A period of calm in capitalism is only a lull before the storm

Lex Fridman introduces Steve Keen as a heterodox economist who has spent decades attacking the core of modern economics and rebuilding models from Karl Marx, John Maynard Keynes, and Hyman Minsky. The conversation that follows runs more than three hours. It begins with what economics is for, lingers on a footnote Marx wrote in 1857, and ends with whether a machine can fear its own death.

The story that frames Keen's career comes late, when he describes a model he first simulated in 1982. He closed the paper — published years later, in 1995 — with what he thought was a nice rhetorical flourish: the chaotic dynamics should warn us against treating a stretch of relative stability in a capitalist economy as anything more than "a lull before the storm." He did not think the line would come true.

Then came the years from 1990 to 2007, when cycles shrank and neoclassical economists named the period the Great Moderation and took credit for managing it. Keen sat watching the same damping his model produced, and he was frightened. In 2005 a predatory-lending case sent him back to the data. Private debt was rising exponentially. He thought, as he tells Fridman, that a financial crisis was coming, and that somebody had to say so.

Asked what economics is, or what it should be, Keen does not start with prices. It should explain how human civilization arises and how it can be maintained, and that is not what the discipline has been. "We have a discipline which has the right name and the wrong soul." The soul, as he wants it, is the question of how we built a way of life so far above the energy, consumption, and knowledge of the Earth's background. Drawing on work with atmospheric physicist Tim Garrett, he argues that we mine high-grade energy — the Sun, coal, nuclear — and that this is what holds civilization up. Without it, he and Fridman would not be talking into microphones. They might be beating drums.

That elevation is, in his phrase, the only free lunch the universe hands us. Economics, he says, has helped trash the planet that supplies it. He will not call his field a profession, let alone a science. He thinks it has helped push human civilization toward a feasible end. The tools it should be using are the ones engineers already use: stocks, flows, and the interaction between a system and its environment — systems engineering, not the spreadsheet logic of difference equations. Thomas Sargent's two-volume text on advanced methods in economics with Python runs close to 2,000 pages; Keen says four of those pages are on differential equations. The rest is discrete jumps in time.

A difference equation is what a spreadsheet does: the value in 1990, then 1991, then 1992. A differential equation describes a process moving through time, with the rate of change of a variable as a function of its own state and others. Fluid dynamics is written that way for a body of water, not molecule by molecule. Economics, Keen insists, is an aggregate process through time, so it belongs to the same family. Some economists do learn differential equations and still skip stability analysis. They assume equilibrium is stable and work near it. As a mathematician he is at home with Jacobians and Lyapunov exponents, and in that world unstable equilibrium is the usual case. The training of the field, he says, runs the other way.

Keen would start the history of the field with a school that went extinct about 250 years ago. The Physiocrats, looking at France as an agricultural economy, borrowed the new idea of circulation from anatomy and treated wealth as something that comes from the soil — which, he says, they really meant the Sun. One seed returns a thousand. Manufacturing they called "sterile": it changes the shape of value, it does not extract it. Their phrase for the harvest was "the free gift of nature." Adam Smith, looking out from industrial Scotland, said the source was labor, not land. That became the classical school: value is objective, prices reflect relative effort, and subjective utility is something to ridicule.

Marx, in Keen's ranking of intellect, stands first, with Joseph Schumpeter second and Keynes third. Smith does not make the list. Marx took a classical theory that had been pro-capitalist and anti-feudal and turned it into a critique of capitalism. In the 1870s William Jevons, Carl Menger, and Léon Walras answered with neoclassical economics, putting value back onto subjective marginal utility. That framework, Keen says, is still what almost everyone meets in the first weeks of university, 150 years on. Students also learn that money is irrelevant. Indifference curves are drawn like isobars on a weather map; double the nominal prices of bananas and coconuts and double income, and the textbook answer is that nothing happens. Anyone who worries about money is said to suffer from "money illusion." The theory only works, Keen argues, if money plays no creative role — as if we still swapped surfaces for bottles in a barter village.

What holds Keen's attention is a break in Marx's own thinking in 1857. A visitor Keen names Otto Brow returned a copy of Hegel to Marx's home in Chelsea. Marx had spent years on the classical economists; after rereading Hegel, his style in the *Grundrisse* flipped, from Ricardo to dialectics, the way a Hunter S. Thompson character goes from one drug to another. The trace, Keen says, is a footnote one and a half pages long in the Penguin edition, pages 267 to 268. Marx asks whether use value — the dimension the classicals had thrown away — is a fundamental aspect of the commodity, and whether there is a tension between use value and exchange value. He adds a question to himself: does this have significance in economics?

