April 11, 2025 • 34 mins
(This interview was recorded before the market chaos of this week.)
On this week’s episode of Merryn Talks Money, Merryn Somerset Webb sits down with economist James Galbraith, who says there’s a problem with economists. The problem, he says, is that almost all of them are working with the wrong models. They look at economics in terms of equilibrium, as though the natural destination of an economy is “some kind of stable state,” Galbraith says. But absolutely nothing else tends to equilibrium.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merrin Talks Money,
the podcast in which people who know the markets explain
the markets. I'm Maren Sumset Web. This week, I'm speaking
with American economist Professor James Galbraith. James as a professoran
(00:23):
government at the University of Texas at Austin. He was
executive director of the Joint Economic Committee of the United
States Congress in the early nineteen eighties and before that
in Economous for the House Banking Committee. He's also written
several books on economics. Most recently is co authored Entropy Economics,
The Living Basis of Value and Production. This is a
book GMOs Jeremy GRANTSLM. Called essential reading on the very
(00:44):
podcast only a matter of months ago, and the book
that we are going to focus on in today's discussion. James,
Welcome to Merrin Talks Money.
Speaker 2 (00:52):
Thanks very much. There's a pleasure to be with.
Speaker 1 (00:53):
You your kind, and you couldn't be more highly recommended than
by Jeremy who every time he comes on it's one
of our most listen to podcasts. Okay, so you have
written this book which I have gamely battled my way
through because some of them's in the middle are quite academic,
but it's incredibly interesting, useful reinterpretation of the way that
(01:15):
economies should work. Correct me if I get any of
this wrong. But the basic idea is pretty straightforward. It's
that in the main economists look at economies in the
way they work in terms of equilibrium, as though everything
is somehow tending to some kind of stable state at
the end of everything, whereas in fact nothing ever tends
(01:35):
towards stability. It's not how biology works, it's not how
the world works in general, so why should it be
how economies work. So in fact we should relook at
economics through the prism of not tending to an equilibrium.
Speaker 2 (01:48):
Well, yes, indeed, and since you're in Glasgow, I can
hardly forbear to mention that, although I have an enormous
admiration for your predecessor there, Adam Smith, taking a certain
amount of departure from his perspective. Really, what we're trying
to do is to bring economics into the main line
of scientific thinking that developed from the nineteenth century onward,
(02:13):
and which really make it consistent with the way life
processes are viewed, the way mechanical systems are viewed to
give an understanding that the economy is essentially an organic
construction that has to be thought of in those terms
and has the same properties as other organic constructions. That's
the broad idea of the book. That's why we call
(02:33):
it entropy economics.
Speaker 1 (02:35):
You say, that's why we call it entropy economics, but
and you probably so superior these days, you don't even
realize there's a whole lot of people like that.
Speaker 3 (02:43):
Absolutely, no, I do what entropy means.
Speaker 2 (02:46):
It means that every life process taps into high quality
resources and uses them, and in order to do any
kind of work, you have to have access to those resources,
and in the course of doing that work, you degrade them.
And that's true of living systems, as true of mechanical systems,
is true of economic systems. What we've realized is that
(03:09):
the textbook view, if you like, the standard supply and
demand view, doesn't take proper account of that fact. It
tends to view resources as a very minor part of
economic activity because they don't figure all that largely in
a construct that we call national income or GDP. But
in fact, without those resources, and without high quality resources,
(03:31):
nothing else is going to happen. Once you see that,
you understand that we've essentially misconstrued a lot of economic problems,
and we're misunderstanding why things are not going according to forecast.
Speaker 1 (03:44):
So most models do not take into account the fact
that most natural resources uscas, so they assume a type
of abundance that isn't necessarily there, or at least the
ability if one resource is not abundant, to substitute for
an almost equivalent resource.
