Steve Keen: Economists Have Left Out Energy!

Over the past decade, the world’s central banks have distorted the price of money by bringing interest rates to record lows.

With credit so cheap, asset prices have risen dramatically as companies and governments have borrowed to the hilt.

And now with the “Everything Bubble” threatening to burst (perhaps in mid-bursting already?), we’re suddenly realizing that the phantom asset price gains were ephemeral, while the debts are permanent.

How will the economy cope with dangerously overleveraged nations, industries and households? Not well.

To discuss this massive problem and propose some potential solutions is Steve Keen, professor of economics at Kingston University in London and author of Debunking Economics:

The basic idea behind a modern debt jubilee is we've let far too much private debt accumulate by allowing the financial sector to exercise the rights of being able to create money without exercising the responsibilities that should come with it.

What they’ve done is do the brain-dead thing of funding asset bubbles because it’s easy to just give somebody money to buy a house. That causes the price of the houses to go up. And then you get nice large bonuses on that. And when the bubble bursts, who cares? You’ve already moved onto another company or you’ve taken out so much it doesn’t matter to you.

It’s been incredibly irresponsible lending not for producing physical infrastructure but for speculation on the price of assets which your own lending is causing. And then of course we’ve had all these people who used to be decent engineers and physicists becoming financial engineers, which is absolutely disastrous for our capacity to build our way out of the ecological crisis we’re facing.


Steve Keen: Actually, it goes way, way back because my interest in economics when I was an undergraduate student, when I was a school student and they asked me what I wanted to do in a vocational course. I said I wanted to do economics and engineering. There is no such combination so I was pushed into economics major instead. But I did engineering mathematics in my first year. So, I’ve always had a background in engineering and physical sciences and physics. It was only six years of lousy science teachers at a Catholic boys’ school that ended up turning me into an economist rather than a physicist. So, that’s not uncommon. I think it’s quite a lot of economists actually end up that way. But I was heavily influenced by the Limits to Growth which I saw as a bit novelist study of the actual interacting feedback systems that determine our physical economy and our ecology. And horrified to see economists like Northouse, specifically Nordhouse demolishing the credibility that incredible study. And I’m denigrating people like Jay Forester in the process. So, I’ve always wanted to bring energy in and I’ve always been dissatisfied not just with how economists ignore energy completely, so mainstream economics and post Keynesian for that matter. Both model protectionist involving labor and capital with no energy. But even people who try to bring energy intended to add it as a third factor of production.

And that never jived with me because if you are using a neoclassical what’s called Cobb-Douglas production function you have labor, capital and energy as three independent inputs. You can set up the parameters so that energy has zero role or if you set it up according to what’s called the cost share theorem which the–the coefficient was raised to a power these different independent inputs to give you constant returns. If you double inputs, you double outputs. So, a sensible constraint on a mathematical model of production.

If you set according to the share of energy in the GDP, you get a sick coefficient for energy at about .07. Now, that means if you do the mathematics of a Cobb-Douglas production function–if you cut energy by 90% GDP would fall about 10 and that just was complete nonsense to me. So, I was always trying to bring it about to say I wonder what this brings this in a fundamental way and the simple insight I got, which is within 10 minutes I turned it into an explanation, both what made the complex function appear to work and what was the weakness as well--labor without energy, is a corpse. Machinery without energy, capital without energy is a sculpture. Both need energy to turn, to create. And so, what you have is rather than energy is independent input to the on an equal footing with labor and capital. Energy is an input to both labor and capital, without which they can’t function. And then you get a much more realistic picture where energy plays a critical role in the production of anything. And of course, we are having energy you never convert according to the second law of thermodynamics you can never convert all the energy into work, unless you live in a part of the universe which is at absolute zero. There is no such place. Therefore it all has waste being generated. So, once you have energy as an essential input into production you also say should I waste energy which fundamentally takes the form of waste matter in our production system. Of course, essentially–importantly but not essentially–only being C02.

You have a direct link between economics and ecology. So, that was something I did about three years ago, and I’m now following that argument to rewrite economics from the ground up so it starts with energy as the fundamental input and fundamentally sees GDP as useful work.

Click the play button below to listen to Chris’ interview with Steve Keen (59m:55s).

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This is a companion discussion topic for the original entry at

Is my math dumb or I don’t understand the math at cost of a house $ 250,000.00-80% =$200,000.00 in my account ! how dose that work? Don’t get me wrong $140,000.00 sure look good in my bank! my math is dumb.I think i will keep paying it down the hard way. The bankers would never do that!

