Episode 121 – What Marx Got Wrong with Steve Keen

Macro N Cheese – Episode 121
What Marx Got Wrong with Steve Keen
May 22, 2021

 

[00:00:04.210] – Steve Keen [intro/music]

Marx is more in tune with modern thermodynamics. He was actually reading the people who were developing thermodynamics as they were publishing their books. Marx was reading works on thermodynamics and understood the role of energy far better than his neoclassical and, indeed, classical rivals. So Marx had an appreciation of all of this, which made perfect sense in his use-value, exchange-value dialectic.

[00:00:29.860] – Steve Keen [intro/music]

I would love to see the flowing of the emotional hormones in Marx when he realized this because when he wrote that passage about machinery, I’m sure he realized, holy shit, I’ve undermined my arguments for the necessity for socialism.

[00:01:35.230] – Geoff Ginter [intro/music]

 Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.430] – Steve Grumbine

All right, this is Steve and this is Macro N Cheese. Folks! We’ve got a returning guest, Professor Steve Keen, a very good friend of mine. He had written some good stuff years ago, especially in this debunking book about Marx, in particular about Marx’s labor theory of value.

And for folks such as myself who operate in the MMT space, a lot of times talking with Marxists, whom I consider myself to be a kindred spirit, one of the most challenging things I’ve ever experienced in my life, bar none, and I’ve been divorced twice. There’s many – I don’t want to call it a religious belief, but there’s beliefs they can’t really tell you where they came from.

They know they’ve heard it. But when it comes down to it, when we attack those, when we can disprove aspects of the original Marxist theory as it pertains to today with current things, it’s almost an impossible reach to make that connection. And I think it’s such an important connection to make. So when I was reading Steve Keen’s book, I’m reading some of the articles out there on this and also some of the rebuttals to his article.

I felt this might be an important conversation to have, not only for myself, so I learn because I’m still learning, I’m putting my hands up in the air saying, “Hey, lead me through the forest like a small child.” But also for the average person out there who hears words like Marxist and proletariat and they hear other things, you know, like labor theory of value and surplus-value, and maybe they aren’t necessarily sure of what they all mean, and not necessarily sure of all the history.

So what we’re trying to do is make sure that we get somebody who really has done the homework to give us the lay of the land and bring this into focus for us. So without further ado, let me bring on my guest. Welcome, Professor Keen. How are you today, sir?

[00:03:52.340] – Steve Keen

Good to be talking to you again, Steve.

[00:03:54.440] – Grumbine

Absolutely. So hopefully I didn’t butcher that intro too much. I’m very curious, I guess. First of all, you took some great time to write about Marx and you basically took down the original context of Marx’s labor theory of value and talked to the surplus-value and the understanding of the role of machines and production. Why don’t you just take us through this and maybe even start back with a little bit of history, how you got to this point to begin with and maybe we can roll into the content?

[00:04:26.390] – Keen

Yeah, sure. The additional context starts with my days as an undergraduate student at the University of Sydney back in 1971 through 1975, and there are a whole range of curious historical reasons. That was the first place in the world that had a revolt against neoclassical economics. And it began in the late sixties when a professor from the University of Manchester, an economist, a Professor Williams, was appointed at Sydney University and promptly appointed two staunch neoclassicals to take over the department, which was what we call a pluralist economics department these days.

That was what Sydney was like before Williams turned up and installed Hogan and Simpkin, and they, in the middle of the year, completely changed the curriculum from a Keynesian style humanist, in a sense, approach to economics, to strictly neoclassical. General equilibrium was taught in the first year, et cetera, et cetera. It was a very, very heavy course and there was a student revolt against it which petered out between 68, 69, and 71 when I arrived.

And in 73, a dispute began in the Department of Philosophy of all things. And just to give a context to people. This is back in the days when the unemployment rate in Australia was one and a half percent. The economy was in a total boom. You would have had no fear about losing a job. What you did have a fear of was being conscripted to go and fight in Vietnam.

And so we made the foolish decision to join the Americans in one of their imperial ventures that they thought was liberation was actually fighting on the wrong side in a post-colonial war. And so that was the whole context, this huge amount of student revolt. And education was fully paid for at the same time. There was no worry about student fees. So that was the world we lived in.

And in 73, the professor of philosophy tried to block a course on feminist philosophy and the department called for students to go on strike. And that cascaded through into economics where we, first of all, supported the philosophers trying to get this course in feminist philosophy up. And at the same time that triggered all the frustrations over the economic course.

So we had a successful revolt against the teaching of neoclassical economics exclusively, and that led to the formation of a Department of Political Economy some years later. Now, in the aftermath of all that, in the summer of 1973, the leaders of these combined revolts – philosophy and economics – held a reading group on Marx. And that was my first exposure to reading Capital (Das Kapital).

And I began as a skeptic of the labor theory of value. There was a boom, a huge boom, in the economy in general, but in particular in Sydney, in commercial real estate and also high rise real estate, which was a new phenomenon in Sydney at the time. And if you’re walking along Sydney University campus, all you could see on the skyline, were what we call kangaroo cranes.

These are the big cranes that were invented, actually an Australian invention. The cranes you see building buildings all around the world were first designed in Australia. And I remember walking through with a colleague, going off to one of these reading groups. And part of the labor theory of value was that surplus value comes only from labor.