Speaker 2 (04:00):
Yeah. Well, a small example from the book. One can
look at gold mining towns in northern Canada northern Yukon territory,
and you discover that if you accounted for them in
the standard way, gold mining would not be a very
large piece of their economy because they had lots of
hotels and taverns and saloons and I suppose brothels and
other things. But the fact was that when the mines
(04:23):
ran out, those places were abandoned and deserted, and they're
now ghost towns. You know, that's a small example of
something which happens on a much larger scale. One can
look at what's happening right now in for example, in Germany,
which is suffering from an extremely high cost of resources
as a result of policy decisions that were taken over
(04:43):
the last few decades, especially the last few years, and
the fact the industrial system of Germany is suffering very
seriously from that. In the meantime, if at what's happening
in the United States for the last ten years or so,
with the advent of let's say, fracking of natural gas,
mostly in the Permian basin here in Texas, you see
(05:04):
the foundation of it of much stronger for the time
being any way, much stronger overall economy, and even stronger
manufacturing compared to what it would otherwise be.
Speaker 1 (05:15):
So in Germany, these economic modelers looked at what they
were doing with their energy system and said, well, you know,
we won't be using fossil fuels anymore to the extent
that we don't have to, and we will shut down
on nuclear industry, etc. They were misunderstanding the fact that
without access to cheap and abundant energy resources, the rest
of their economy couldn't operate in the way that they
(05:35):
had previously expected.
Speaker 2 (05:37):
That's essentially a major piece of it. A second piece.
A second piece of the argument relates to the relationship
between the government and markets. In the conventional view, these
two things are basically opposed. They're antagonistic to each other.
The government interferes with what, in an ideal world would
be a let's say, a perfect market outcome balance. We
(06:00):
call it an equilibrium. But in the reality, all markets,
all sophisticated markets, but essentially all markets require government. Now,
they wouldn't exist without having a regulatory framework. And that's
essentially the same way that our bodies would not survive
if we couldn't regulate temperature and blood pressure. Our machinery
(06:21):
would not work if we didn't keep it cool and
operating within its design limits. And the same is true
for our economies. So if you then think that deregulation
is going to make your economy more efficient, our prediction
would be no general regulation is going to cause breakdowns.
And you see that, of course in real life when
you look at the financial system in the United States.
(06:42):
We deregulated it really beginning in the early nineteen eighties
and extensively at the end of the nineteen nineties and
early two thousands, and then we're right on schedule. In
two thousand and seven, two thousand and eight, it broke
apart and melted down, and we're still to some extent
suffering from the consequences. The economist said, well, well, that
was an unpredictable shock, something nobody could have expected, et cetera,
(07:05):
et cetera. And the answer is no, if you think
about it from a systematic point of view, it was
entirely predictable based upon the policy decisions that were taken,
which were in turn based upon an economic theory. So
in some sense, we're trying to bring our theoretical perspective
in line with way in which basically any business or
(07:25):
any observer of the real world knows that it actually works.
Speaker 1 (07:29):
You're hardly the first to say that a lot of
the economic theories and models that we work with are
fairly useless. They're terrible predictors, and if they worked very well,
maybe we wouldn't get ourselves into mess up, to mess up,
to mess So it's no shock to anyone to be
told that everything's wrong. So why is it that we
(07:50):
haven't changed the way that we try to run economies
and the way that we operate on models. When I
did my economics degree at University of Half, an economic
agree is does that many many, many years ago I
was taught the same thing that I think undergraduates are
still taught today.
Speaker 2 (08:07):
That's an excellent question, But I think the answer to
it lies in the way politics and economic power intersect.
There are always forces that want to run the system hotter,
that want to make an easier, faster profit out of
in a given situation, and who don't care about the
long term sustainability of an economic system. This is the
(08:29):
way in which in which the way speculative forces operate
on the economy and the way political forces operate on institutions.
So you have attention there.
Speaker 1 (08:40):
Let's go back to this idea of resource scarcity and
the use of resources and the running down of resources
inside a system. There's nothing that can actually be done
about that, So how do you change policy to take
account of it.
Speaker 2 (08:57):
Well, normally, in order for the condition had changed policy
to occur, historically, there has to have been a major disaster.
