Nov 262012
 November 26, 2012  Posted by at 12:39 am Finance

Science? Or Religion?

I’ve said this before, but just in case: I have very little appreciation and/or patience for the field of economics and its practitioners. Labeling it "the dismal science" does it far too much honor in my view, since it's not a science at all. No more than psychology is, or anthropology, or beer brewing. Nothing that can't stand the falsifiability test Karl Popper left us is a science. Falsifiability is the dividing line between the real thing and a whole wide range of mere pretenders.

That said, if there's one economist today (OK, maybe a few more) who I would be tempted to make an exception for, simply because he's made it his goal to at least approach economics from a solid Popper-like viewpoint, it's Steve Keen and his rigorous math. It's therefore no coincidence that Steve is both a good friend of The Automatic Earth, and controversial.

Since about WWII at the latest, a certain group of economists, think Chicago, have tried their stinking best to best recognized as scientists, an attitude that culminated in the launch of the faux Nobel Prize in 1968. They produce serious looking formulas and graphs up the wazoo, which the media reproduce alongside interviews replete with lofty terminology, and the general public has fallen for the trick: ridiculous though it may be, the field has acquired a scientific aura.

Why did and do they want this? Because trillions of dollars worth of policies based on their ideas gain critical respectability if they can make themselves look credible and in control. So it's no surprise that the entire effort has been carried by the support of virtually unlimited amounts of money from the finance industry, as well as 99% of the ruling political classes.

That's how Milton Friedman and his Chicago School became so prominent. Nothing to do with science, let alone falsifiability. Just money. Credibility for sale. If you're a politician, and you manage to get make people, your voters, believe that there's a scientific underpinning to whatever it is you want to do economically, you got it made. And there are plenty of rich people and institutions willing to finance that fake science, since it serves their purposes.

This is to a large extent why we are where we are: stuck in a long, long crisis. If you take a simple belief system, phrase its beliefs in difficult looking formulas and graphs, and thus dress it in the veneer of some kind of a scienctific method, you can push societies to the brink of financial disaster, and it makes no difference whether you're wrong 9 times out of 10. You just tell them that it's all very hard to understand, and you set up an education system that teaches only the models you want it to teach. This way you create the idea that things are knowable while they are not, and all students have to do is get a degree and be the next high-priests. Any religion that poses as a science is dangerous, and economics more so than all others, because it can turn entire societies into poorhouses.

Against that backdrop, it's not terribly surprising to hear that Steve Keen and his entire economics department at the University of Western Sydney (UWS) are under threat of extinction. The Australian government has used a nice trick to achieve this. Under the guise of creating more competition, it destroys it. Anyone who can fog a mirror can now apply to the "top" universities in Australia, no matter what their grades are coming in. This is the sort of thing that ostensibly aims for fairness, in the same way that globalization and privatization do. All hail the lowest common denominator. The result is that everyone applies at the top uni's, and only there.

Since the University of Western Sydney, where Steve teaches, has never been promoted to the top (though its economics programs may be far better than the others'), nobody applies for its programs anymore. And though this is an entirely new situation, the government has already proposed simply closing down the economics department at UWS. Even though the situation is volatile, and many students who won’t get into the top schools will likely come to UWS later.

The measures taken by the Australian government are too broad and wide-ranging to make any sort of claim that they are aimed at any specific people, but that doesn't mean there won't be plenty people, read: those working in economics (certainly in Australia), who are quite happy with the fallout. Steve himself puts it like this:

A fail grade for market deregulation

The older I get, the more cynical I become about government intervention in the economy. That statement might appear to be either a recantation of everything I’ve ever argued, or a sign of the usual tale of left-wingers moving to the right, and right-wingers to the left, as life experience tempers youthful exuberance. It’s neither (well, okay, maybe it’s a bit of the latter), because my developing position reflects the complexities of a mixed economy.

The latest real world experience that has pushed me further into cynicism about government is a very personal one: an attempt by the Australian government to increase competition in education via deregulation is the direct cause of the proposal to terminate the economics program at my university. The policy change will actually reduce competition in the education marketplace in Australia: the market was more competitive with the preceding regulations in place.

