor announcing the second rescue of the banks sometime in 2008. I’m aware of that historical link with criticism of not just the financial system as it exists, but also how it was rescued in the bubble, in the breakup of the bubble. As soon as I looked at it, I thought, “This guy believes money is gold.” Quite obvious, because 21 million of them exist, 21 million Bitcoin. You’ve got to mine it. A better analogy for gold, I can’t think of, etc., etc.

Steve Keen: I thought, “It’s doomed, because money has never been gold.” This is a false analogy that Austrian economists get off on, and that a lot of people who are hyper capitalist in their attitudes also believe that money is gold, whether they mean it actually is or it should be is often a moot point. They believe money is gold, and therefore all the problems that come out of fiat money, we should get rid of fiat money, particularly we’ve got to abolish that nasty thing called fractional reserve banking, which is fraud, etc., etc. All these attitudes are built in there, and they’re completely wrong.

Peter McCormack: Is this because gold is a commodity, but a commodity can’t be money?

Steve Keen: Exactly, exactly. The best expression of this ever written was by a wonderful Italian economist called Augusto Graziani, and Augusto stood all of about five foot nothing. You never saw a man stand taller when he gave a speech. He argued that looking at money from a sort of first principle’s basis, he said, “What is money? Money, first of all, store a value,” etc., etc. stuff. He said, “Can money be a commodity? Money can’t be a commodity in a literal sense, because if you say money’s a commodity and you’re trying to model it as an economist, then all you’ve got is saying, ‘I’ve got an N commodity economy. Now I’ve got an N+1 economy commodity.’ I haven’t actually changed the nature at all.”

Steve Keen: He said, “The first thing is money must be a non-commodity.” Then for it to be a non-commodity, it also can’t be simply credit, because if I bought that paper mug on the shelf behind you by saying, “Here’s my IOU,” you might give me the mug, but there’s still a relationship between the two of us that hasn’t yet been terminated. It can’t be pure credit, but it also mustn’t give the person who issues it … Like with an IOU, I can go ahead and give IOUs all around the place, and finance my life by IOUs. That effectively gives me the right of seigniorage.

Steve Keen: He said, “Genuine private sector money must not give seigniorage rights. The only way you can make sense of all this is that money is a promise to pay a third party, which both the parties of a transaction accept.” If I were going to buy the mug off you, I’d make a transfer of my bank account to your bank account. That’s a transfer, a promise for a bank to pay me, a promise for the bank to pay you, and you accept that in complete exchange of me buying that mug off you. Money, in that sense, is a non-commodity. You understand that, that way it’s a non-commodity, it’s a triangular relationship, there are three parties to every exchange, the buyer, the seller, and the banking sector. That’s the correct vision of how money has functioned and does function. Bitcoin was never built with that understanding.

Peter McCormack: Right. Before we get into my questions on Bitcoin, because I find your perspectives on it very interesting, and actually one of the things that I can easily do with a podcast like this is just have lots of pro-Bitcoin economists or pro-Bitcoin technologists on. I think it’s very important to have contrarian views, either to improve it or to improve our understanding or use of it.

Peter McCormack: I guess the question I have for you before I go into a little more detail is, are there things you like about Bitcoin? Do you see it has any role to play in the economy?

Steve Keen: We need something to challenge the current existing monetary system, because two reasons, we need something for transactions, which is not based on credit. I’d be in favour of any system which enables us to have a transactional system that wasn’t tied up in credit, money creation at the same time. In that sense, Bitcoin could have been something of that nature. That’s one positive.

Steve Keen: It’s also useful to have transparency. The whole idea that the problem with banks is they keep bad ledgers is normally bullshit. That isn’t the problem. They create too much money for the wrong reasons, that’s the real problem. Also, we don’t write that debt off which we should write off. We treat it as sacrosanct. There’s those two problems. Actually, it affects me.

Steve Keen: Once in history, recent history, there’s been a case of a bank losing its ledger. That was actually the Commonwealth Bank in Australia. They lost about, I think it was all the records before 2012, they lost literally on a truck. The tapes just went missing in transport, “Oh dear we’ve lost the records”. There’s interesting arguments as to why they managed to lose all that stuff. Generally speaking, banks keep very accurate, very well maintained, very secure ledgers. The whole idea that you’re getting a distributed ledger and making it safe by the algorithmic approach rather than by a trusted third party, as if that were the main problem with the financial system, no, it wasn’t.