So machines add what they have as value, whereas labor adds more than the value that it contains to the product. And that’s all labor’s the only source of surplus, which becomes the only source of profit. I remember remarking to him like a bloody good explanation for Marxists why those cranes on the horizon over there aren’t adding value.

So what we did, we read methodically through Marx, from chapter one all the way through Capital. And in reading Chapter six, I found what I thought was a brilliant explanation for Marx around where value comes from, using the concepts of use-value and exchange value. And when I read this interpretation – to me, it explained that any input to production could be a source of value. So that’s where I began from and I could actually explain the logic there.

But that was my beginning back in 73, 74. And the response of my fellow readers at this reading group was to laugh at me and, I then didn’t go on to an academic career. I went on to become a school teacher, worked in overseas aid, a bit of computer journalism, ended up working in the public service in part of what’s called the Accord, which was a part of the Progressive Labour government.

They were trying to bring an agreement between labor and capital in managing the economy. And then finally after that, I went back to the university about 15 years later after I started my undergraduate degree and did my master’s and then in my master’s, I decided to go deeply inside Marx and work out how he developed his logic, both labor theory of value, initially, and then what I saw as a transcendence of that with his arguments about use value and exchange value.

And to do that, I read everything Marx ever wrote on economics in chronological order from the first writings, which was the Economic and Philosophical Manuscripts of 1844, which were Marx’s first readings of the classical economists, which he did, effectively living in a garret in Paris after being expelled from Prussia.

And then right through to the very last of Volume Three of Capital, which was the final thing, effectively, Marx wrote, that was published by Marx. And in the middle of reading it, I found where Marx had developed the philosophical extension of his thinking, which transcended the labor theory of value. And that’s what I argue in those papers and of course, in “Debunking Economics.”

[00:10:01.190] – Grumbine

So basically, you went back through every single thing. I got to tell you, I’ve got Capital and the thought I think is for you need a magnifying glass to read it. And as thick as my arm, it’s an amazing, huge tome. How does one go about actually reading Marx? What kind of pre-knowledge would you need to have to be able to even really, truly understand what’s being said in there? Is it something that someone could just pick up and start reading or just economics for the economics mind? Is this theoretical? Is it factual? Is it scientific? Because it’s so massive.

[00:10:41.110] – Keen

Let’s get one thing in clear straight away. I regard Marx as one of the greatest intellects in economics, probably the greatest. So I put him above Keynes, comparable to Schumpeter. I regard Schumpeter as an incredibly original thinker. And if I want to see my pantheon of great economists, it starts with Richard Cantillon, leaps to François Quesnay, jumps over Ricardo and Smith, and lands on Marx.

So it’t true to see him as a really great thinker. And at the same time, he was a poet, wrote some fairly good and sometimes fairly embarrassing love poetry in his early youth, to his love of his life, and was also training to be a lawyer. His Ph.D. was in law, not in economics. And he became a famous journalist. His major source of income was writing for The New York Times.

[00:11:27.200] – Grumbine

Wow!

[00:11:27.200] – Keen

So, and he could be incredibly tedious in pulling apart in forensic detail government reports at the time reporting into the state of the working class in England and a whole range of other issues. And there were parts of Capital which are just tedious to read through because it will be 40 or 50 pages of Marx dissecting a report from 1858 about the state of the working class in the United Kingdom as published in the parliamentary report.

So and there will be parts where it’s dreary beyond belief and other points about splashing insights. I mean wonderful, wonderful scatological prose. So if you’re able to read, then you can understand Marx, but you have to be able to read a gigantic intellect who can focus upon trivia at various times. But at the same time, there are flashes of great insight. And Marx also read all the classical economists himself.

He read everybody from Catillon forward. He read Petie. So he was a historian of economic thought, first and foremost. And that means you can actually read him without reading the others beforehand. But of course, it helps to read them too. So I am doing my master’s degree treaded full time while being a full-time member of staff, I might add. So I got a teaching job at a university full time, not tenured, unfortunately, that’s part of the story, but I was being paid full time to do my master’s degree.

So when it came to reading Marx, I knew that there was a flaw from having read Capital and having my unusual interpretation of Chapter Six of Capital. Well, then I’ve got to find where Marx got this insight about the role of use-value and exchange-value, and the only way to find it was read through chronologically everything he had written. And I found it on page 267 to 268, I think it was, of the Grundrisse in a footnote.

[00:13:17.380] – Grumbine

I’ve never even heard of that book. In terms of Capital, you’ve got the Communist Manifesto, you’ve got the Eighteenth Brumaire, you’ve got a number of things. I’d never heard of that. Where does that fit chronologically in his writings?

[00:13:33.720] – Keen

Well, it starts in 1857, and the Grundrisse, I can’t pronounce it properly and they’ll probably translate it badly as well. But I think it’s German for rough draft. So in 1857, Marx was of the opinion the revolution was about to occur and so he decided to go back and reread all the classical economists so he could write the definitive theoretical text for the revolution, which ultimately became Capital Volume One published in 1867.

And my vision of him and I really see him as a human being, that is, not the god that a lot of Marxists talk about and then getting off with his carbuncles to go and sit in his seat. I think was the British Museum or the British Library, I’m not sure which one I should have visited when I was in the UK and I never did one of my great failings.

But he was just sitting there and reading, reading, reading all the originals. And the reason the Grundrisse was so important is that if you go back to when Marx first read the classical economists, Smith and Ricardo in 1844, he came from the position of a philosopher and a poet, and he was incredibly critical of both Smith and Ricardo because he saw them as being dehumanizing.