Is your head spinning yet? Let me clarify the position by explaining why my university (the University of Western Sydney) is proposing to shut down its economics program.

Government regulation used to require universities to set a minimum entry standard to apply for entry to courses based on performance at the final school exam (now known as an “Australian Tertiary Admission Rank” or ATAR). Deregulation of the sector means that this is now optional, and two major universities in my region – the University of NSW and Sydney University – have responded by letting students apply for a course regardless of their anticipated performance at high school.

When a minimum ATAR was indicated, many students who thought they wouldn’t get a good enough high school result to qualify at one of the higher ranked universities would hedge their bets by also applying for entry to some of the lower ranked universities – including UWS. That then meant that at the end of one academic year, there was a reasonable spread of applicants across all universities: the top-ranked universities got the lions’ share, but there were applications too for the lower-ranked universities, from students who also expected to be more lowly ranked.

Now that open slather is permitted, students have responded by applying for courses only at the top-ranked universities. So now, as the current academic year ends, the projected intake into UWS’s economics program is catastrophically low. In previous years we had well over 100 applicants for our first year intake at this point. This year, we have just 19.

UWS management’s reaction to this has been to propose to shut the degree down completely because it is no longer economically viable. As they put it to one of the many ex-students who has complained about the decision:

"Whilst we acknowledge the tremendous achievements of our staff and students in raising the profile of economics at UWS and beyond, unfortunately, at the present time just 19 students are forecast to enter the B.Ec course in 2013, which renders the course economically unsustainable. This is largely attributable to the advent of the open market for undergraduate courses which was implemented this year."

Over the 20 years or so he's been at UWS, Steve has built a unique position in the field, and his position and views are so different from that of his peers that they will be glad to see him go, lest he makes them look bad, or worse. Economics as we know it these days is a one-dimensional exercise, along the exact same lines US politics is. That is to say, there is a media-hyped fake distinction between two heads of the same beast, a distinction aimed solely at fooling people into thinking there are actual differences. Whether it's neo-classical, Keynesian or any other flavor of the day, the foundations remain the same: no matter which head you pick, it's still the same beast.

Steve will be alright, he's made a name for himself that has even given him a voice on the BBC. His students, present and future, however, will not. The potential scope of different views in and on economics is being narrowed even more than it already was. Soon everyone will have the exact same ideas, and no dissonance will be either allowed nor available. And you may think that in today's world, Paul Krugman's idea(l)s concerning spending your way out of debt represent a fundamentally different view from those that favor cutting the debt, but these are not the fundamental issues. What is fundamental is the understanding of the role of debt and banking systems in our economies. And neither Krugman nor his alleged "adversaries" have any such understanding.

Steve Keen once again explained this and other topics very eloquently in an interview last week on Russia Today's Capital Account:


The economists who today control the ways we fight our financial crisis, view the economy in the exact same deluded ways that those did who led us into it. The EU's bureaus are full of such conventional economics disciples, and in the US people like Larry Summers and Christina Romer were highly influential until recently in formulating economic policy. Tim Geithner's still there.

And lo and behold, people are starting to think that these geniuses have found the right ways to fight the crisis. But they have of course not solved one single riddle. You can't solve a problem that you don't understand. They have thrown trillions into the financial system and the result is that today in the US home prices are down 35% and real unemployment is stuck somewhere between 12% and 16% or thereabouts. Yay!

So what is the solution? It's simple really: try science, try physics, and don't fake it. If you can only produce things that violate thermodynamics, get rid of them. And get rid of all the posers, and make economics a field that doesn't just function to produce theories that help a small part of the population fool the rest. Here's a start, as Steve Keen writes it:

Wanted: A theory of wealth

The question "where does income come from?" was at the core of pre-neoclassical theories of economics. It was phrased differently, as the question of the “theory of value”, but the essence of the question was “what is the source of the physical surplus of goods that are produced each year?”

The issue disappeared in modern neoclassical economics because the word 'value' was reduced simply to a question of relative prices – which is why I titled one chapter in my book Debunking Economics “The Price of Everything and the Value of Nothing”. But the topic is far more than just a question of how relative prices are set. At its heart, this is an existential question: humanity produces not merely enough to stay alive from year to year, but a surplus above needs that (at least for some) results in enormous opulence.