From that page he has a positive derivation of surplus instead of an exclusivist one. Labor is bought at its exchange value, the hours needed for subsistence — say six — and used at its use value, a twelve-hour working day. The gap is profit. About thirty pages later he writes the same thing about machines: their use value is significantly greater than their exchange value, meaning their contribution to production exceeds depreciation. That sentence, Keen says, hollows out Marx's own theory of revolution. In *Capital* Marx still insists that a machine which took 100 hours or cost £150 cannot under any circumstances add more than 150. The post-1857 dialectic and the old exclusive logic are at war. The political case for socialism depended on a falling rate of profit, and that rate falls only if labor alone produces surplus. If machines can produce it too, the chain breaks. Keen thinks Marx saw the contradiction and could not live with it, so he passed over it.

Strictly speaking, Keen says, socialism means public ownership of the means of production, not the American habit of calling public schools socialist. On why the real thing failed, he is "100 percent" with the late Hungarian economist János Kornai. Kornai imagined an ideal socialism — no Stalin, no purges, Marx's hopes intact — built on the primitive foundation of Russia. Marx himself had expected revolution first in England. Advanced economies would go through it; primitive ones would need a capitalist transition. That was the Menshevik line. The Bolsheviks thought they could skip the capitalist phase. Hyman Minsky came out of a Menshevik family: his parents were refugees from Stalin's Russia who met in Chicago and stayed socialist.

Start from a feudal, barely industrial country and try to leap to an advanced industrial one, and every sector has a legitimate claim on scarce resources. Everything is fully employed, often over-employed. The easy way to live inside a resource constraint is to make last year's product again. Keen's personal exhibit is a motorcycle. A girlfriend's brother in suburban Sydney could not afford a 650cc Honda or Kawasaki at about $3,000. He found a Cossack for $650 — a dollar per cubic centimeter. They opened the crate, pulled off oil-soaked rags, and stared at a 1942 BMW, the same machine Steve McQueen rides in *The Great Escape*. The Soviets had been building it for thirty years. It still had a bicycle seat.

Kornai's contrast is blunt. Socialism tries to pay workers as much as it can and build the best world as fast as it can, and it does not innovate. Capitalism tries to pay workers as little as it can and steal demand from rivals, so Kawasaki, Honda, and BMW keep changing the machine. You get cycles, booms, and slumps, and you also get novelty. Khrushchev banging his shoe at the United Nations and promising to bury the West meant burying it in commodities. In the long run, Keen says, you cannot bury anyone in output unless you innovate. The Soviet engineer Grigory Feldman recast Marx's department model as mathematics and urged building factories rather than cars; Keen reworked the equations as a master's student and found the exponential growth was being driven by a huge pool of unemployed labor. Once that pool and the peasantry were exhausted, growth could only track population. Western consumers looked at the goods next door and said, in Keen's telling, that if that was exploitation, they wanted exploitation.

Would Stalinism have taken the form it did if the Bolsheviks had not skipped capitalism? Keen thinks perhaps not — but a shortage economy makes people unhappy, and unhappy people are easier to rule by suppression, so the path is mechanically friendly to something like Stalinism. He also rejects the cartoon that centralization must mean totalitarianism, and he quotes the old Soviet joke: they pretend to pay us, and we pretend to work. In a Havana hotel about eight years before the recording, he walked into a tourist office staffed by three women, stood waiting for eye contact, and got none. When he finally asked how to get to the beach, he was told he could find a taxi outside. Low pay that does not mean anything, he says, produces that posture. It is a structural result, not a national character.

China, Keen argues, is the rare case that cut politics and economics partly apart: political power stayed centralized, economic power was diversified. On sheer survival as a society, he thinks China may prove more resilient than Western capitalist ones. Deng Xiaoping's pragmatism — it does not matter whether the cat is black or white, so long as it catches mice — was the break from Mao. In 1981 Keen took a group of Australian journalists to China and into a Sichuan free-trade zone. Foreign firms could not simply harvest cheap wages. They needed a Chinese partner, and within five years that partner had to own 50 percent of the business. American factories shutting in what became the Rust Belt might have been paying about $2 an hour; in China they were paying about two cents. They were willing to give up half the profits and the ownership. China was not only using its labor. It was growing a capitalist class, and today's Chinese firms, he says, came out of that.

The old bureaucratic vice traveled with the new machine. The safest way for a subordinate to avoid blame is to carry out instructions to the letter, past what the people at the top actually wanted. On that 1981 trip a news report said light industry had grown 17 percent while heavy industry had fallen 7 percent. Every official's first answer was that they had followed a directive of the Central Committee. Someone finally spelled it out: the directive was to promote light industry, so they stripped heavy-industry factories and turned them into light-industry ones. Keen sees the same over-implementation in later lockdowns. The overlay is still there. Under it, people were told to make goods, market them, and sell them, and the inventive part of the species was allowed to work.