So a large part of what you read in the economic and philosophical manuscripts of 1844 is him being disgusted by the way that neoclassical economists reduce most of men in general to an autonomaton in the production process. And he called it strictly dehumanizing. But by the end of the manuscript, he started to be convinced in the logical work, particularly of Ricardo, and what he saw was Ricardo had an explanation where profit comes from, which Marx thought was inadequate.

And because he simply assumed that profit would come out of the production process, then both Ricardo and Smith used labor the amount of time it took to produce something as a measure of its value. So Smith argued that if a deer cost twice as much as a sheep, then it was to take twice as much time to capture the deer as to process the sheep.

So it was a strict labor theory of value, but I couldn’t find where profit came from. And Marx said, well, what’s going on is when a capitalist buys a whole range of inputs for production, when he buys labor, what he pays is the means of subsistence. He pays a worker enough income for that worker to be able to stay alive. And that might take four hours, let’s say, to reproduce the means of subsistence for a worker. But the employment contract means you’ve got to work for eight or 12 hours, was 12 hours a day back in Marx’s time and six days a week.

So the time above the time needed to produce the means of subsistence was a surplus that accrued to the capitalist. And that was what Marx used the explanation where surplus came from, where profit came from, and therefore that was also the foundation of his argument that there was going to be a tendency for the right of profit to fall because Marx saw a tendency for capitalists to use more machinery over time, which didn’t produce a surplus relative to labor, which did.

Therefore there was a tendency for the rate of profit to fall. He had seven countervailing factors behind that, but fundamentally that was the fulcrum on which he argued for the inevitability of socialism because with capitalism driving the rate of profit down by increasing technological overweight  of machinery to labor over time, that means a diminishing amount of profit.

The seven countervailing factors would ultimately lose out. Capitalists would start to batten down on the workers to increase the level of exploitation that would lead to a revolution, and then you have socialism. So that was his perspective in 1857. But then he went back to read all the originals and pardon me for going on too long here.

[00:17:11.520] – Grumbine

Oh no, not at all. You’re doing great.

[00:17:14.610] – Keen

1. Because Marx was a leader of the international, it had rivalry from the anarchists, Proudhon and Kropotkin I think were attacking him as well over the whole international. Putting the 1850s in context, I see the state of industry and living conditions in England as similar to India 20 or 30 years ago, in the worst of what you’d find in a suitable boy, the pollution, the extremities of the capitalist, pressures on the workers and so on.

And remember, Marx and Jenny moved out of Chelsea at one stage because there was a cholera outbreak. So you’ve got to put yourself in that context and see the strength of the working-class reaction to the situation they found themselves in at the time. Anyway, so in the middle of all this, Marx was one of the leading intellectuals, the leading intellectual, the only rivals coming from the anarchists and a colleague, I think it was Otto Brayer dropped in to visit Marx in 1857 with a copy of Marx’s own copy annotated copy, I think of Hegel’s Philosophy of Right and Marx having read Ricardo and Smith back in 1844, developed an explanation for profit which they themselves didn’t have after that.

He became like another version of Ricardo. Samuelsen used to call him a Ricardian Socialist, highly sophisticated but he almost dropped the philosophical logic that he’d built up when he was studying under Hegel’s successors back in Germany when he did his Ph.D. in law. And in 1857, he’s re-exposed to Hegel’s dialectics. And when I’m reading the Grundrisse, the section after which he’s reread Hegel as well is definitively different to what went beforehand. And in the same sense, you know, Hunter S. Thompson, of course. Hunter S. Thompson.

[00:19:00.530] – Grumbine

Yes, absolutely.

[00:19:02.720] – Keen

Well, you know, you could tell which drug he smoked. Was it mescaline? Was it cocaine? Was it marijuana? You know, you could pretty much tell depending how much consumption you’ve taken, that’s what he’s on at the moment. Well, it was a distinct shift. Suddenly he started to speak in Hegelian terms, talking in terms of dialectical pairs.

And one thing which the classical school was very, very different about compared to the Neo-classicals is that the classicals – Marx, particularly Smith and Ricardo – saw no role for use-value, as they called it, not utility, but use-value in political economy. So they would say that the commodity has to be useful, has to have a use-value so that it can be purchased. But the use-value plays no role in setting its price.

Now, this was in contrast to Jean-Baptiste Say who was a proto-neoclassical who said that the utility is what people pay for and the neoclassicals have built on Say and say that the price is determined by the coincidence of the marginal utility of a product with the marginal cost of producing it. And now so Ricardo and Smith were emphatic that use-value plays no role in setting price and therefore use-value had no role in their economics.

And that’s effectively what Marx also developed and said use-value plays no role in the political economy. But in reading Hegel, he started to talk in dialectical pairs and the classical school talked about the use-value of the commodity and the exchange value of a commodity, dismissed the use-value and said the exchange value comes from the time involved in producing something.

So that’s where the labor theory of value and measuring capital in terms of labor time as well to make capital that became the way of thinking. But here’s Marx talking in terms of dialectics. And then I want to quote the entire footnote. I still remember the moment that I found this footnote where I was, I was actually in my ex-wife’s parents’ house in the northern New South Wales town of Mullumbimby, just off from a town called Byron Bay that you might know.