There was one in nineteen twenty nine, and it led
to in the United States a four year depression through
to the election of Franklin Roosevelt in nineteen thirty three,
and from that a real extraordinary change in the structure
(09:19):
of the American economy occurred, with the creation of a
vast number of regulatory institutions and the setting of a
policy direction which emphasized the use of new energy resources.
What Roosevelt had going for him was that at that
time it just had the discovery of major oil fields
in Texas, so that you could focus investment on highways,
(09:42):
in air fields and other activities which used that energy resource.
Speaker 1 (09:46):
But suddenly discovering new sources of abundant energy is not
a policy, it's a stroke of luck. So I suppose
my question is that lacking a new source of energy,
lacking another type of natural resource that we haven't really
come up.
Speaker 3 (10:00):
You see the way energy.
Speaker 1 (10:01):
Moves through the ages, from wood to coal, to oil,
gas or whatever.
Speaker 3 (10:07):
Whatever.
Speaker 1 (10:08):
Being the question, Nuclip, there isn't another option out there. Realistically,
all we can do is attempt to move to renewables,
and that's, as I say, it's a policy choice. But
it's not the same as finding a new source of
dense energy.
Speaker 2 (10:21):
Well, there's the modern situation posses additional difficulties. The fact is,
of course we are today using more coal, using more wood,
we're using more oil, we're using more natural gas than
we ever have in the past. So all of those
things continue to be used even as new sources, as
nuclear power came on, as renewables have come on. That's
(10:43):
the first thing. Secondly is that there is obviously a
climate question which has to be considered in this equation,
and that's a relatively new consideration. But the idea that
you can move from high quality resources to low quality
resources to ones that were what we call the return
learnt on energy invested is not very high. It's a
physical fact. It's a problem, and it has to be
(11:06):
taken into account. It's going to limit how much you
can get out of renewables in the long run. So well,
I'm not, certainly we're not saying that renewables are a
bad idea, but what they have to be looked at
realistically in terms of what they can contribute to the
effective functioning of a competitive economy, of a prosperous economy.
(11:27):
These these problems have to be faced seriously.
Speaker 1 (11:30):
Okay, So if global economic organizations and big governments at
the moment accepted the premise of your book and accepted
your ideas, what policy choices would they be making now
that are different the ones that they are making?
Speaker 3 (11:46):
Do you think?
Speaker 2 (11:48):
I'll offer two big, big thoughts here. One is that
our societies have developed an enormous amount. Well, it's basically
one big thought, if you like, with two aspects of it.
The society has developed a lot of fixed overhead. One
piece of this is the financial sector. It's much larger
than it ever used to be. It absorbs much more
(12:10):
in the way of resources, and adding to the size
of the mass of the financial sector, one now has
the enormous energy resources that are being absorbed by mining
for cryptocurrency. In this kind of thing, we need to
think about whether we can cut back and make that
sector much smaller, much more efficient, and make it serve
the productive sector rather than being the master of the
(12:32):
productive sector. Number two is the question of the military.
We have an enormous overburden of military expenditures. This is
particularly true of the United States, which has the largest
the military expenditure in the world. Much of it invested
in technologies which are now plainly obsolete, and this needs
to be reconsidered in a serious way. How to get
(12:53):
rid of the overburden of the nuclear forces that can
never be used. Of a navy whose technologies were essentially
fixed in the nineteen forties and modestly upgraded since then,
but are now outclassed by new developments. We haven't reconsidered
these things, and we're continuing to pour resources into them,
which could be used more effectively to build up a
(13:15):
prosperous and sustainable society. And until you confront the fact
that you're overinvested in certain things and you can't really
move resources efficiently to where you which should have them.
Speaker 1 (13:28):
So, if the US is overinvesting in defents in the military,
which is something maybe you couldn't say about the rest
of the world, where is it under investing Where should
resources be diverted to.