Of course, one simple answer is that there isn’t a surplus – some are driven below subsistence, and their suffering becomes the source of the excessive incomes of the minority. [..]

In the 20th century, the ascendant neoclassical theory argued that you couldn’t favour one input over the other: both labour and capital contributed to output, and could be smoothly substituted for each other in what they called a “production function”.

The problem for neoclassicals was that, just as Marx’s argument created a conundrum for Marxists, so did the core neoclassical model – developed by Robert Solow – for neoclassicals. Changes in the amount of labour and capital in Solow’s model accounted for less than 50% of recorded growth: the gap, which became known as “Solow’s Residual”, was attributed to technological change – for which neoclassical economics had no theory.

If this looks like a mess to you, you’re right: economic theory should be able to answer this question, but the best it has managed is to get it less than half right.

The solution, ironically, is to return to the 19th century – though not to its economists but to its physicists, and in particular Ludwig Boltzmann, who developed what is now called the second Law of Thermodynamics. These laws, unlike those of economics which are violated more often than observed (anyone for the Law of One Price, or the Law of Demand?), cannot be broken – and production, which is a physical activity, must therefore obey them.

The four laws of thermodynamics are neatly summarised in a simple ditty: 0th: You must play the game; 1st: You can’t win; 2nd: You can’t break even; 3rd: You can’t leave the game.

The zeroth law concerns the dynamic tendency of energy to dissipate. [..] The first is the Law of Conservation. [..] The second is the real catch: the degree of order tends to diminish over time. Connect one vessel full of air to another with a complete vacuum, and over time the pressures will equalise. [..] The third law says that you can escape the consequences of the second law if and only if you can dump the waste heat from a working engine into a vessel whose temperature is absolute zero – minus 273 degrees Celsius. Unfortunately, there is no such vessel – hence “You can’t leave the game”.

How does production – and the generation of a physical surplus – fit into this? Production appears to defy these laws. Each year we start with a given stock of produced outputs, which become inputs to production, and (except during recessions) we end up with a larger stock of more elaborately transformed outputs. Yet the second law can’t be defied, any more than one can defy the law of gravity. So production must cause an aggregate increase in disorder over time.

The only way to reconcile production with the second law is that production involves a localised reduction in disorder in the goods and services we generate, which is more than countered by an increase in disorder via the waste outputs from production. Figure one gives a visual representation of this process – and 'free' energy, energy not produced by humans but nascent in the universe itself – plays a crucial role.


This free energy can take many forms. It can be solar radiation, as indicated in figure one, but it can also be stored energy in fossil fuels, nuclear energy in transuranic elements, even nascent nuclear fusion energy in deuterium and tritium. Without this energy, production – and life itself – would be impossible.

It therefore turns out that the most realistic economic theory of “where does income come from?” was the first: that developed by the physiocrats. Their mistake was to identify the sun as the only source of free energy, and to believe that only agriculture could exploit it free energy. But they were the best: subsequent economic arguments, from Smith through Marx to Solow, took us further away from the proper foundation for a “Theory of Value”.

Econophysicists are taking us back to that foundation now, with the most well thought out work to date being done by Robert Ayres and his colleagues. Their empirically derived model, which treats energy as the key source of production and labour and capital as adjuncts to the exploitation of free energy, adds energy as an additional independent input to production. They call it an “energy-dependent Cobb–Douglas function”:

Whereas Solow’s model (which has labour and capital as independent inputs, but not energy) misses over half the actual growth, Ayres’s model’s fit to the observed growth in economic output in the US from 1960-2999 has an R-squared of 0.999.

Economics has to start from an explanation of where income comes from: a Theory of Value is inevitable. Since we live in a physical universe, this theory must be physical in nature, and the second law is the ultimate physical rule. In my future economic modelling, I’ll be revising my production equations to be consistent with Ayres’s work.