Crocodile Dundee lives in the area. So here is Marx. I’m reading this on the drafting table of my ex-father-in-law’s. He was actually an engineer. The drafting table he had in the garage where they stored all the farm equipment. But here’s the quote: “Is not value to be conceived of the unity of use-value and exchange value. In and for itself is value as such the general form in opposition to use-value in exchange value as particular forms of it?”

I’m going to read this out. “Does this have significance in economics?” Now we’re going to move away for a moment here and just comment. The Grundrisse was Marx’s rough notes. It’s the stuff he was writing down as he read through all the various literature that he was rereading to get prepared to write Capital. So it’s just like, these were never meant for publication. When he wrote, “Does this have significance to the comment to the question in and of itself?”

And then you said, “Use-value presupposed even in simple barter, exchange or barter.” I’ll jump over these very verbose, as you know, being more verbose even than me at the moment. But he finally says, “If only exchange value as such plays a role in economics, then how could elements later enter which relate to use value, such as right away in the case of capital as raw material, etc.?

How is that the physical composition of the soil suddenly drops out of the sky in Ricardo?” So he’s suddenly saying. “We’ve neglected the role of use-value here. We have to take use-value into account,” and then he says again, this is a footnote which goes on for one and a half pages.

[00:22:33.679] – Grumbine

Wow!

[00:22:35.320] – Keen

“The price appears as merely a formal aspect. This is not in the slightest contradicted by the fact that exchange value is the predominant aspect,” blah, blah, blah, blah, blah. Then he says, “In any case, this is to be examined with exactitude in the examination of value.” He obviously wasn’t writing for publication and “not as Ricardo does to be entirely obstructed from nor like the dull Say he puffs himself up with the memories of his vision of the word utility.

Above all, it will and must become clear in the development of individual sections to what extent use-value not only is presuppose matter outside economics and its forms, but to what extent it enters into it.” And so he’s now saying I’ve got to use use-value and exchange-value as dialectical pairs to derive the labor theory of value. Ok?

[00:23:21.310] – Grumbine

So I’ve heard you bring up Say many times. Is this the same Say that would be of Say’s Law?

[00:23:27.400] – Keen

Oh, yeah, absolutely. Yeah. And the one of the crazy things about Ricardo is that Ricardo had a classical theory of value in which utility played absolutely no role. And he was a correspondent with Say. They were good friends corresponding from different countries. And Say’s Law was based on a utility maximization view of capitalism. Now Ricardo adopted Say’s Law with a totally in contradiction to his own theory of value.

[00:23:52.710] – Grumbine

[amused] Seems like a lot of them are adopting things that go against their own philosophy. [slight laugh]

[00:23:56.930] – Keen

This is what happened with Marx because what he was doing was creating use-value and exchange-value as a Hegelian dialectical pair. And here, by the way, if I mentioned the word dialectics, what phrase comes to mind for you?

[00:24:09.500] – Grumbine

Opposites.

[00:24:12.180] – Keen

Yeah, but there’s actually there’s a way of expressing it: thesis, antithesis, synthesis. You know that one?

[00:24:18.110] – Grumbine

Yes. Yes.

[00:24:19.010] – Keen

1. I was reading through Marx. I knew that was what people called the dialectic. I was reading Marx and I said right from what he wrote in 1844 , and I’m getting up to 1857 here, and not once did I see him use those expressions. And I always thought thesis, antithesis, synthesis was first of all bloody hard to pronounce properly. And secondly, just didn’t seem… it had no real logical content to me as a way of being able to discern his thesis, antithesis, synthesis.

You could do anything with that. And one of Marx’s great reads is called “The Poverty of Philosophy” because it was a reply to the anarchist Proudhon, and Proudhon and Marx had met in Paris, I think in 1844, or right after 1844. Marx was trying to teach Proudhon political economy. And as a result of that, Proudhon wrote a book called “The Philosophy of Poverty.” And what Proudhon used in that was the thesis, antithesis, synthesis crap, which actually is not at all Hegel.

That comes actually from another German philosopher called Fichte. I’m sure I pronounce the word wrong. So that’s the stuff that Proudhon used in what Marx refers to as the Misere, Poverty of Philosophy. And it is not at all the way Marx thought. What I realized was that Marx and by extension Hegel, where he got the idea, didn’t talk about thesis, antithesis.

He talked about foreground and background. And the idea was that anything like a human being, a commodity, a social structure is in itself what Marx called a unity. But that unity doesn’t sit in isolation from anything else. That unity will be embedded in society. And society will focus upon one aspect of that unity, which is the foreground, and therefore it puts the remainder of the unity into the background.

Now, if you’re focusing on something and you make it the foreground of whatever unity you’re looking at, the background still exists. And there’s a tension imposed on that unity by the fact that society is emphasizing the foreground and putting the other stuff into the background. So there’s a tension between the two. So you have foreground, background, and tension, and that to me made far more sense.

That, to me, was a way of putting a whole lot of elements of social change into an understandable framework. So I loved the idea of foreground and background, and that’s what Marx is using here. So he’s saying that the use-value is the predominant aspect. What he’s saying is a commodity is to have both exchange value and use value.

Now, if you put that commodity in an ancient society, like, for example, ancient China, I’m going somewhere with this and it’s all focused on you got the emperor at the top and everybody else down below. Then what matters to the emperor is the use value, what it provides, and who cares about the exchange value.   So I took a bunch of journalists for a tour of China in 1991, I think it was.