Peter McCormack: Right. Where have these myths around money come from? I’ve seen you present about the, a lot of the beliefs within the crypto currency community is built on the myth of a barter system, which has never actually existed as an economic system. It’s been used, but not had a whole economy built on it. Where does this come from?

Steve Keen: All sorts of places, but I’d actually blame Adam Smith. Smith began the argument … First of all, I regard Adam Smith not as the father of economics, but the bastard uncle of economics who’s led it astray. One of the ways in which he was the bastard uncle was to argue that we truck and barter. He said, “Nobody’s ever seen a dog make a deliberate trade of a bone with another dog.” The tendency to truck and barter was built into Smith’s mindset. Largely speaking, he left the financial sector out of his thinking. He was actually, interesting enough, he was a critic of a deregulated financial sector. He was in favour of interest rate charges and controls. He was opposed by Jeremy Bentham, and Bentham was more extreme than Smith in wanting a deregulated financial system.

Steve Keen: Smith, not that he was sanguine towards it, but he set up a mindset in which you could imagine that money was just a veil of a barter. That became ossified in conventional economics. They continued running with this idea of the barter system. Valra came along and built a model of a hypothetical multi-commodity marketplace, where money was not used. Those visions of barter and the veil of money is the way the Neo-Classicals think about it. Just part of the background noise, it really picks up when they wake up in the morning. You’re not even aware that it’s garbage. That’s where the myths began.

Steve Keen: Then it’s people like David Graber, Felix Martin, a range of other anthropologists and historians, Michael Hudson. Looking at the data saying, “Look, there’s never been a case of barter being used on a grand scale, except as a ritualised process between otherwise potentially warring, neighbouring tribes,” which there’s been several records of that, particularly in Australia and parts of New Guinea and so on. Or it’s been used when there’s a period of total political breakdown, like the 30 Years War and the 100 Years War in Europe, when you no longer trusted the king you were fighting for to actually be alive the next day to pay you your fees as a mercenary in his currency. You wanted payment in gold or silver.

Steve Keen: In those isolated periods of social breakdown, that’s when gold money has been, gold has been used as money or silver’s been used as money. Fundamentally, it’s been a unit of account created by the relevant political authority for the region, and that’s what maintains it, not that it has a commodity backing.

Peter McCormack: Right, so all money therefore is based on a trust system, trust belief?

Steve Keen: Yeah.

Peter McCormack: Trust between … I mean gold isn’t money, but if I wanted to buy something from you with gold at a very good value, you’d probably accept it because you trust gold. Whereas if I offered you some new thing that you’d never heard of, so new random crypto currency, you wouldn’t accept it, because you don’t trust it. One thing Bitcoin I guess has managed to do is create trust in a network of people, ironically on the trust in the system.

Steve Keen: I don’t know, it’s created a system. The extent to which there’s been breakdowns and the validity of that trust are really pretty remarkable. We have rules in stock exchanges, to require prospectuses to be backed up by some legal discovery process. The reason is we used to not have that, and you had so many scammers, particularly in the days of the South Sea bubble of course, but so many people ripping off people on the basis of euphoric expectations at different points in financial bubbles, that the regulations are built to kind of restrain that, and it still happens.

Steve Keen: Now, Bitcoin is the Wild West on that front. Yes, it’s based on you trusting the algorithm, but the algorithms have never been perfect. There’s always been breakdowns. There’s been forks, etc., etc. There’s been plenty of fraud as well, which Nouriel of course really hammers you for. People trust an algorithm, but their trust can be exploited in the same way that trust in the financial sector can be exploited.

Peter McCormack: I think that is why I said at the start I would separate crypto currencies from Bitcoin. I feel like a lot of what Nouriel was saying were problems I would associate more with crypto currencies in general, and less so with Bitcoin. Most of the scammers or the scams that seem to have happen have been on other crypto currencies, either forks or ARC20 tokens on the Ethereum platform projects, where people have exited and disappeared.

Peter McCormack: Now, that’s not to say that people haven’t created scams with Bitcoin. There was an exchange this week that did an exit called Make An Exchange, and it’s suspected it might be an exit scam. I guess there are different levels of fraud. There are fraudulent creation of fraudulent currencies, and then fraudulent exploitation of people’s use of the currency. I think they’re two different things.

Peter McCormack: That said, you think it’s good to have a challenge to fiat, and it’s good that we’ve got an alternative. How would you like to see crypto currencies change, or specifically what do you think would be nice to see in Bitcoin, to see it become a good challenge to the fiat monetary system?

