Home Forum Political Economy Exchange with Blair Fix on an ecological Kalecki/Goodwin model

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    “…as I wrote above, I am too very critical of neoclassical economics, and I think heterodox economics schools like post-Keynesian economics and institutional economics are relevant. Yet, I think for the most part even these heterodox economic schools entirely ignored the issue of sustainability and thermodynamics, especially given that we’re not facing the consequence of such ignorance of two centuries in the form of climate crisis and environmental breakdown.

    There now are some post-Keynesians who engage with these issues, but it seems that 95% of “heterodox” ones still even fail to register that we’re now facing such crises.

    So I believe heterodox economists (and those who try to be heterodox) should account for environment and thermodynamics, and that’s the reason I think your research is timely and important.

    My feeling is that to engage with heterodox economists and convince them to look into these issues more, we should speak their language. I think that an imminently important and doable task would be trying to make a model of aggregate demand determination and distribution in terms of either (or both) energy and low-entropy matter.

    In fact, it seems that there is a Kaleckian aspect in the distribution of, say, energy, in that, in an economy, energy is distributed between households(who use energy to mostly survive and for leisure) and capitalists(or, say, factories, who use energy to produce goods and services that households will later consume), and I think it might be possible to delineate how two interact with each other and eventually aggregate demand is determined and income is distributed again.

    (Of course, I think such model should account for energy inequality too, in there there’s a huge disparity between high-income earners and low-income earners in terms of their energy and resource consumption)

    On the other hand, it might be said that a Goodwin model can be used to explain the issue of energy and sustainability in general, in that, at least it seems to me, there is indeed a predatory-prey relationship between those who consume more resources (and cause more pollution and other types of damages) and those who consume less.

    So, my main question is this: do you think there can be a Kaleckian or a Goodwin model that accounts for energy and natural resources – or that treats them as “factors of production” – and explain the determination of aggregate demand and income distribution? Or do you know any researches that have done this? (as far as I know, there has been none).

    I know that you’re skeptical of the concept of “factor of production”, but I think it’s at least now a sensible thing to do (for instance, Steve Keen showed that a Leontief production function that treats energy as an independent factor of production clearly explain the historical trend of GDP and energy consumption)…”

    • This topic was modified 1 week, 2 days ago by Brian Kim.
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    • #245353
      Blair Fix
      • Topics started: 2
      • Total posts: 26

      To clarify to forum readers, this is an exchange that started via email. Brian asked me the question above, and I responded below. After Brian’s second response (which he will post shortly) I asked him if he’d like to continue the discussion on this forum, so that the back-and-forth would be public, and also so that other people could weigh in if they wish.


      Hi Brian,

      Thanks for getting in touch. About heterodox economics and biophysical economics, you are correct that there is a disconnect. I am increasingly convinced, however, that the way to solve this is not by ‘speaking the language’ of economics to heterodox economists. That’s because I think that almost everything about economic growth theory (including heterodox approaches) goes down the wrong path. (Obviously, many people don’t agree with me on this).

      The problem is that the goal, in economic growth theory, is to explain the growth of real GDP. Even heterodox economists, who are generally skeptical of neoclassical theory, mostly agree on this goal.

      In contrast, I think real GDP is a garbage indicator. Hence it’s growth is not worth explaining. (See this post for details: https://economicsfromthetopdown.com/2019/04/29/real-gdp-the-flawed-metric-at-the-heart-of-macroeconomics/). When we throw out real GDP (and the concept of ‘economic output’), that leaves models of economic growth (Solow, Goodwin, etc) with nothing to do. So there is virtually nothing left of economic growth theory.

      The solution is to turn not to economics, but to biology. Ecologists and biologists study the growth of natural systems all the time. They never use production functions. They never measure ‘output’. Instead, they study biophysical flows. It’s these flows that are important in their own right. We should study them directly, and how they relate to social structure.