And we were walking through the Forbidden Palace and in the palace, there was an object that still had all the artwork still inside it when I went through, which was about I’d say it was about the length of your arm. Just imagine your arm basically and bend over your hand as much as you can, bend the hand and the fingers. And that’s what the object was.

It was made of solid gold, about one and a half foot long sort of handle at one end. And then on the face could be measured with your fist. The fingers studded with rubies, emeralds, diamonds, you name it. The diamonds would have been up to an inch wide. Ok, looking at one hell of an object. And one of the journalists said, “What do you think it is, Steve?” “Oh, it’s obvious. It’s a backscratcher.”

[00:27:49.010] – Grumbine

Hahaha.

[00:27:51.290] – Keen

She caught up with me after. “Steve, I asked one of the guards. He said you’re right. It is a back scratcher.”

[00:27:58.580] – Grumbine

[laughter]

[00:27:58.580] – Keen

So that’s where the use-value is the predominant aspect and exchange rate – who gives a shit about the fact that it costs an absolute fortune to make this thing. There’s only one of them on the entire planet.

[00:28:07.120] – Grumbine

A back scratcher. [laughter]

[00:28:10.070] – Keen

Yeah, ok, it’s a back scratcher. Now a back scratcher in capitalism you buy them from Australia, we call it K Mart, you call it god knows what. I pay fifty cents, it’s made of plastic. So the exchange value in capitalism, the predominant aspect of a commodity is its exchange value, but its use-value still has to exist. So there’s a tension between the two.

So exchange-value is the predominant aspect, use-value in the background. There’s a tension. And that was the way that Marx now approached the question of where does value come from. So he said, “Well, let’s look at the commodity labor. What matters in capitalism is its exchange value and that’s what determines its price.

So its exchange value sets the price of labor and that exchange value is the cost of subsistence, that’s what you have to pay a worker to get that worker to come and work for you, but the worker has use value and this is going to be a big sin for any Marxist listening. It’s a quantitative use-value. Marx normally talked about use-value being qualitative.

So the use-value of a chair to Marx is that you can sit on it, not how comfortable it makes you feel, which is the neoclassical subjective utility. To Marx it was an objective utility. The utility of a chair is you can sit in it. The exchange value is the cost of buying the chair –  same thing for labor. But in the case of labor, the purchaser doesn’t care about the qualitative aspects of labor. He cares about the quantitative aspects.

So the use-value of labor in the production process is quantitative and you have a quantitative exchange value as well so that you have to pay six hours of labor time effectively to hire a worker and you can get them working for 12 hours. The six hours is the exchange value. The 12 hours is the use-value. The gap between the two is surplus-value.

Now, Marx was absolutely triumphant when he worked this out. It’s all done in the Grundrisse not long after the passages that I’ve quoted. And he was absolutely proud of himself that he’d derived the source of value, not by talking in terms of labor time and power and stuff, but exchange value and use value. His greatest intellectual dance was doing that. But I looked at it and thought, this is brilliant. It works. And exactly the same logic applies to machinery.

The exchange rate, machinery, cost of production, the use-value, the amount of commodities it can churn out. Marx emphasized the use value and exchange value were incommensurable. There’ll be a difference. Both of them can be a source of surplus-value. And that’s what I spouted out in my Marxist reading group back at Sydney University in 1973, 74 and got laughed at by my Marxist friends, which is why I decided to study Marx in my masters when I went back to the university.

[00:30:58.030] – Intermission

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[00:31:47.360] – Grumbine

So we’ve gone through time. You see, the early neoclassical economists had ideas and people built on those ideas and changed those ideas and eventually found those very eras that they had baked in. And they altered the theory to change the model to be more reflective of what they thought was reality.

I guess my question to you is, in Marx’s original labor theory of value, have you seen anything change in Marxist thinking – other more modern Marxist thinkers perhaps that have taken a different angle at this and maybe have modified it or changed it to make it more realistic or incorporate the machine use and so forth?

[00:32:32.310] – Keen

No, what I’ve seen is the rigid and frankly, religious hanging on to the idea that machines produce no value. That’s become a religious belief in Marxists. And so when I apply this logic and say the use-value, exchange-value analysis is any input production can produce a surplus, what that does is it undermines the whole idea of a declining rate of profit because the central argument behind the tendency for the rate of profit to fall was that you only got surplus out of labor.

So if you had a high ratio of machinery to labor, you got a lower rate of profit. Now, if I say according to Marxist philosophy, any input to production can produce a surplus in value terms, then there is no tendency for the rate of profit to fall. And what I see in Marx was a realization of that when he first realized the role of this use-value, exchange-value analysis and explaining where profit comes from.

He applied it to machinery. And just give me a moment to find the particular phrase in Marx’s Grundrisse where he again applies it to machinery. Here we go. Here is the quote, first of all, Marx uses the use-value, exchange-value dialectic to explain that labor is the source of surplus value, then he applies it to machinery. This is on page 383 of the Grundrisse. This is the Penguin edition.

[It also has to be postulated] in brackets, [which was not done above] closed brackets that the use-value with the machinery significantly greater than its value, i.e. that its devaluation in the service of production is not proportional to its increasing effect on production. Now, that’s correct, that’s logically clear, he’s right, OK? What he did in the labor theory of value was identify the depreciation of the machine with its contribution to production.