Steve Keen: I don’t know that Bitcoin can, because that relies upon the energy cost as a way of getting your validation of the ledgers and then rewarding the miners. The energy cost elements are just a fatal flaw for Bitcoin. I don’t think it can be reformed, unless you dramatically reduce transaction cost and dramatically reduce the energy overhead in Bitcoin.

Steve Keen: The basic idea of a crypto-

Peter McCormack: Can we explore that? Can we explore that area? Why do you think energy cost is a fatal flaw?

Steve Keen: Oh my God, mate. At the moment, the energy costs of Bitcoin are close to the size of Belgium. They’ve fallen a bit, courtesy of collapse in the value of Bitcoin. You don’t want to have simply transaction costs absorbing that much of your GDP to begin with. If you continue the sort of extrapolation of price people were doing before the price crash earlier this year, then the energy costs started approaching the size of a major continent, let alone a major country. Frankly, energy is not something we can afford to be pumping into the biosphere anymore, wasted energy.

Steve Keen: Of course, Bitcoin is fundamentally the classic definition of entropy, because all you’re doing is you’re burning 10 minutes of processing time across the whole planet, across thousands of computers, plus all the network transactions, simply for the sake of verifying the current system of accounts. In an energy sense, that’s masses of energy in and masses of heat out the other side, and bugger all physical stuff. It’s massively wasteful at a time when we have to be dramatically cutting back on our energy consumption, or finding a way of reducing the damage we’re doing to the biosphere. Bitcoin ain’t helping global … Actually, Bitcoin is helping global warming, but in the wrong direction.

Peter McCormack: Okay, let me ask a different question on that. There is a whole debate around the energy side, and I don’t think we need to have that now. I can share some articles back with you. There was a recent article produced by a guy called Dan Hell, looking at energy consumption for Bitcoin. Some people would argue that actually that cost of securing the most trusted, I say quote/unquote trusted network in the world is important.

Peter McCormack: I think your point about wasting energy when we’ve got a problem with global warming is an interesting point. Why is that a fatal flaw in Bitcoin’s purpose?

Steve Keen: It’s not a fatal flaw in its purpose, it’s a flaw in its design. We cannot be relying upon proof, is it called proof of work?

Peter McCormack: Yeah, that’s it.

Steve Keen: Where that requires massive amounts of energy to validate the system. This is partly because of the whole focus upon not having a trusted third party. You have to have thousands and thousands of ledgers, and people competing for the ones to get the reward and so on. If you made Bitcoin, a crypto currency, which had a few hundred copies of the ledger in trusted institutions, like central banks, at least on the accounting side that deserve to be trusted, in the private banks as well. Then have a way the public can access a copy of the ledger, which is totally anonymised, to verify that actual transactions took place, so we’ve got a trace to some extent of those transactions without them being personalised, that’d be a useful system. I know there are some people working on ideas like that.

Peter McCormack: Yeah, I think you just described something called EOS.

Steve Keen: Yep, and there’s a couple of others.

Peter McCormack: I guess the problem with that, what many Bitcoiners would have, is that’s against the fundamental decentralisation side of Bitcoin, whereby most Bitcoiners want maximum decentralisation. That’s probably one of the most important aspects of Bitcoin. I understand how it might be seen inefficient to use that much energy, but at the same time, I don’t see how that’s a flaw in the system, in terms of whether it can be a challenger to money. To me, that’s just an economic component of the system, in that miners mine, they get a block reward. They can use that to pay for it. It’s just part of the engine of the system. I don’t understand-

Steve Keen: It’s too expensive. It’s too expensive an engine, particularly when you’re talking … How many transactions does Bitcoin handle right now per second?

Peter McCormack: It was seven transactions per second. I think it’s slightly up with … Although I’m out of my technical depth.

Steve Keen: Seven transactions, a system wouldn’t have a … There’s more than seven transactions per second on the street outside my window.

Peter McCormack: I know it, I get that. That’s by design choice. We can easily-

Steve Keen: Yeah, and a bad design choice.

Peter McCormack: There’s an easier way to increase transactions per second, by increasing the size of the block. You might be aware of this.

Steve Keen: I know, I’m aware of that, yeah. Two megabytes versus eight, and so on.

Peter McCormack: Yeah, and there’s been a massive debate over the years. What was created was a fork site called Bitcoin Cash, which it’s been proven to be the false way to scale Bitcoin. The best thing to do is what we have, is something in layer two called Lightning Networks, which I’m not sure if you’re aware of.