Speaker 2 (13:37):
You can look around the United States and find plenty
of places where you could make useful new investments. And
if you look at the need for essentially a reurbanization
and again more efficient use of the energy resources that
we have, and you look at the kind of needs
that the population actually has, then you need to support
(13:58):
a population that is healthy, that is growing, that has
useful employment opportunities. Essentially, one needs to rethink what our
national priorities really are. And this is actually going on now.
You can see that the new administration, the Trump administration,
is clearly rejecting of forty or fifty years so past
(14:20):
priorities are past complacency. But the problem is it also
has a very outdated vision of what direction things should go.
They think they can revive the American automobile industry and
make it into the world leader. And you know, I
think that's a not a realistic view when you compare
what is happening, what the capabilities of the American companies
are compared to those that operate in other parts of
(14:43):
the world, most notably in China at the moment. So
there's a certain naive te associated with this, But the
underlying instinct that things should that priorities should change, is
not wrong.
Speaker 1 (14:54):
And why is it not realistic to think that America
can rebuild its automobile industry. And one of the things
that I've seen you talking about is the way that
for example, sanctions on Russia closing Russia down to a
degree allowed it to reinvigorate its economy, and tariffon on
China again semiconductor areas, etc. Given it a way to
revitalize or invigorate parts of it economy. Why would that
(15:16):
not work for the US.
Speaker 2 (15:17):
That's an interesting question. Let me talk a little bit
about the Russian case. This is a very clear cut
example of the problem of applying the conventional economic theory
to a practical policy question. The idea, which was very
clearly stated by the policy authorities, was that they could
remove crucial building blocks of the Russian economy through sanctions.
(15:40):
They could take away its financing, they could take away
its technology, they could take away these important Western companies
that were managing things. They could encourage bright young people
to leave the country. And all of this, in fact,
to a degree, actually happened. What they didn't understand was
that they were actually creating the conditions under which Russian businesses,
(16:02):
which in Russia's become basically a business economy over the
past twenty five years, in which Russian businesses could grow
and profit and expand. And so there was a major
shock to the Russian economy that was in fact the
effect of the sanctions. But once that shock was registered,
and once it was clear it wasn't going to go away,
the conditions for indigenous economic growth were extremely good. Resource
(16:26):
prices were low, domestic financing was available, capital could be
bought very cheaply from the exiting firms and then converted
to by domestic producers, and all of that happened. And
the Russian economy has grown I think twice as fast
as the European economy, maybe more than that, in the
last several years, and it's now the fourth largest one
(16:47):
in the world, after only China, the United States, and India.
So now we're seeing that the consequences of the sanctions
policy were exactly the reverse of what was clearly predicted.
And the reason was not that the sanctions were ineffective,
but that they actually were a gift to the Russian
Federation in terms of what it wanted to do. I
(17:08):
think that's an exceedingly clear example. Now in terms of
what the United States might do, I think it would
be much harder in the context of the US to
impose the same strict incentive structures that were imposed on Russia,
although to some degree, restructuring the financial sector, restructuring of
(17:28):
the national security sector, the creationists Trump is clearly doing.
Of trade barriers, relatively low energy prices. These are going
to attract European companies, for example, to invest in the
United States. So a little bit of this is going
to go on, but I'm inclined to think that it
will not have the same let's say, mobilizing effect on
(17:50):
the US because, among other things, we simply haven't got
that kind of spirit in what remains of our major
industrial corporations. They're going to be inclined to say, how
can I profit in the short run and raise their prices,
increase their dividends, diversify, acquire other companies the way oligopolists
tend to do. They will be hesitant to expand capacity
(18:15):
and maybe not capable of moving forward technologically to catch
up with these same industries and other parts of the
world which are now well ahead of them. So I'm
inclined to be a bit pessimistic about the capacity of
American capitalism to achieve the same kind of gains. That's
a pity, unfortunately, but that's the way I see it.
Speaker 3 (18:35):
Maybe it'll be pleasantly surprised. Can we talk about that
the near.
Speaker 1 (18:40):
Future and where you see the US economy over the
next couple of years. There is a new consensus building
everyone at the end of last year having said that
the US would not fall into recession. Now as being
economists after economists after economists raise their expectations of the
US being in recession in the relatively short term.