What he’s saying here with the use-value, exchange-value, by logic, is that the use-value of the machine can be greater than its value. And that means, therefore, the machine is a source of surplus-value. Now, as soon as he did that, he started backpedaling, trying to find a way to make his previous logic about labor being the only source of surplus consistent or appear to be consistent.

And this is where the huge amount of waffling and handwaving, particularly in Capital itself, which is still a generation or two or five, six generations of Marx. But fundamentally, Marx contradicted his own logic to hang on to the labor theory of value. And the main reason for that is without labor theory of value, and essentially the argument that capital does not produce surplus, then that basically sterilized the argument that there was a tendency for the rate of profit to fall.

And that was the basis of Marx’s scientific socialism. And he simply couldn’t give it up. And his followers have continued and preserve his mistake rather than the great logical advance he made with this dialectic between use value and exchange value.

[00:35:30.250] – Grumbine

So what would you say is the contribution at this point? Clearly, we see an insane balance in the world today. The balance of financial capital versus actual productive capital. And then the rest of us plebes down in the bottom struggling. The wealth gap is just outrageous. And that has to come from some form of surplus-value.

Lots of surplus value that’s being siphoned straight up to the top. So how does one process what you have previously – and are now bringing to the floor – identified in the problem of his labor theory of value in present day terms with an understanding of a modern money economy?

[00:36:15.670] – Keen

Well, for starters, I mean, the capitalists exploit not just labor, but machines as well. OK, in some ways the labor theory of value was saying, well, you can only exploit labor. And therefore, in that sense, capital is subservient to labor because if labor doesn’t produce surplus, there’s no profit for the capitalists.

[00:36:31.000] – Grumbine

Does it not exploit all the natural resources everywhere as well?

[00:36:36.260] – Keen

Yeah, and that’s the most important element, which, again, you can find Marx being aware of this and very aware that the labor theory of value got in the way of understanding this properly because he actually also said that they make a surplus out of energy. And in this sense, Marx was more in tune with modern thermodynamics.

He was actually reading the people who were developing thermodynamics as they were publishing their books. Marx was reading works on thermodynamics and understood the role of energy far better than his neoclassical and, indeed, classical rivals. So Marx had an appreciation of all of this, which made perfect sense in his use-value, exchange value dialectic.

Because when you think about what is the exchange value of an undeveloped mind and actually Marx sends up Ricardo on this front and says that according to the labor theory of value, the exchange value of an unexploited mine is zero because no labor’s gone into producing. There’s no labor input into producing an unexploited mineral resource, then its exchange value is zero.

But that’s not what you pay for it. You pay for what he called the prospective use-value, the expected value of that resource. That’s what you pay for. And therefore the price will be greater than the cost of production. But what you’re taking advantage of is the free energy. So there was an incredible richness in Marx, but to actually properly employ that richness in analyzing capitalism, he would have had to accept that he disproven the labor theory of value when he applied this use-value and exchange-value dialectic to it.

He couldn’t do it. I would love to see the flowing of the emotional hormones in Marx when he realized this because I’m sure when he wrote that passage about machinery, I’m sure he realized, “Holy shit, I’ve undermined my arguments for the necessity for socialism.” And that was such a big thing, he couldn’t do it.

[00:38:34.760] – Grumbine

Let me ask you a question, because I view socialism at a more simplistic level, being just sort of like a spectrum in the range of balance between capital and labor. And we’ve seen a million slices of variations of socialism and Marxism. We often see people trying to make everything about Eugene V. Debs. They try to model an industrial world, whereas today is a very different world.

And so when you say socialism, I’m trying to understand because I understand labor theory of value has been basically, as it was written, debunked. And I believe a lot of socialists out there, at least the leading thinkers as opposed to the lay people are on that path as well.  I guess my question to you is – within that sphere of balance of capital and labor, I don’t think that you’ve necessarily disproven socialism per se. So explain that better for me.

[00:39:37.860] – Keen

Socialism to Marx was a case of overthrowing the capitalist class. But when you look at what he was talking about in terms of socialism was what we call democratic socialism today. He wanted to have electoral control for a start. He also wanted to have public health, public schooling, et cetera, et cetera, all the stuff that Social Democrats have campaigned for in Europe, in particular, was what Marx in many ways when he envisioned socialism that’s what he saw.

But he also didn’t have private ownership of the means of production. He saw that as being collectively owned as well. And the main thing about Marx was, in terms of socialism he saw it as being an overthrow of the capitalist system, which was a necessity, because of this tendency for the rate of profit to fall. Now, what people mean by socialism today is the sort of democratic socialism, public health, public schooling, to some extent, public ownership of some major industry but private control of others.

That mixture is what people mean by socialism today, and that’s what I mean by socialism today. But Marxists or socialism meant complete overthrow of capitalism and that the public ownership of all means of production. And I find my dealing with Marxists these days. I’ve actually seen and examined some Marx Ph.D. theses which I passed, I might add, even though I disagreed with the underlying argument.

But when I find myself confronting them, they hang on to this tendency for the rate of profit to fall, and the only way they can get that is by saying labor is the only source of surplus and it’s become a religious thing, particularly people like Andrew Kliman of what’s called “The Temporal Single System Interpretation of Marx.”

So I just see them as being unwilling to accept that Marxist philosophy overthrew the labor theory of value because like Marx, they are hanging onto this idea that complete public ownership of the means of production of socialism is an inevitable historical tendency, which it manifestly is not.