Steve Keen: I’ve heard of it, yeah.

Peter McCormack: Therefore, Bitcoin is the settlement layer, and Lightning Networks becomes the way for people to transact. Low transaction cost and it’s fast. I still don’t understand … We have Bitcoin being used now, people are using it to send value to each other, etc., etc. I still don’t understand why you think the mining side is a flaw in the system. I almost think it’s a red herring to the question I’m asking you. I’m asking you what are the flaw, what does Bitcoin need to do to challenge fiat. I think it can work with the mining. I think it’s other properties that probably are more important.

Steve Keen: I just can’t see how the mining scales. We’re talking seven transactions a second. We’re using the energy of Belgium to finance those seven transactions a second.

Peter McCormack: Why does that matter?

Steve Keen: You need 700,000 transactions a second to even approximate the demands of transactions on a planet with nine billion people. If you can get to 100,000 times the number of transactions, you have to do it in a way that doesn’t give you 100,000 times the energy consumption. Now, even if it gives you 10 times the energy consumption or 100 times the energy consumption, a million times as many transactions per second, that is one hell of a blockage. At some point, if we start … Please don’t tell me you, you can tell me. Go ahead and tell me you don’t believe global warming is happening.

Peter McCormack: Oh no, I believe global warming is happening.

Steve Keen: I work in both fields, more in economics obviously than I do in climate change. We’re going to destroy the planet that way. To have a requirement of that much energy consumption just for the sake of transactions, when there’s so few transactions right now and such a huge energy demand, I simply can’t see a path that gets you to pretty much the 10 to the 6 times as many transactions, possibly 10 to the 7 times as many transactions, without getting a 10 to the 2 or 3 times as much energy usage. If either one of those happens, either if you don’t get the transactions going, it’s not going to work to replace fiat money. If you do scale the energy, it’s going to be banned in the next 10 to 20 years. It simply will not be allowed because it’s too wasteful and too damaging for the biosphere.

Steve Keen: Now, that’s a Venn diagram that doesn’t overlap.

Peter McCormack: There’s a couple of points there. I think the first one is I believe global warming is happening. I’m with you. I’m not a denier. I have my concerns. Equally, I think people should be eating less beef, because I’ve watched Cowspiracy and I’ve looked at how much the beef industry is contributing to global warming. There are factors everywhere.

Peter McCormack: In terms of the transactions per second, I think one area that might be worth spending a bit of time, not now, I’ll send you the stuff, is looking at the layers of the network. Bitcoin is the ultimate settlement layer, which can handle half a million transactions a day, which should be more than sufficient as a settlement layer, with the second layer, Lightning Network, for all the much smaller transactions. That, to me, is like a sensible network. That, to me is, in terms of a structure, is right.

Peter McCormack: With the mining, again, there’ll be better people to discuss efficiencies or inefficiencies and the damage to the environment. A lot of that rhetoric has actually been debunked. Again, it’s something I’ll send for you to read to challenge.

Peter McCormack: I’m more interested with you in knowing what are the properties in the design of the protocol that would be good for it to challenge money?

Steve Keen: First of all, you have to be able to create it, to have it expand, feeding the needs of a growing system. Again, there’s been no economy on the planet that has grown with a shrinking money supply.

Peter McCormack: Right. This is where the, and I’ve tried to read and understand, this is where the Bitcoin, the benefits of deflation with Bitcoin, but you disagree.

Steve Keen: Totally. Deflation is what gives you Great Depressions. They should take a look at the 1930s and see how wonderful it was to have falling prices back then. What they’re leaving out is the accumulation side of a system like that. Falling prices would be fine inverted comments, if all the demands on your money also fell at the same time. If you have a financial system we have right now, which of course is a credit and debt based system, a falling amount of money does not mean a falling amount of debt. What you get is an increasing debt burden coming out of deflation.

Steve Keen: Now if they could say, “We’re going to have falling prices and falling prices will take the place of the money supply growing,” then you’ve got to have a system which doesn’t have an accumulator like debt, or doesn’t give something like, again … If you’re in Bitcoin and you’ve got a rising price for everything in terms of Bitcoin, which is what’s going on, [inaudible 00:57:18] in terms of Bitcoin, Bitcoin getting more expensive. Those who’ve got Bitcoin are accumulating wealth. You get, again, the same inequality, asset based inequality system. When what people have always got in their minds about money is they think about it in an income system without a wealth system attached. Like the Austrian vision of money, talks about credit. They’re quite aware of the existence of credit, but they completely leave out that if you have credit, which is change in debt, you’ve got to have debt. Then the level of debt becomes an important question in this system.