      Yes, it may be politically easier to get heterodox economists on board with thermodynamic limits by evoking their models. But I think the result is bad science. On that front, I’d rather have good science that is politically naive, in the sense that most economists will ignore it.

      That said, there are economists doing good work. Some of the most interesting stuff (that’s heavily influenced my thinking) is work by Giampietro, Mayumi and Sorman. They have written two books about the role of energy in human societies. They do not use production functions, nor indeed anything recognizable from economic theory. Instead, they’re influenced by ecology. The books

      • The Metabolic Pattern of Societies: Where Economists Fall Short
      • Energy Analysis for a Sustainable Future: Multi-Scale Integrated Analysis of Societal and Ecosystem Metabolism

      To drill down to the point, you ask:

      do you think there can be a Kaleckian or a Goodwin model that accounts for energy and natural resources – or that treats them as “factors of production” – and explain the determination of aggregate demand and income distribution?

      My answer is no. I think these models are dead ends. But if you think otherwise, I would encourage you to explore your ideas.

      Hope this helps.

      Blair

      • This reply was modified 1 week, 2 days ago by Blair Fix.
    • #245355
      Brian Kim
      • Topics started: 1
      • Total posts: 4

      “…I am very in favor of your approach (please correct me if I’m wrong) that the only meaningful measure of human society is throughput of energy and low-entropy matters – a point first raised by Jevons (who was in fact the godfather of neoclassical economics! check his book The Coal Question) and then Soddy and later revisited by Georgescu-roegen and Daly.

      Yet, I also think a model that tries to account for the social organization and the way it operates – in other words, I think theory of money is important.

      Ultimately, I think the important question is this: what does money really buy? Or what do we really “consume” when we buy something with money?

      I guess this is the theory of value question. As we both know, while neoclassical economics suggest utility is the ulterior source of value, there’s no way we can actually explain anything with that. Marxist and Keynes endorsed labor theory of value, and I am somewhat sympathetic to this view, in that I think in our society what money mainly purchases is labor or someone else’s effort. Even if all manual labors can be substituted with robots, I think, there should be a, say, “prime mover” that direct the usage of energy and resources to something. While Keynes himself essentially endorsed LTV, post-Keynesians mostly did not care much about theory of value.

      Yet I agree that, as Herman Daly pointed out, any theory of value that does not account for the laws of thermodynamics is immaterial. So in that sense I think what we consume mostly is energy and low-entropy matter, plus someone’s labor (or “effort”, to be more precise). People say consumers buy “services”, but it seems they ignore the energy and resources required to actually perform said services.

      But what the existence of money suggests is that (regardless of whether it recognizes thermodynamics or not) it’s the governing rule and mechanism of human society. We don’t live in a barter economy, money is debt (IOU), and most importantly, money is backed by law and its execution is guaranteed by the legal system. Behind every human activity, it can be argued, lies contract law, commercial law, consumer law, and tort law, and so on, and these statutes contain and regulate the aggregate of those activities to a certain direction (which is not 100% and there are leaks here and there, of course).

      And if these systems – which can well be just regarded as a mental construct – are intact, I think the conventional heterodox economics and their theories, such as Marx/Keynes’ M-C-M’ (monetary theory of production) or endogenous money have more or less well explained these social organizations and operations.

      Frederick Soddy, for instance, called for a “Cartesian economics” in that human society is comparable to the mind-body dualism of Descartes and suggested that we should deal with both the mind and the body. He criticized that economics entirely abandoned any efforts to have bearing for reality and ignoring laws of thermodynamics. Wealth, Soddy argued, is the flow of energy (sunlight) that we can collect with our capital (machines, too, are the accumulated outcome of our energy usage) and actually use. But Soddy did not stop analyzing the issue of the mind: he explained how money is debt and, contrary to the real wealth, it can growth mathematically and infinitely, and capitalist always be “relatively” richer than everyone else by endlessly raising debts and collecting rents and interests.