[00:41:36.000] – Grumbine

Understood. So one of the things that I like about your economics – and we’ve talked about this previously, but I think it plays into this – is the inclusion of energy and the inclusion of oil

[00:41:49.020] – Keen

Yeah.

[00:41:49.020] – Grumbine

Into your economic models. And what I see is many don’t even weigh in any of that. And so – I’m going to use a word just for the purpose of making an effect – a more complete socialism would include the use of those real resources because you can rent a plot of land, but in reality, as soon as you die, property rights are transient. We have a lot of different rules and laws throughout history that have changed, defining what private property is versus what public is.

And we all live on this rock and the natural resources on this rock are really required to save us from total annihilation, in many ways. We have to have a shared sense of purpose. So I see a large modern view of this that maybe doesn’t look exactly like the Industrial Revolution or prior, that it would be in a more green world where we’re looking at real resources. Would that be a fair statement?

[00:42:49.650] – Keen

No… I’ll bring you back to the philosophical stuff first of all, and then talk about what a future society is going to have to be like, I think, and not the labor theory of value reason but ecological ones. Firstly, when you understand the role of energy, then the whole argument about the surplus evaporates because in the laws of thermodynamics, there’s not a surplus, there’s a deficit.

And this is where Marx had his head around some of this because the people who were developing thermodynamics were people he was reading. He actually went to some lectures on thermodynamics in London as well. And not that they were full, but we went to lectures at the Royal Society and heard some of the originators talking about the developing ideas of the laws of thermodynamics.

And one of the most important is the conservation of energy. You can neither create nor destroy energy. So the amount of energy we find in the universe is a constant, thats the first law. The second law, it’s very hard to express in simple terms. The fundamental says energy degrades over time. You start from high-frequency energy. You transition to low-frequency energy over time.

And the second law of thermodynamics is called also the law of entropy. And that says disorder rises over time. And the simplest illustration, if you manage to squeeze all the air in a room into a ping pong ball and then you prick the ping pong ball, then that is going to fill the entire room very rapidly. And the state where all the air is inside a ping pong ball is highly ordered, whereas the state with the air is dispersed through the entire room is relatively disordered.

There’s a tendency to go from this concentrated state to a dispersed state. Well, the first law means there’s no such thing as a surplus. The second law means that there’s actually degradation over time. So how do you make a profit? Well, fundamentally, because we find this energy in the universe free. The fact of Marx’s argument about a mine, the minerals are there, regardless of humanity’s use or not.

We simply exploit that and we then are exploiting free energy and turning it into work, creating waste in the process. What we’re battling over as worker and capitalist is a share of the energy we’re converting into useful work. And that becomes the new focus of a proper biophysical economics which could have arisen out of Marx’s logic. It’s the great tragedy is that Marx didn’t think of this 150 years ago because he had the foundations for it.

So you start by having a view that there is no surplus, ok? There is exploitation of existing energy to turn it into useful work, and as in the social systems we’re in, we struggle over the portion of that between returns to the owners of capital and returns to labor. And that, to me, is the foundation of explaining capitalism and profit today. You’ve got to tie it up with thermodynamics and energy.

And then in terms of where we’ve gotten to ecologically because we’ve ignored the second law of thermodynamics, the necessity of creating waste, the fact that to actually exploit energy, you must have waste energy because you can’t convert all energy into useful work unless you can dump the waste from the process that’s exploiting the energy into a spot in the universe where the temperature is absolute zero and there’s no such spot and the temperature of the earth is about 300 degrees Celsius above absolute zero.

So there’s a lot of waste energy. And also, of course, waste products are a necessary part of production and we’re dumping all that into the ecosphere. And we’ve dumped so much that we have now overruled the sustainability of the biosphere. And that’s the price we’re going to pay in the future from climate change and degradation of the environment.

So if we’re going to have a society that functions after that, we have to constrain how much we can exploit the energy and the reproducible resources of the planet and how much we reserve for ourselves versus what was available to the other life forms on the planet that aren’t part of our production process. So I think we can’t have just the individualistic capitalism of the past. We can’t have unconstrained capitalism.

We have to constrain humanity’s footprint on the planet, something which leaves a large percentage of the planet, other species outside our social system. And that means you have to have a constrained version of capitalism. You can’t have let it rip what Baumol called cowboy capitalism anymore. We’re now on Spaceship Earth and we have to treat it as something where we have to reserve some parts of that system for the use of other life forms that are not part of our social system.

[00:47:24.290] – Grumbine

When we talked a few times ago, one of the things we discussed was the breakdown in the supply chain through this pandemic. And it becomes clear that travel and energy, and transportation of manufacturing process being manufactured all around the world has its own faults. When we had to shut down, it brought the supply chain to its knees.

But the flip side to that is local production, local manufacturing, creates a different waste footprint. I’m curious to understand, because I know that decentralization in some respects is sought after, and yet at the same time, it seems many of these things require… dare I say, central planning, almost. What is your take on the relationship between centralized and decentralized control and basically management of the energy and waste that we are contending with as part of this futuristic view?

[00:48:26.510] – Keen

Well, we have to have a balance between the two. This is, again, when you think about one of the weaknesses of neoclassical economics on one extreme, Marx is the other, is that neoclassical talks in terms of “let it rip” capitalism unconstrained and Marxism is saying, let’s go to complete public ownership of the means of production.