Steve Keen: The best form of money, in some ways, is money which turns over rapidly, which you’re encouraged to turnover. That’s the opposite of HODL, hold on for dear life. HODL is saying, “Let’s hang onto this stuff and not spend it, watch it go up over time.” That is a fabulously bad basis for transactions. That means you’re going to think, “Should I buy that coffee? If I buy that coffee and I’m going to have a bit less Bitcoin, that means I’m going to lose this money in the future, so I might not shop. I’m going to sit back at home and I’m going to make myself a hot water and I’m going to put a bit of sugar in.” I’m being a bit exaggerated there of course, but it’s encouraging you not to circulate your money.

Steve Keen: Now money is a means of circulation. We have a whole range, it’s not just Bitcoin that has this problem, it’s also the credit system itself. They both of the problem. They encourage you not to circulate the stuff.

Steve Keen: Now, a better model for Bitcoin would have been the Worgl currency. If you go back and take a look at Worgl, which is a town in Austria that was suffering from the Great Depression as badly as anywhere in the Austro-German area. I’ve forgotten how the Mayor came in to be aware of the existence of Silvio Gazelle’s ideas, but he then produced a local scrip, which could be used to pay council rates and so on. If you didn’t spend it, it deteriorated in value over time. Within a very short period, that town went from 25% overall unemployment to 0%. A booming economy with the circulation of stuff, until the Central Bank shut it down.

Steve Keen: Something that encouraged circulation would be a much better form of virtual currency that Bitcoin. That could be a real rival for the system we currently have.

Peter McCormack: What are your thoughts on Austrian economics? Obviously, Bitcoin and Bitcoin Maximus are huge fans. I’ve done some of my own reading, and I find some really interesting things in there, but I’m not an economist. I’m not an intellect that way. I could be very easily led to believe one system over the other. I respect probably more the opinions of lots of different people. What are your thoughts on Austrian economics?

Steve Keen: There’s a lot of things I have sympathy for, in terms of the analysis of the importance of lack of information, and the market as a coordination system for a world in which we do have very incomplete knowledge. We have no knowledge of the future, and incomplete knowledge of the present, and only vague and contradictory knowledge of the past. In that system, you can’t have central planning getting everything right. Therefore, you have to have a market works as a good way to distribute an information system effectively, to let us make intelligent, roughly intelligent decisions, given very, very limited information.

Steve Keen: That’s a totally different perspective to the Neo-Classicals, who literally, just hold the fact that their mathematics never worked, they got mathematical answers they didn’t like together, and the errors they presumed were all Nostradamus or God. They presume infinite knowledge, and this nonsense about perfect knowledge and perfect foresight, and all this utter garbage. The Austrians, thank God, are a resistance to that, but they still swallow the idea that capitalism approaches equilibrium. They’ve still got a very primitive notion, even though they’re aware that banks create money to some extent, they’ve got a very primitive notion of banks, and they think the money should be gold and so on. There are all these various flaws around some of their foundational elements.

Steve Keen: They also have the same subjective utility theory of value that the Neo-Classicals have. For reasons that are a bit too complicated to go into on this podcast, your ultimate basis of your theory of production must be objective. You must explain how we manage to turn energy into useful work. That’s completely objective empirical data. If you don’t have an excess of energy out from energy in, you don’t have an energy returned and energy invested, you’re not going to have anything you’re going to put in utility to. You’ve got to start with an objective theory of value, and they start with a subjective theory.

Steve Keen: You have elements which are subjective and objective sitting on top of that, and I can build that out of Marx’s philosophy of dialectics, which actually in some ways Hayek shares. Most people aren’t aware of that, but Hayek actually had a Russian dialectical trainer in his education, a wonderful member of the Austrian philosophical community, called Chris Skiabra, identified that for me some time ago.

Steve Keen: There are good and bad elements woven through Austrian, to the extent that they share the same foundations of the Neo-Classicals. That’s where their problems come from. Given that bad foundation, they do better with it, by acknowledging we have very bad, incomplete information, even about the past, let alone about the present and future. The market works as a coordination system for people who are groping in the blind, better than a central planned one. Those are good elements of it, the focus on uncertainty, and the focus on the role of the entrepreneur. I think they’re all important.