      I am not trying to suggest that we have to do something to achieve a certain kind of goal. But there is seemingly a disconnection between money and throughput.

      And I think we need to account for both – and perhaps their relationship – to understand the world better.

      So my question would be: is there any way to deal with this seeming disconnection between money and throughput (energy/entropy)?”

       

      • This reply was modified 1 week, 2 days ago by Brian Kim.
    • #245364
      Brian Kim
      • Topics started: 1
      • Total posts: 4

      Another Question to Blair Fix and others (feel free to join us!):

      As the issue of climate-related financial instability has gained more attention, there are attempts to incorporate climate issues into monetary policy.

      Mark Carney, former governor of Bank of England, said in a famous speech in 2015 that climate change will induce “Minsky moment” in that it will lead to sudden changes in asset values (he was mainly talking about the so-called “transition risks”).

      Yet it seems that, besides the now frequently quoted “Minsky moment”, he did not fully understand Minsky’s financial instability hypothesis, in that it’s more about an inherent development of financial capitalism that leads to more fragility over time in a cyclical manner, than a single point of collapse, as you have extensively dealt with.

      While it might be appropriate to use Minsky to explain climate change-induced financial stability, obviously Minsky (just like most economists) did not take biosphere into account, let alone climate change, in his model. So, I think, I might be able to argue that, in the similar sense that he talked about “lender’s risk” and “borrower’s risk” that increase as the indebtedness of entities increase, as we emit more greenhouse gases and other pollutants, we are piling up “ecological debt.” But ultimately his FIH was about the endogenous dynamic of monetary economy, not about the relationship between nature and economy.

      In this sense, I think what would be more appropriate lens is that of Frederick Soddy, who arguably started the field of ecological economics. The problem of modern economy, Soddy argued, is that Wealth is bound to the laws of thermodynamics, money and debt are our mental/legal construct, and it grows mathematically (exponentially) – so that the banking sector and capitalists can always extract value from the rest of the economy, making them always relatively affluent them others. this endless imperative for growth of Wealth (so as to meet debt obligations) leads to endless financial crises.

      So I wonder whether it would be possible to connect the post-keynesian monetary dynamics with the dyanmics between nature and economy. Would be possible to connect Minsky’s FIH with Frederick Soddy’s debt dynamics in a consistent way (perhaps modeling it)?

    • #245369
      Blair Fix
      • Topics started: 2
      • Total posts: 26

      Brian,

      You raise many important ideas. Let me respond to each.

      Ultimately, I think the important question is this: what does money really buy? Or what do we really “consume” when we buy something with money?

      Excellent question. The answer, according the theory of ‘capital as power’, is that money is a symbolic representation of power. Yes, you can use money to buy things. But ultimately what is being quantified is not the things themselves, but the property rights around those things. Without property rights, there can be no prices.

      Now, property rights are ultimately about power — they are about the power of the owner to exclude you (and everyone else) from using their property. It follows, then, that money is just a quantification of power. (For a brief summary of the capital-as-power thesis, see this post.)

      The idea that money is power is important, because ecological economists usually focus on the purchase of physical goods. And of course, such goods are some of the property that you can buy. But you can also buy things that are more abstract — human organizations themselves. This fact goes virtually undiscussed in ecological economics. But it’s a basic fact of capitalism.

      I think the conventional heterodox economics and their theories, such as Marx/Keynes’ M-C-M’ (monetary theory of production) or endogenous money have more or less well explained these social organizations and operations.

      I disagree here. Marx’s theory is fundamentally flawed. The entire theory rests on the idea that labor produces surplus value. The problem is that this surplus value is unobservable — indeed, based on units that do not exist. I won’t go into detail here. If you are interested in deconstruction of Marxist theory, read Nitzan and Bichler’s book Capital as Power

      About Keynes, I have struggled to find an actual theory of capitalism in his writing, other than the theory of business cycles. I guess that’s why I’m not a post-Keynsian. A side note. Steve Keen was an external examiner for my PhD defence. During the defence, I mentioned that I had a hard time finding any core theory in post-Keynsian work. He agreed with me.