What we need is a symbiosis between central control and distributed control. And what we should have is a global level understanding that a certain percentage of the planet cannot be touched by humans, must be left for other species, and we don’t intervene in that part of the planet. Now, with unconstrained capitalism, total free enterprise, private control, private decision about everything, you’d never get there.

You’re already seeing that happening at the moment. And of course, with Russia involved in this as well as America. “Oh, the Arctic sea ice is going to disappear. Let’s work out a channel to ship goods from one side through the Arctic sea ice”.  Get the fuck out of there is what we should be doing. And let the ice reform.

[00:49:22.640] – Grumbine

Amen.

[00:49:25.010] – Keen

So you won’t get it from a privatized system completely privatized, nor will you get it from a totally centralized system which believes it can override the biosphere. We have to see ourselves as the custodians of the biosphere first and capitalist or socialist second, and neither extremely neoclassical nor Marxism enables that to happen.

But what was in Marx originally would have been consistent with saying, again, going to be a dialectic vision to be able to maintain human society, it must be part of the planet we don’t touch. And that’s the wisdom we need now, which we could have worked our way to 150 years ago if Marx wasn’t so caught up in trying to prove that socialism, as he saw it back then, was inevitable with the declining rate of profit and therefore the labor theory of value.

[00:50:15.050] – Grumbine

So you’ve got new work coming out here. I know that you’ve got a new book that you’ve been scribbling on for some time now that should be coming out here in the not too far off future. Plus, you’ve got advances in Minsky. You want to tell us a little bit about what you’ve been up to?

[00:50:31.010] – Keen

[laughs] Well, I’ve just finished writing a book called “The New Economics: The Manifesto.” I better add, the title was chosen by the publishers, not by me, but I then tried to live up to the title. So what I’m arguing in that book is that we need an economics based on, first of all, the proper understanding of money, that’s both very consistent with Modern Monetary Theory and the extension’s that I’ve done on the role of credit in a capitalist economy.

We have to have both an understanding of the fiat money system and a credit money system together, and that’s the first substantive chapter of the book in that sense. Then we have to have an understanding of energy. So I talk about the need to understand the biophysical economics fundamentally and how deadly economics has been for failing to understand the biophysical foundations of the capitalist system, but also of existence on this planet.

And I also have the section on complex systems. So again, there’s a tendency in economics to think in very linear ways, to not look at complex feedbacks – the earth, everything. The universe is a complex system and our little circle of it on this planet is a complex system and the economy is a complex system. And we have to understand complexity. We can’t think in linear equilibrium terms.

So that’s the gist of the new book. It also has basically an attack on neoclassical economics over the work of William Nordhaus and the idiots around him who I think will be responsible for the collapse of capitalism.

So it won’t be Marx, at least, bringing the death of capitalism, but William Nordhaus, because he and his panglossian economic analysis of climate change has fooled us into believing it’s going to be trivial when in fact it’s going to be threatening the further existence of society, I’m going about the book saying neoclassical economics has to go.

And what I’m trying to do in that is in the book as well as show how there’s another way to think about the economy around complex systems and thermodynamics. And with Minsky, that’s a software package I’ve built to enable complex systems analysis of financial systems as well as the physical economy.

And Minsky has been dramatically improved, courtesy of a grant from the Friends Provident Foundation, which gave us 200,000 UK pounds to raise it from the state I managed to get it into with a grant from INET, and then my Kickstarter campaign to the state where I think it’s now quite a sophisticated software package.

So part of what I’m doing, as well as writing a manual for using Minsky, I want to see post-Keynesian economists and MMT people throw out difference equations, throw out equilibrium thinking and develop the complex systems approach to the economics as part of being able to actually contribute to understanding capitalism rather than as the neoclassicals have done fucking it up completely.

[00:53:09.810] – Grumbine

Well, as always, this was amazing. I think from my vantage point, I’m going through a very, very tedious learning process. I wish that I would have learned some of this in grad school. Most of what I learned wasn’t at all like this. But then again, I think every person that’s got an economics degree or an MBA can probably say the same thing. [laughs] It was just about as useless as can be. The accounting maybe was worthwhile, but all the rest of it? Throw it in the garbage.

[00:53:38.010] – Keen

It’s like learning about phlogiston.

[00:53:41.580] – Grumbine

Well, I really appreciate it. I think that I’m going to chew on this a lot more because what you’ve presented to me fits very nicely inside of my brain because I do truly realize that the need for understanding the role of energy in production and the role of energy in terms of just the state of our environment, I think is very important. And I think that anything that doesn’t consider that, especially with the existential crisis we’re facing, is irresponsible.

[00:54:11.870] – Keen

Yeah.

[00:54:12.630] – Grumbine

So I really appreciate your time, sir. I really do. I love our talks.

[00:54:16.840] – Keen

So do I mate. And I think it’s a bit of a random trip for people listening in, but let’s see how the reception goes.

[00:54:21.720] – Grumbine

I hope we can get some good conversation generated around it because it is a worthwhile subject and I’m just really happy that we could do it together here, sir.

[00:54:30.660] – Keen

Hope so. Thanks, Steve.

[00:54:32.610] – Grumbine

Alright, we’ll talk soon. Thank you all very much. This is Steve Grumbine, Steve Keen, Macro N Cheese. We’re out of here.

[00:54:43.800] – Ending credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.