In second- and third-tier Chinese cities of "only" four million, the social circles he knew felt happy. He reaches for a metaphor: a benevolent Big Brother, or a marriage. There are limits; inside them people have fun and feel free; nobody wants a divorce — so long as the walls are wide and you have not hit them. Fridman presses on ignorance and North Korea. Keen answers with *Mao's Last Dancer*: even children told they had the world's highest living standard inferred that the rest of the world must be miserable. The feeling around 2014 to 2016, he says, was freedom within limits because the system was working. He also thinks selection of officials still includes sucking up, but it includes skill. Australia's National Broadband Network is among the worst, he says, because Tony Abbott and Malcolm Turnbull chose fiber to the node and copper to the house. China, in his account, would not make that call, because the people deciding know that fiber into copper will not run.

Keen says the past five years of his life have included depression, and that it started when he read what mainstream economists wrote about climate change. Scientists and economists are not looking at the same object. An OECD report in 2021, in a chapter on the Atlantic Meridional Overturning Circulation — the Gulf Stream, in ordinary speech — said that if that circulation collapsed against about 2.5°C of warming, the share of Earth's surface suitable for wheat would fall from 20 percent to 7 percent, with a similar collapse for corn, while rice might go from 2 percent to 3 percent. The report's word was "catastrophic." Richard Tol, in a 2016 paper using an integrated assessment model, estimated that losing the Gulf Stream would *raise* global GDP by 1.1 percent. Keen calls it the worst work he has read in fifty years of criticizing neoclassical economics.

Global climate models include precipitation. The economists' integrated assessment models, he says a 2021 paper confirmed again, do not. They have temperature. If temperature moves toward a range better for farming, they assume rainfall will follow. "Imagine trying to model the climate while ignoring the fact that there's rainfall." William Nordhaus, Nobel laureate and former president of the American Economic Association, assumed that 87 percent of American industry occurs in "carefully controlled environments" and would not be subject to climate change. Manufacturing, services, government, finance: what they share is a roof. Keen's charge is that Nordhaus has confused climate with weather. Climate change rewrites the planet's weather pattern. The extreme case is a breakdown of the three circulation cells in each hemisphere — Hadley, Ferrel, polar — into the turbulent "equable climate" you get when you turn a stove up under soup. Rain would then fall near the equator and the poles; the middle would be dry except for extreme storms.

Human civilization grew in a freakishly stable window. Over the last million years, global average temperature sawed between about one degree warmer than now and four to six degrees cooler. Over the last 12,000 years the wobble has been about half a degree. That perch sits on a turning point of the Milankovitch cycle, the orbital rhythm that redistributes sunlight. If we had never burned fossil fuels, Keen says, we would have been heading into the next ice age, with glaciers eating farmland and a return to nomadism. Instead we ran the other way, about 100,000 times faster than the natural cycle. Fridman plays devil's advocate on technology — lab-grown meat, engineered food. Keen borrows Elon Musk's distinction between a prototype and mass-producing the prototype. Scaling to replace today's agriculture looks like decades of work, and the window is decades, not centuries. He grants that Paul Ehrlich's *Population Bomb* was wrong. He does not grant that a missed forecast from the 1970s refutes the physics. After watching some scientific colleagues leap from lab work to public policy during the pandemic with more confidence than he liked, his rule of thumb became simple: stand with the humble, not with the arrogant.

The 1982 model sat on work by Richard Goodwin, a neglected American Marxist mathematician. In 1967 Goodwin published a five-page paper that turned a verbal cycle in chapter 25 of *Capital*, volume one, into mathematics as a centenary gift. Marx's story was simple: in a boom workers win higher wages, wages eat profits, investment falls, the slump raises unemployment, wages fall, and the cycle repeats. Goodwin saw the Lotka–Volterra predator-prey equations. Grass is the prey, cows the predator; more grass, more cows; more cows, less grass; the cycle does not die. Keen added a layer. Capitalists invest more than profits in the boom and less in the slump, financing the gap with debt and paying interest. Two equations give a limit cycle. Three — the wage share, employment, and private debt — open onto Lorenz-style chaos.