I'd say we have something to work with here. And I don't think we can afford not to try. The longer we leave our economies in the hands of a bunch of delirious high priests, the bigger the mess we leave our kids. We don't have any right or any reason to do that. There are people out there trying to do honest work that neither violates thermodynamics nor fails falsifiability, instead of dictating some belief system incapable of defining either debt or value. That's what's on offer here.


Home Forums How to Rendition An Inconvenient Economist

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    Science? Or Religion? I’ve said this before, but just in case: I have very little appreciation and/or patience for the field of economics and it
    [See the full post at: How to Rendition An Inconvenient Economist]


    Excellent article. I must admit this is the great disconnect. I thought about this as a pilot- such a prodigious energy expenditure, and for what? To make people go fast?

    Also, the economy adds distortions to otherwise physically impractical endeavors. take electrical generation for example. The best steam turbines run at 33% efficiency. That means 2/3 of the energy input is wasted as heat. if that energy input is coal, take another 10-15 % off the top to mine the coal and ship it the the generating station. Then if we consider another 15% loss in transmission, and further losses in the efficiency of the end-use machinery or illuminating device, we are operating at a net loss. Is it possible? Does it actually take more energy to shove the electricity into your house than you can derive as a benefit?

    If this doesn’t make sense physically, how does it make sense economically? Only because the ponzi scheme is complicated enough, and delayed long enough to blur the physical realities that spell the doom of our modern energy-consuming society. And also because we so far have had the luxury of so much energy at our disposal that we could afford to waste it in a profligacy so opulent that it may never have an equal.

    Mark T

    I haven’t heard any discussion by the economists or politicians about the tidal wave of debt that is engulfing Canada.

    The following information is from a Statistics Canada credit market summary data table as of the end of June 2012: (The debt statistics for Canada up to the end of September 2012 will be released in about 3 weeks by Statistics Canada).

    Total debt in Canada as of the end of June 2012 (bottom line of the data table) was 5.1 Trillion $

    From the end of June 2011 to the end of June 2012 the total debt in Canada increased by 209 Billion $.

    For that 12 month period the total debt in Canada increased at a rate of 572 Million $ per day.

    I would have to agree with Karl Denninger when he said (a few years ago) “You cannot expand credit at a rate faster than GDP forever without suffering a financial panic and collapse”.

    Mark T

    Let me try that link in my post again:

    If it still doesn’t work please go to the Statistics Canada website and put “credit market summary” into the search box to get to the data table I have referenced in my post.


    “The older I get, the more cynical I become about government intervention in the economy.”

    Gee, if I didn’t know any better I’d say ol’ Stevie boy is starting to sound like an Austrian! It is true that those who work for the government statistically have the lowest opinion of government programs. Maybe that’s because when you are funded by theft and you are not constrained by the profit motive, only negative outcomes are possible?

    You need to go deeper. You have to look at the violence. You have to look at the contradictions.

    You have to be able to see the guns and how they skew the incentives, always for the worse. It’s so hard for people to see, and then once you do, it’s impossible to unsee.

    taxation is theft.
    war is murder.
    violence against those acting peacefully is always wrong.
    We know these things and practice them in our own lives, yet we make this magical exception for the goons of the state.

    everything they have is stolen.
    everything they say is a lie.
    everything they claim to do, their aim is the opposite.

    the war on drugs = rampant drug abuse
    the war on poverty = rampant and always worsening poverty
    the war on terror = rampant terrorism (TSA? SWAT? Drones?)
    public schools = mass indoctrination and retardation of critical thinking

    It’s hard to accept. I get it. Twelve years in government indoctrination centers takes a lot of undoing.

    But trust me – its worth it. Cast it aside. Let it go. Once you see those who claim the right to initiate violence against others as the scum that they are, it all falls into place.

    It’s time to put down the gun.


    FB post in response to this article by some guy named John Vermazen:

    First of all, the idea Karl Popper, anti-communist extraordinaire and apologist for the West in the Cold War, wrote the final word on science is absurd. Falsifiability was critiqued at length, it isn’t how science is actually practiced. Kuhn and Lakatos wrote the definitive works revising the concept in light of plain reality, while Paul Feyerabend famously reduced Popper to absurdity in Against Method.