Speaker 3 (19:04):
What do you see there?
Speaker 2 (19:05):
Well, I'm a habitual pessimist, and I think the element
of uncertainty at the moment is very high, which tends
to work against major long term investments.
Speaker 3 (19:17):
Here.
Speaker 2 (19:17):
The problem is that, first of all, this administration it's
basically likely to be a one term administration. It could
lose control of the Congress in less than two years.
The tariffs have been imposed, but or are being imposed.
The question is how long will they last. I'm inclined
to think that there will be a lot of weight
(19:38):
and see amongst the major sources of business investment to
see whether the climate that the administration is trying to
create will in fact be a lasting one. The President
has declared tariffs and then taken them off and clearly
using them for short term political purposes. So if I
were considering investing a large amount of mone a new
(20:00):
productive capacity, I wouldn't be entirely committed to it at
this stage. I don't see that kind of rapid transformation
that some people are hoping for. Will there be a
recession in the short run, I think it's entirely possible.
What thing that goes against that is that the household sector,
which is the largest part of the American economy is
(20:20):
pretty stable, and it tends to continue to do what
it does to consume to take out debt when necessary
until it can no longer do so. So things can
go on for quite a while before this expansion comes
to a final end. But we're clearly in what shall
we say, I'm certain and even unchartered waters at the moment.
Speaker 1 (20:43):
Yes, with all that in mind, obviously, one of the
things this administration is attempting to do is just cut
the size of the state via the Department of Government Expenditure, etc.
Speaker 3 (20:53):
But with the possibility of.
Speaker 1 (20:55):
Recession ahead, are you concerned about the US debt marketcerned
about the extent of public debt in the US?
Speaker 3 (21:04):
That can that go on indefinitely?
Speaker 2 (21:07):
Well, first of all, I don't see that the administration
is succeeding so far in reducing public expenditure. They're making
all kinds of gestures in that direction and doing a
fair amount of damage to existing institutions, regulatory agencies, regulatory
structures which will degrade economic performance in the long run.
(21:27):
So they're running against their declared objectives with all of that.
But that said, so far as I have seen, public
expenditure continues to grow. It continues to grow because much
of it's on automatic pilot anyway, so that will sustain
economic activity. Am I worried about the fact that the
Treasury issues debt or pays interest on reserves in order
(21:48):
to placate the investment community by giving them bonds that
pay interest or other assets that pay interest. No, I'm
not worried about that so long as the broader community
wants to buy those bonds, which so far there's absolutely
no sign that is losing its interest in doing so.
And there's no reason why would the United States pays
a bill with a check that creates a dollar balance,
(22:11):
and the person receives it, if they don't have an
immediate use, they like to convert that into an interest
bearing asset, so the Treasury issues a bond. This is
not itself a problem of sustainability. If things really started
going against the dollar, that would show up in a
decline in the dollar exchange rate, but we're not seeing
that either. In fact, we're seeing that with uncertainty, the
(22:34):
dollar tends to rise because other currencies, the euro in
particular and I guess the British pound, you know, they're
not considered to be a safe so people tend to
flee to the treasury bond market because it's large and
it's liquid. So again, one can look at the level
of interest rates, the long term interest rates, and you
just don't see the kind of warning sign that there's
(22:55):
going to be a significant decline in the dollar anytime soon.
Speaker 1 (23:00):
We talked earlier about the US misallocating expandit share and
spending two months on military et cetera. When you look
at the extent to which the debt interest burden is rising,
and obviously this is the case in all high public
debt countries that UKNQ did, the percentage of public spending
that is going towards debt interest rises and rises and
(23:21):
begins to crowd out public services.
Speaker 2 (23:24):
It doesn't crowd out public expender just adds to it.
And what it does is provides income or provides increments
to the wealth of the wealthy. So it's a it's regressive.
It distributes, redistributes the balance of purchasing power toward people
who have capital assets, who hold treasury bonds on away
from people who are living hand to mouth on their
(23:46):
wages and their salaries. And that is that that's a problem.
