The Path Not Taken: Following Unconventional Wisdom in Economics

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Student Reporter Adam Wong interviewed Dr. Steve Keen, Professor of Economics and Finance at the University of Western Sydney, on his new but controversial economic ideas in sustainability and economic modeling. Economics has always been one of the main forces of human development and in this new era of resources depletion and financial instability, this is no different. Conventional economic ideas continue to play a vital role in helping our governments and societies to make decisions that improve our well-being. However, Dr. Keen is against the conventional ideas of orthodox economics and he views the economic world completely differently from neoclassical economists.

Economics cannot grow forever

‘Green must become grey growth,’ Dr. Keen pointed out in his presentation. Our economic growth cannot be infinite, he said, even with advances in technology and if we continue to follow the current mindset of neoclassical economists. His arguments are based on a controversial blog post called Exponential Economist Meets Finite Physicist, written by physicist Dr. Tom Murphy. Dr. Keen agrees with Dr. Murphy’s argument that an exponential economic growth cannot continue forever because of the fact that there are energy limitations involved with utilizing energy on earth.

Dr. Keen pointed out that the way we exploit free energy and dump waste energy to promote economic development are actually against the fundamental laws of the universe. As a result, no matter how efficient we transform free energy into goods in the future, we will still ultimately reach a point when the temperature rise of our planet will make it impossible for us to inhabit on earth. Dr. Murphy also states that if we keep energy usage growing at an annual rate of 2.3%, heat generated from energy usage will boil the Earth in 400 years. Keep that up for 2500 years, and we would be using the entire energy output of the Milky Way. Hence, economic growth must come to a halt.

Theoretically, the situation described by Drs. Keen and Murphy can happen if we assume that economic growth will keep up at the same rates in the future. However, there are some opposing ideas against the arguments given by Drs. Keen and Murphy. In the blog post ‘Murphy’s Law? Or, Follies of a Finite Physicist’, a finance professor Noah Smith points out that the economic idea of “local non-satiation” – the idea that no matter how much you have, you always want more of something – is not necessarily true in the real world and this idea must fail in some situations.

Therefore, Noah believes that as soon as humans completely satisfy our needs and wants, economic growth will stop. This does not mean “getting all the stuff we want.” Rather, it will mean changing our desires directly, through the application of Desire Modification technology. He believes that when we like the world so much that we don’t want anything to change, and then we will have no more reason to grow the economy.

Some people might think that Drs. Murphy and Keen’s ideas are too pessimistic, but Noah’s ideas also seem quite idealistic to many. As can be imagined, forecasting and modeling the future are always difficult tasks and there is always no definite answer. However, these issues are definitely worth discussing.

Does Orthodox Economics Make Sense?
Dr. Keen thinks that the current economic models do not make sense since they ignore banks, debt, and money. What are needed then, are models that also include capital and monetary systems (see this blog post for an explanation on the role of private debt in a capitalist economy). Consequently, he developed Minsky to provide a platform for designing both dynamic and monetary models.

Lessons from China
In both Dr. Keen’s presentation and interview, he also gave his points of view on the industrialization of China. As Dr. Keen pointed out, China’s situation was very different from that of the other developing economies during its industrialization period, in the sense that China successfully retained business ownership and managed to attain foreign technological know-how. By being nationally focused in its economic development and industrialization, China managed to set up national policies that boosted homegrown companies. He believed that the case of China could definitely be a good reference for other developing economies.

 

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