    Secondly, Steve Keen is nothing but a new wave alt-Keynesian who proposes strategic state interventions into a capitalist economy with debt jubilees. He is an apologist for capitalism. His MO is to create a “capitalism that works better” where the capitalists still exploit labor and systematically maldevelop the globe while wrecking the environment, but with less losses from crises and slowdowns.

    The Marxist labor theory of value is not the Ricardian labor theory of value; it is not true that there exists some metaphysical value attached to each and every commodity exact equivalent to the concrete amount of labor-time which was put into producing it. People think this because they only read Vol. 1 of Capital, and nothing else. Marx’s point was to CRITIQUE Ricardo’s theory of value, and classical political economy generally. The fact is that calorie counting is and has never been the constraints on actual production–what is the restraints is there are a fixed number of hours in a day that a laborer can work. To go on and on about thermodynamics is pure absurdity: it goes without saying production always conforms to thermodynamic constraints because thermodynamic constraints govern ALL PHYSICAL PROCESSES. The EIA and IEA constantly produce reports on how much energy we consume–its hardly written off as a carry-over. The fact is that no energy has ever been recovered for “free”–the Earth’s surface recieved the same amount of potential energy from the sun for millions of years. What changed? The social organization of human labor to exploit the potential chemical and solar energy through domesticated crops that greatly expanded the capacity of food storage available to human social units in given units of time. That said, if we ever have a communist mode of production, econophysics-like concepts may be important to the purposes of in-kind and physical accounting for value-less production processes.

    In any case, the Marxist theory of value is better dubbed the value theory of labor. The central issue is how human creative capacities must be accounted for as labor-values, must be subordinated psychically and socially to production as a concept–this itself is the product of a society based on wage-labor and generalized commodity production: the capitalist mode of production. The social revolution is the overthrow of human creative powers being caged within value.


    I don’t know enough to argue with this guy, except that I know this sentence from his response is hogwash: “The fact is that calorie counting is and has never been the constraints on actual production–what is the restraints is there are a fixed number of hours in a day that a laborer can work. “


    I have a strange feeling that Steve will become even more cynical once he factors in energy into his QED model.

    2-nd Law: You can’t break even:


    Deconstructing The Price Of Gold – Gold Bugs Better Sit Down For This One

    Tao Jonesing

    While I am a fan and supporter of Steve Keen, his solutions will ultimately perpetuate the problems he seeks to solve.

    Here’s the reality: economics is not a science but a rationalization for the current distribution of power. Note: I said “power” not “wealth” or “income.” Power within the collective is all that matters.

    Keen’s problem is that he does not understand that money and credit as they exist today function to (1) secure the current power of the elites and (2) consolidate ever more power in their hands. Our economy is based on diverting the value created by the division of labor into the elites’ hands, and money and credit are the primary basis for accomplishing this. Unless you fundamentally change the nature of money and credit, nothing will change in the long run. Sad to say, Steve does not propose such fundamental change.

    At the end of the day, he is just another good guy trapped in the cage imagined for him by the bad guys. It is not enough to “debunk economics,” you have to ignore them altogether.


    Hi Illargi,

    There are people out there trying to do honest work that neither violates thermodynamics nor fails falsifiability, instead of dictating some belief system incapable of defining either debt or value.

    I guess that will be the remaining aboriginal/indigenous pre-industrial peoples – what’s left of them. Without being too Zerzan, all civilization is based upon conquest and the subsequent ‘assimilation’ (theft) of resources whether from the ‘natural’ (existing self sustaining ecosystems) and the sustainable humans who exist in such, or from other ‘civilisations’. Trying to get the current high priests of this current culture to change would be like trying to stop the Aztecs priests from performing their blood sacrifices to their gods, or to fight Cortes – not gonna happen dude…. their mindset/system was just too tight.

    Without digging into John Gall’s Systemantics too deeply, his axiom of


    (Gall, 2006, “the Systems Bible”, 3rd Ed. p.130) has stood the tests of time, the Family being his best example.


    steve from virginia

    Keen is a giant among ordinary economic men, this does not mean there are no grounds for criticism. First of all, Keen does not question the productivity or viability of industrialization itself (which is where our problems lie). As w/ Keynes, industrialization is assumed to be ‘a force for good’/a force of nature. Economists’ job is to make adjustments at the margins so as to keep the factories and businesses running properly.