I once took a tour bus in Scotland to see some of the historical sites and learn about their unique history. The driver (who was also the tour guide) his Scottish brawl was so thick I could only comprehend about every third word. This podcast was similar, I found myself going, wait what did he mean. What did he say. So much intellect, a lot to share in a short amount of time! Will have to listen multiple times.

“What I see is a predator that is eating not just the prey but also the prey’s food and that doesn’t end well. And that’s what really scares me about the extent to which this is ignored in economic theory and therefore ignored in policymaking.”
Amen to that!

“What I see is a predator that is eating not just the prey but also the prey’s food and that doesn’t end well. And that’s what really scares me about the extent to which this is ignored in economic theory and therefore ignored in policymaking.”
Amen to that!
To me, Capitalism has become more like the “the snake eating it’s own tail”.

Greek economist (and former Finance Minister) Yanis Varoufakis has spoken about the ecological consequences of unrestrained capitalism. So that train of thought actually IS getting out there into the (somewhat) mainstream media, albeit with still some way to go.

“Why would the ordinary person want rising prices?“
Lengthy description follows …
“The end product that was always in economy was zero GDP. It is just overruns everything and nobody produces anything.“
Sooo don’t we already have zero GDP? Don’t we currently produce nothing… but debt. And debt us not productive.
This was as clear as mud! Anyone want to explain?

“Why would the ordinary person want rising prices?“ Lengthy description follows ….
I'm not sure I can add any clarity. I ask the question of economists because I'm seeking an answer that goes like this, "People don't need or want inflation. Heck, the world got by for thousands of years without any baseline inflation at all. The banking system, however, configured as it is around debt-based money absolutely needs inflation. You see, without this mysterious inflation phenomenon occurring there's a danger of the credit machine stalling. Once that happens it's rather cataclysmically revealed that there never was any way to pay back all that debt, credit markets dry up, banks go under, and all of the fake jobs supported by ever climbing credit aggregates go poof!" Put plainly; banks in a debt-based money system need inflation, people don't. While it's true that many people are "productively employed" because other people are pulling consumption forward by using debt, it's also true that this is not a sustainable system. Eventually there has to be a clearing, a reckoning, a jubilee. Until that day inflation helps to keep that truth under wraps.

There is no easy way out. Keen is just guessing. This goes against Nature.

I’ve followed Steve Keen for years. He’s far ahead of the intellectual dwarfs in the economics faculties of our colleges. I’m not surprised that he’s now encompassed the climate emergency in his thinking. Smart people accurately identify threats.
I contrast this with people like Mish Shedlock, Kerry Lutz, Martin Armstrong, Jack Spirko and others, all of whom pooh-pooh the climate issue or claim it’s a conspiracy.

“Why would the ordinary person want rising prices?“
Wait, that's easy. Because ordinary persons are in debt much of their lives. Aka, student loans, home loans, cars loan, etc. After 10 years later with 2% pay raises, that 30 year mortgage is smaller potatoes. Later in life we stop taking on debt. Sure at that point we would not mind some deflation.

Chances are, our lifestyles are going to go through a simplification over time. I would hope it doesn’t happen over too short of a period of time, I think everybody needs time to adjust but probably most won’t change their habits. They’ll just go screaming to their government official demanding more free stuff and subsidies. Did you see in one of the Democratic debates, when asked by the moderator who’s plan included health care for illegal immigrants? They ALL raised their hands! Hello, they’re ILLEGAL, and they don’t have a problem with that. I see most politicians as short sighted, self serving adolescents that are hoping to secure their future retirement by hand waving, lying and over promising at we, the taxpayers expense. Where I live there is a district Senator that lost her job and was replaced because we the people are tired of her reckless, misdirected spending. How does the government treat such employees? By giving her $85,000 a year, full medical and dental insurance for the rest of her life as her pension for being a “Public Servant”. If you don’t have a skill that someone wants, needs or desires, don’t expect government employment to be your future. That is a financially non-producing lifestyle for society. That is 100% consumer. Paying taxes on money that was taken from a privately employed working individuals taxes is not being a producer, no matter how you justify it in your mind.
I would have to disagree with Steve with his idea that the government needs to create the money and give it to the firms to build the _ _ _ _ _ for the New Green Deal. Remember “Solyndra” under the Obama watch that got all that money? No? Let me give you a hint, a lot of people got cars, boats, houses, vacations, and still have them, and nothing got put to use. Bankruptcy. With our current technology, solar panels are not efficient for large scale application. Our electrical grid cannot regulate and handle the rapid fluctuations in voltage caused by full sun then cloud cover. In 20 years they are diminished in capacity that will require replacement. How many hours a day do they work, even in places like Las Vegas? I think the number for max output is 4 hours a day. How are you going to generate electricity the 20 hours they are not putting out maximum output? Batteries? The numbers are beyond comprehension for the amount of money and area it would take to even dent the current demand for our consumer lifestyle. 3 blade wind turbines? Inefficient. Why isn’t Boeing using propellers. 95% of the wind goes though the blades of a wind turbine, only operate within a narrow band of wind speed, the massive weight of the blades limits their usable life cycle, when they fail, there is no money to pay for repair, and now that there are no government subsidies for installing them, nobody is installing them. Why would that be? BECAUSE THEY DON’T PRODUCE WHAT THEY ARE CLAIMED TO PRODUCE.
I’m not sure what he assumes climate change to be. Climate change is normal. How could millions of Woolly Mammoths have lived in Siberia if the climate hasn’t changed since their extinction? If it is the pollution that is destroying the environment, then yes, existential threat. Serious threat created by the race to consume, extract, build, repeat. Maybe there could be the option for those of us that aren’t under the debt pressure because of poor financial choices in life, to opt out of this consumer driven habitrail. Let me keep my $5500 a year in property taxes that is being, in my opinion, wastefully spent. Or the $3600 in social security taxes taken out of my paycheck. I don’t want the government to spend my children’s future on “The New Green Deal”.
How would giving people money to lower their debt change their lifestyle so they don’t find themselves in the same situation 10 years later? If I got an injection of cash, the last thing I would want to be forced to do with my money is to buy shares in companies to lower or cancel their debt. The system is broken. The social contract has failed and only serves the few. Rapid regression is near. A culling of the herd is coming and people need to plan for that hard truth.
Just a thought from outside the psychological straight jacket.

