284 - Steve Keen: The Economics of Global Warfare

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**Steve Keen** (0:33)
I am selling the building.

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The final season of FX is the Bear.

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Or not.

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FX is the Bear, the final season. All episodes now streaming on Disney Plus.
I recently spoke with our mutual friends, Rick Wolf and Michael Hudson, both of whom are also economists working outside the mainstream. And I wanted to begin by asking you something that I asked Rick, which is, when you look at the world of today, when you see China's rise, the wars in Iran and Ukraine, Trump in the United States, is there a big economic picture that you think mainstream narratives are missing?

**Steve Keen** (1:40)
Oh, there's too many pictures to...
How many pictures do you want? You can fill them. You can fill the Louvre with the pictures that are being missed by the mainstream. But the fundamental one that I come down to is the ignorance that mainstream economists in particular have about the role of energy in production. So that's absolutely crucial. They have no idea of the impact of losing the supply of the fuels coming out of the Strait of Hormuz. They also have basically no concept of production in general, so they don't realize that there are other products coming out of the Strait that without them, 20 percent of manufacturing processes and capitalism can no longer occur. So it's actually ignorance of the production system that lies, I think, both behind the war itself, because anybody who understood the production system would never have made that invasion in the first place.
Just ignorance about the consequences of losing both the energy supplies and the fertilizer and sulfuric acid and helium and the lubricating oils that all come out of that one particular part of the planet. So I just see complete ignorance in most of the mainstream media commentary on what's going on in the war.

**SPEAKER_4** (2:55)
Well, I've never had you on the show before. I often, like with a physicist, will do an episode like a master class on relativity or quantum mechanics or something like that. And the reason that I bring this up is that the episodes are often pedagogical, and I'm not an economist and the vast majority of our listeners aren't. So it seems like this is a good time to ask you if maybe we could just go over, I mean, the brief version of the economics of production and the role of energy in production and where, for instance, Trump is missing this. Oh, go, Trump, I've been entering.

**Steve Keen** (3:38)
For Trump to actually land on the right square, on a chessboard would be quite an achievement. But back to the question of production, the mainstream economics basically assumes that all the inputs to production are substitutable. So if you don't have enough labor, you can compensate by using more machinery, that sort of thinking. And what it means is when they look at something like losing access to energy from the Strait of Hormuz, what they say as well, you know, energy accounts for about 5% of GDP, roughly speaking, and that therefore means that if there's a 10% fall in energy, only 0.5% of that fits GDP.
So the default way of thinking is that losing 10% of energy supply, I will substitute labor and capital for that, and output will only fall by half of 1% when energy inputs have fallen by 10%.
Now, that's the reason they got into that perspective is that they modeled production initially as if you could produce goods and services by just combining machinery, labor and what they call technology without actually specifying what technology is.
And then that model has never fitted the data. In fact, the original mathematics to push the model, to push that model forward called the Cobb-Likus production function made statistical errors that economists have never bothered checking because they actually like the main implication of the theory, which is that people get paid what they're worth. It's basically a theory that we get paid a meritocratic distribution of income. So everybody gets what they deserve. That's their perspective. And they leave energy out completely, but when they do include it, which is very rarely, but when they do, they say, well, energy is just like labor and capital.