    Second of all, Keen critiques finance and debt management even though finance and debt management aren’t the central economic problem (the markets are fine and finance is an important component to any way out of our mess). The real problem is the illusion of industrial productivity: at-scale economic enterprises do not pay for themselves. Speculative ‘investments’ are made in purely financial instruments because there are no other investments to be made.

    The only productive enterprises are those that don’t require credit or require very little: small-scale enterprises that rely on creativity/economic necessity rather than at-scale material transformation. For instance, a town filled with cobblers and cabinet makers is productive in that there are more shoes and sofas being produced every year and a good market for these things. However, there is nothing for a capitalist to invest in … there isn’t the appearance of great output to leverage. The capitalist lends to an ‘entrepreneur’ (thief) to open shoe- or furniture factories (in China) in order to steal the markets that belong to the town’s workers (by way of credit-subsidized lower prices).

    See ‘Walmart’.

    “… calorie counting is and has never been the constraints on actual production–what is the restraints is there are a fixed number of hours in a day that a laborer can work. To go on and on about thermodynamics is pure absurdity …”

    That is simply nonsense, it is calorie mis-counting. The illusion is that input materials are fairly priced which they are not. If a gallon of gasoline was priced equal to the amount of human labor it represents it would cost $1500 per gallon. It is this ‘saving’ — between what an input costs and what it would cost if priced alongside labor equivalents — that sets the boundaries of industries’ false- ‘productivity’. The subsidy only lasts as long as the material input in question is in plentiful supply. If not there is a ‘scarcity premium’ attached to it and firm/system ‘profitability-narrative’ is rendered false and vanishes. More credit provides a lifeline … but only for a little while.

    Only governments … can fund money-losing enterprises for long periods. The Europeans learned this lesson during some of their many wars …

    The high input cost- shrinking profits/shrinking credit dynamic is blitzing the Continent’s countries into oblivion under everyone’s noses! France borrows roughly €200 million every single DAY … money that is simply thrown away for fun … There is nothing to show for that money wasted … or the fuel that money is exchanged for. How long can such nonsense go on? Once France is admittedly insolvent it won’t be able to borrow any more. Then what?

    All great surpluses — including surpluses of cheap inputs, cheap credit, surplus profits — have greater associated costs. Those costs are where the thermodynamics appear.


    Using an econometric unit of energy flux density [joule/$/sec^2] to quantify the value of production does rely on arbitrary EROEI boundary conditions. This becomes problematic when accounting for the embedded energy of tools and the energetic leverage of innovation, but no more so than with monetary valuation.

    The first law of gravitonomics:

    All economic activity is leveraged on the facilitation [labor] and maintenance [capital] of a food surplus.

    All social control is leveraged off the facilitation and maintenance of a food shortage/scarcity.

    The first statement is falsifiably true.
    But it seems to indicate a gross misvaluations of labor and tools employed in food production, which should be valued more than their price affords.

    Providing that hierarchical division of labor decouples capital surplus from food production [grain tokens], and providing that all social control constrains economic activity and limits aggregate surplus, the corollary is also true.


    Ah the physiocrats! Haven’t heard them mentioned for 30 years or more, it’s about time. The National Organization for Raw Materials (NORM) would
    argue that stealing the labor and raw materials (artificially low prices for farm commodities) from rural America for the last hundred years leads to unending debt. The “law” of supply and demand requires many willing buyers, many willing sellers, and equal access to information. None of which exist. NORM believes that the country has been in a Depression for decades, masked only by the growth of extreme debt.


    Thank you for an incredibly lucid explanation of where value comes from. I would prefer that you had used the term “wealth” instead of value. This is my conclusion from some years of independent rumination but you have put it crystal clear for me by relating it to the laws of thermodynamics. I intuitively knew that energy was at the core of wealth but you made the jump to the thermodynamic laws. WOW. I have already printed this blog post and filed it. It is great to have you back and writing regularly. Say hello to your female collaborator. I enjoyed her conversation at our dinner table a year or so ago.

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