yes, the climate changes but the rate of change is unprecedented.
if you think 7.7 billion human yeast, breeding 1,000,000 more every 4.5 days, living on massive carbon footprint, non-negotiable lifestyles, powered by burning 100 million barrels of hydroCARBON fuels every day = 410 ppm of co2 increasing at a phenomenal rate of 3 ppm/ year is just normal background change, then i have to ask you…
were you born stupid, or did you take classes?

Wait, that’s easy. Because ordinary persons are in debt much of their lives. Aka, student loans, home loans, cars loan, etc. After 10 years later with 2% pay raises, that 30 year mortgage is smaller potatoes. Later in life we stop taking on debt. Sure at that point we would not mind some deflation.
Travis, of course the usual caveats apply. 1 - As long as our incomes are rising faster than inflation, of course, because otherwise that mortgage value isn't really helping out too much. 2 - As long as the home price appreciation is at least the rate of inflation and 3 - We haven't taken out an adjustable rate mortgage of any sort that then gets pricier as inflation hikes rates...  

… and works to eslave those who had not been enslaved. It’s taking assets from those who are not endebted, and giving it to those who are.
umm… that’s part of why it has been so hard for me to get forward, even without debt.

for your concise explanation… I find it quite gratifying to live with a footprint of .9… (How’s that for virtue signaling?)

"1 – As long as our incomes are rising faster than inflation, of course, because otherwise that mortgage value isn’t really helping out too much."
Income only has to increase at the same rate as inflation for the relative cost of the mortgage to shrink.

QE is a Debt Jubilee, using the valve of currency to bail out debtors. FWIW: Debt started blowing out of control when interest rates were dropped. High interest rates would have kept debt levels in check (avoid excessive debt binges) and also make it easier for investors to recover loses.
Once a debt Jubilee happens it will simply open up the flood gates, as everything goes on a bigger debt binge knowing that at some point they’ll get bailed out. I think investors will be reluctant to loan out money, presuming either the become the bag holder, or results in currency devaluation.
Bottom line there is no easy fix. No matter what policies are implemented there is going to be extreme pain.

“As long as our incomes are rising faster than inflation, of course, because otherwise that mortgage value isn’t really helping out too much”

  1. Wages have been falling for over 45 years. What makes you think this trend will break?
  2. Wage increases are inflation. When it happen wages never outpace living costs.
  3. When inflation takes off, Banks and other loan business will either raise rates very high or just stop lending, preventing & business & consumers from future borrowing (ie impacting home purchase, auto, etc).

I’ve been trying to engage with MMT lately first, with Michael Hudson and now Steve Keen. I’m more sympathetic to the notion of a jubilee than I used to be in the broad sense that the banking system got one already and turnabout is fair play. It is also reassuring that a jubilee would also hand cash to people who worked hard, saved and paid off their debt so they were not penalized for doing so. What I haven’t found yet is the reason why MMT theory says such overt money printing won’t wipe out the currency. Perhaps it is ignored like debt in the Keynesian models?