The path he got is technically a Pomeau–Manneville route to chaos: oscillations shrink, then blow up. That shrinking is what the profession later branded the Great Moderation. In the model, capitalists borrow, but workers pay. With three classes — workers, capitalists, bankers — the capitalists' share can hold still while the bankers' share rises and the workers' share falls. Credit, the annual change in debt, is part of aggregate demand. In the United States it peaked at 16 percent of GDP in 2006–07 and went to minus 5 percent in 2008–09, a twenty-point hole. Plotted against unemployment from about 1990 to 2010, Keen puts the correlation at minus 0.9. A neoclassical model, he says, would want that number near zero. Paul Krugman is the face Keen puts on the "loanable funds" story, in which I lend to you and my spending falls by as much as yours rises. The Bank of England stated in 2014 that the textbooks are wrong: a loan is booked on both the asset and the liability side, and the money is new.

Irving Fisher had been a believer in equilibrium. He wrote on interest, sketched an ancestor of the efficient-market idea, and grew rich on an invention Keen remembers as a Rolodex. Before the Depression he was worth about $100 million in today's terms, 90 percent of it in stocks bought on margin. Margin debt in America rose from 0.5 percent of GDP in 1920 to 13 percent in 1929, then went to zero. People sold Rolls-Royces for £20 to meet margin calls. Fisher's later paper, "The Debt-Deflation Theory of Great Depressions," contains the line Keen calls Fisher's paradox: "the more debtors pay, the more they owe." Liquidation knocks down the price level; nominal debts shrink and real debts grow. That, Keen says, is a more dangerous capitalist failure than inflation. Calvin Coolidge took credit for federal surpluses of about 1 percent of GDP from 1922 to 1930 while the private sector was borrowing about 5 percent of GDP a year from banks. When the willingness to borrow peaked, credit flipped from positive to negative and demand collapsed.

The policy implication is specific. Treat the level of private debt as a target of economic policy, alongside inflation and unemployment. Keen's healthy band is 30 to 70 percent of GDP; he puts America at 170 percent. Cap how high debt can go, stop speculative lending, and keep credit for innovation, investment, and necessary consumption. Cycles will not disappear. Breakdown, he thinks, can.

Keen's blunt summary of modern monetary theory is that it is accounting. Money is a creature of double-entry bookkeeping, not of gold. Assets are claims you have on someone else; liabilities are claims someone else has on you; the gap is equity. Transfer a deposit from Fridman's account to Keen's and the sum is zero. Borrow from a bank and the bank's loans and deposits both rise: money has been created. Money, in that sense, is the liability of the banking system. A government deficit spends more into private accounts than it taxes out of them, so those accounts rise, and the matching asset shows up as reserves at the central bank. In a mixed credit economy, Keen says, a government deficit is a feature, not a bug. The normal state of government should be deficit.

Austrian hard-money thinking, gold bugs, and remaining Bitcoin enthusiasts treat money as an object you can both dig up without affecting each other. Keen's point is that money is a social claim, a triangular transaction: buyer, seller, and bank. The late Italian economist Augusto Graziani's *The Monetary Theory of Production* is, he says, one of the most important papers he has read. When Elon Musk objects to government always being in deficit, Keen thinks the objection fails at this first-principles step. Obsess about limiting public money creation and the remaining creation is done by private banks, which means rising private debt — and the collapse of credit when that debt stops growing is, in his view, the fundamental cause of financial crisis.

Inflation looks different once money's three textbook jobs are pulled apart. Unit of account and means of exchange pull one way; store of value pulls the other. If money is appreciating, the rational store-of-value move is to hold it and not spend, which throttles exchange. If it is depreciating, you lose by holding it, so it circulates. A century ago Silvio Gesell proposed depreciating money and was ridiculed; Keynes thought he was a serious mind. During the Depression the mayor of Wörgl, Austria, facing 25 percent unemployment, issued a local scrip that could buy goods in town and pay local rates, and that lost value unless you stamped it. Velocity exploded, activity took off, unemployment went to zero. The Austrian central bank sued, shut the experiment, and unemployment went back to 25 percent. Not long after, Austria voted overwhelmingly for the Nazis. That is not Weimar. Hyperinflation, Keen says, almost always comes after physical resources have been smashed and the monetary authority tries to paper over the hole. Moderate inflation is the price of keeping money moving. The fight over inflation is a fight over which of money's jobs we are willing to wound.

Young people calling themselves Marxists, he thinks, are usually holding a cardboard cutout. The practical way to be kind, in his accounting, is to stop treating a public surplus as virtue. Decades of that obsession have cut social services, health, education, and infrastructure, and the rich can buy those things themselves. A government that runs a deficit as a normal feature of a fiat system can fund a decent floor for people who lose the capitalist game. The climate envelope still binds. Inside it, he thinks you can have a society where the poor are not desperate, the rich can look after themselves, and fewer twenty-year-olds reach for a slogan they have not read.