      Frederick Soddy, for instance, called for a “Cartesian economics” in that human society is comparable to the mind-body dualism of Descartes and suggested that we should deal with both the mind and the body.

      It’s an interesting analogy … but one that ultimately is reflected in mainstream economics as the distinction between ‘real’ economic activity, and its ‘nominal’ representation’ in money. I have thought about this dualism for a long time. I wrestled with it in my Masters thesis. In hindsight, the result was mostly gibberish.

      A better way to think about things, in my view, is to treated prices as a nomos. Nitzan and Bichler borrow this word from Aristotle, and use it to describe the social order. Prices quantify, create, and recreate the capitalist social order. Yes, one of the effects is that physical goods have prices. But the price is not a reflection of those goods … it is a reflection of the social order.

      there is seemingly a disconnection between money and throughput.

      Yes! But that has always been so. Money was never designed to quantify physical flows. It was designed to quantify property rights.

      is there any way to deal with this seeming disconnection between money and throughput (energy/entropy)?”

      The way to deal with it is to treat prices as a quantification of property rights. Yes, these prices affect the flow of physical resources. And the flow of resources (or more properly, control of this flow) can affect prices. But the ‘disconnect’ is a fundamental feature of money. It is not a quantification of physical resources.

      Money was never designed with sustainability in mind. It was designed to ration property rights. If we want to limit resource flows, then we should do so directly by rationing them directly. If we want consumption to be equitable, we can distribute the ration equally and bar selling the ration. That’s because as soon as money comes into the picture, people with great wealth can hoard resources.

      • #245389
        Brian Kim
        • Topics started: 1
        • Total posts: 4

        Thank you for responding to my question!

         

        I have a question about the possibility of monetary/banking regulation regarding ecology.

        Right now, the most prominent (in a sense that it’s been supported by progressive/heterodox economists) proposal for financial regulation regarding climate change is “greening the monetary system”: for instance, by establishing a public taxonomy of what constitutes “sustainable” and incorporating it into monetary policy. (The European Union has been creating EU Taxonomy but it’s been mainly about disclosure of risks).

        Yet, it seems that even this approach fails to account for the fundamental disconnection between money and energy(entropy).

         

        Based on Soddy’s view, figures like Buckminster Fuller called for tying money to energy so as to fundamentally limit money (and debt) creation and consumption of energy and resources. There have been various small local projects and conceptual suggestion of it, but obvious doing this would mean going beyond the current institutional structure of capitalism.

         

        For some detail, check this report “Energizing Money” by economist Josh Ryan-Collins published in 2013.

        https://neweconomics.org/2013/02/energising-money

         

        Do you think, for instance, tying money to renewable/low-carbon energy, would be pursuable?

         

    • #245371
      George Elliot
      • Topics started: 0
      • Total posts: 1

      To understand production you need to work with physical units. As Blair mentioned, any measure of economic production or productivity based on monetary units has unresolvable methodological errors.

      However prices are obviously useful to understand distribution and exchange. Importantly, monetary and non-monetary data can be combined to reveal how resources are priced differentially over space and between social groups.

      Still to explain HOW these exchange rates come about requires collecting and analyzing non-monetary data about social structures and processes.

    • #245390
      Scot Griffin
      • Topics started: 0
      • Total posts: 4

      So, my main question is this: do you think there can be a Kaleckian or a Goodwin model that accounts for energy and natural resources – or that treats them as “factors of production” – and explain the determination of aggregate demand and income distribution? Or do you know any researches that have done this? (as far as I know, there has been none).

      In December 2020, Steve Keen and his team provided an update on their efforts to incorporate energy (and eventually entropy) into macroeconomics.  In case you have not seen it, there is a link to the December 2020 report in this Patreon post.

       

       

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