Peter McCormack: Last thing on Bitcoin, do you think there’s a possibility that people are trying to pigeonhole Bitcoin as a thing, like a gold, or money, or stored value, and actually there’s a potential that it is just something new and unique, and may play out as something that does serve multiple purposes?

Steve Keen: It could, but I simply can’t see Bitcoin surviving, because I think those design flaws, there’s too many of them and it’s too close to the crunch time on a whole range of those. In the next decade, I think we’re going to into energy rationing.

Peter McCormack: Right, okay.

Steve Keen: Even Donald Trump will have to consider that, if he’s still alive. 71 year old and all that sort of jazz, suffering obviously from Alzheimer’s. The reality’s going to bite, and when it bites, if you’ve got a transaction system with enormous energy overheads of Bitcoin still, then they’re going to say, “No, we’re shutting you down.” If you’re going to go from seven transactions a second to a million transactions a second, don’t start it with a ball and chain around your feet, which is what that actual seven transactions in ten minutes rules all give you. Start again.

Steve Keen: I think in that sense, Bitcoin, and it is often what they call the first mover advantage, I think Bitcoin is a first mover disadvantage, because those mistakes, the fundamental mistakes in the knowledge of what money is, and the design of the system on top of it, are enough to me that I think it’s going to fail. Some of the other crypto currencies, which are being developed, the ones you and I have alluded to in this conversation, they may well end up succeeding, using the original ideas that come out of the wreck of Bitcoin.

Peter McCormack: This has been a like a real eye-opening interview to me. Just very enjoyable. I do want to finish on one thing though. I just want to get your opinion on something. Especially as I’ve got a 14 year old and an eight year old, and I think I know the kind of answer you’re going to give, but what do you think of the current education system?

Steve Keen: It sucks, in so many words.

Peter McCormack: Yeah, I thought you might say that.

Steve Keen: We’re trying to test the death out of these kids. We have dumbed down the university education drastically, because we have far too many people going to university. They should be going to, a lot of the population, they should be going to technical colleges and getting advanced training in machine tools and engineering. We should have respect for those professions, rather than only respecting somebody who walks out with a degree.

Steve Keen: At the same time, we’ve turned universities into bureaucratic hell holes, and we’re doing the same to schools now, in the name of making them into more like a market. In reality what it means is you pay these people outrageous salaries to be your bosses, and what they’re doing to workers … Suppose they got rid of the terribly inefficient public sector layer, what you’ve replaced it with is marketing. You get me anybody who’s going to argue that marketing is more efficient than a public sector bureaucracy and you’ve got a fight on your hands. I don’t like bureaucrats.

Steve Keen: I think we get the worst of all worlds out of the mess we’re in right now. It’s a great pity, because at the same time, we have technologies that make things like, what’s its name? The mathematics teaching system on the web. I’ve forgotten its name, but there are beautiful ways to be able to learn without the restrictions of some of the backward parts of old school education and old university education. We’ve completely stuffed it up with these attempts to marketise it.

Peter McCormack: Yeah. This has been absolutely fascinating. Can you please tell everyone who’s going to listen to this how they can get a hold of you? Where they can find the work you’re doing? I will share it all out in the show notes. Then also anyone you would like to hear from.

Steve Keen: Yeah, sure. I’m pretty much leaving the university sector. I’m actually one of the victims of the attempt to turn into a marketplace, because the Brits copied a stupid idea from the Australians, which was to deregulate first year student intakes. Allegedly, to make it more like a market. What it meant was the top ranked universities offered more positions in humanities, to try to get bums on seats, because humanities are cheap to teach, STEM subjects are expensive. That destroyed my university department in Australia back in 2012. The Brits did the same thing in 2013. I started in 2014. It’s slowly strangling the first 92 universities. My university’s been forced to massively downsized, shortly after I arrived at the place.

Steve Keen: I’m now becoming crowd funded, and I’m using Patrion for that. If any people want to find my work, it’s www.patreon.com/ProfSteveKeen.Most of the stuff that I put there goes up for free, but people can sign up and support me for as little as $1 a day, and as much as they like above that. I’ve got just over 1,000 people supporting me right now. That means I can afford to be an independent scholar. That’s fabulous freedom to … I’d do it anyway. I was a thorn in the side of mainstream economics and politics and so on, while a university professor, but I can now continue doing it and absolutely relish in it, not have any fear about, “Am I going to have another fight with the Vice Chancellor, courtesy of this one?”

Peter McCormack: This has been so utterly fantastic and fascinating in so many ways. Steve, thank you so much for coming on.

Steve Keen: You’re welcome.

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