Space, for Keen, is not a luxury. Capitalism would work better off the planet because waste can go into the Sun instead of back into the biosphere that feeds us. On Earth we have already dumped enough residue to undermine our own productive capacity. In the very long run, if the job of the species is to maintain life, life has to be established somewhere the Sun cannot swallow. Production out there would be mechanized. You cannot commute from here to the asteroid belt and home for dinner. A handful of people would service the machines. Conscious machines, he notes in passing, would also wreck the labor theory of value — one of the cleaner logical objections to it.

He remains a skeptic that we will ever build a machine that is truly conscious. The bottleneck is not processing power. It is imagination. Insights hit him without warning; he writes them down and they solve a problem he did not know his mind was working on. He does not know how to make a machine do that. If we try, the path he can see is to build an AI that wants to live, that fears its own disappearance, because human intelligence evolved in a predator-prey struggle and intelligence was a survival technique. Fridman adds Ernest Becker's *The Denial of Death*: humans do not only have emotions and a will to live, they can foresee their own mortality far ahead, and that foresight is a source of extra creation.

Keen accepts the logic and the cost. You cannot control a truly conscious being. He offers a family story. A niece, about six months old, was gurgling in her cot. Her father wagged a finger and told her to stop making that noise. The infant gave him a look. Keen told him he was going to have issues with that one. Life, once given, does not belong to the giver. The analogy holds for AI, and it is why the prospect is both exciting and frightening. He thinks the risk is one humanity should take eventually — and that to do it we would have to let artificial intelligence grow in an environment where it fears its own death.

Keen's career advice is undiplomatic. Do not do an economics degree. Start with a little book, *Econ Comics: Taking the Con Out of Economics*, then skip the degree, because what universities teach is obsolete technology — Earth-centered astronomy, with epicycles added so the model can fit the data. Study system dynamics, which you can use in any field, and then point it at economic questions if that is what you care about. A base engineering education, he says, is far better preparation. The tweet of his that Fridman reads back is the same idea in another key: we are the opposite of ants, individually intelligent and collectively stupid. Humans share beliefs. That is why we can act together, and why we can delude ourselves together. It helped when the job was to take spears against a pride of lions. It gets in the way now that we are the dominant species. Kenneth Boulding's line, as Keen recalls it, is that anyone who believes in exponential growth on a finite planet is either mad or an economist.

E.O. Wilson's "50 percent rule" would reserve half the planet for non-human species, off limits to us. Keen thinks that is too generous to humans. He would give us 20 to 25 percent at most and let the rest evolve without our interference. That program is neither democracy nor authoritarianism. It starts with a floor: respect life itself. On top of that you still need a politics in which people feel they have a say, while that floor stays untouchable, and you need people who understand complex systems making the hard calls, because causes in this world travel at an angle. In space, the same ethic becomes practical: if we cannot find life elsewhere, seed it. He did not plan the chaotic life that followed from seeing mainstream economics as wrong. At twenty he led a student revolt at Sydney University. Years later, at a restaurant, a table of old comrades who had become accountants listened to the teaching, the aid work, the programming, the research, and said they wished they had done that. He listed the downside: they were getting married, he was single; they had jobs, he was unemployed; they had houses, he did not have a car. The kingpin of the group told him they would still rather have had his life.

The darkest place in his own mind, he says, was reading Richard Tol and related work on the economics of climate change. In one paper Tol calibrated damages by assuming that the relationship between GDP and temperature across space would apply across time: if New York and Florida differ by ten degrees and 20 percent of income, a ten-degree warming would cut GDP by 20 percent. Keen went blank at the stupidity of it. His wife, who is Thai, walked in with treats, asked why he was like this, and cut him off: nobody is interested in climate change, you cannot change it, "if we die, we die." He could not argue with that Buddhist landing. It pulled him out of the depression. The problem remained. A geologist friend told him the Anthropocene should not be called an epoch; it will be an event. Life will abide. We will still take a great deal of it with us, including our own, for no good reason.

Marx, Keen notes, wrote love poetry to Jenny von Westphalen long before *Capital*, and also fathered a child with the household's housekeeper. Love is vital, and it has to be transferred not only to the rest of our species but to the others. He puts us on a spectrum between chimpanzees and bonobos and thinks we sit too close to the chimps. On his own death he is afraid of going through it, not of the other side, which he does not think exists; he is atheist when pressed, agnostic about the brute fact that anything exists at all. Asked how he hopes to be remembered, he says as someone who managed to integrate economics with an appreciation for life. Fridman closes with Marx: to be radical is to grasp things at their root.