That is why I don't favor a policy of high
interest rates, and I think the Federal Reserve List what
has been doing in the last four years is essentially pointless,
except that in so far it affected that kind of redistribution.
But let's say, does it draw real resources that the
(24:06):
government would use for other purposes. No, it doesn't do that,
because when the government has other purposes, it simply legislates
that they should be achieved and the process moves from there.
Speaker 3 (24:18):
Are you worried about inflation.
Speaker 2 (24:20):
Yes, of course I always worry about inflation. The question
is what is the cause and what are the policies
that are appropriate to maintain reasonable stability in the price level. Well,
first of all, what was driving inflation in the early
part of this decade twenty one and twenty two was
first and foremost the rise in oil prices from the
very low base in the middle of the pandemic. That's
(24:43):
what drove up gasoline prices and other heating oil and
so forth, and fed through into food prices. So dealing
with that that was actually done by the Biden Whitehouse
when it started selling oil from the Strategic Reserve. That
was the anti inflation policy. What the Federal is irve
started doing in March of twenty twenty two was basically
(25:04):
Eyewash started raising interest rates, the price changes started coming down.
In June, three months later, they'd only raised the interest
rate by less than a percentage point seventy five business points. Actually,
they were basically saying, oh, we're waiving our magic wand
we're the ones who were controlling inflation. Didn't have anything
to do with it, and they still don't. And now
(25:25):
they're caught in a little bit of a dilemma because
they thought the inflation had gone away, but of course
it hasn't. And the administration, assuming the tariffs go into
effect and start feeding through into prices, they're going to
see that in the price indices. And then questions was
their policy of failure? Was the policy that they've been
pursuing for the last three years just a failure And
(25:46):
the answer to that is it was neither a success
nor a failure. It was just not relevant to the
change in the price level. So when you have a
price level problem, you need to deal with it with
its actual sources, which in our situation, energy prices, the
supply chain disruptions, and then some strange things that go
on in the housing sector, which I think I won't
(26:07):
trouble you with. But thank you are largely statistical.
Speaker 1 (26:12):
Okay, I've had you for a while now, so I
want to move on to the end of your book.
Let's go back to the book, and I'm sorry to
have to tell listeners.
Speaker 3 (26:21):
That the last chapter is not hugely optimistic.
Speaker 1 (26:23):
You described yourself at the beginning as a fairly relentless pessimist,
and towards the end you say that human society has
become complex, rigid, and fragile, and whether this human society
can withstand even relatively small changes in the operating conditions
laid down by previous human societies under the earlier conditions
(26:44):
is an open question. So your vision of the future
of humanity in a warming and greening world isn't particularly
happy one, is it. There's a transition period for us
that isn't great.
Speaker 2 (27:00):
No, it's not a terribly happy outlook, because we just
apply the same principles to the economics of the household
and what we observe. And this is something by the way,
that I learned from my students who are perfectly candid
about this, is that, first of all, modern households have
very large fixed expenses, They have mortgages, they have car payments,
(27:24):
they have utility bills, and if they have children, they
have a major tuition payments and all of that. And
so when they're placed under austerity programs, which they have
been in most of the wealthy countries for the last
twenty years at least, what do they do. They figure
they've got to economize somewhere. And the way they economize,
(27:46):
one of the most important ways, is to have fewer children.
And so you see and practically every in fact, in
every upper income society in the world, under these circumstances,
the fertility rates fall, and ultimately population begins to fall.
It won't happen in the short run at the global level,
because there's still countries in some countries which have large
(28:08):
populations of young people, a few countries that have high
fertility rates, but it will happen eventually if this continues,
and as populations get older, the stresses on young families
become even greater, and so you ultimately look at a
let's say, a downward spiral. It's very much like the
(28:29):
famous statistic r that we all became familiar with in
the COVID epidemic when it falls below one, then you're
on the happy path toward the end of an epidemic. Well,
if you apply that to demography and have the same principle,
you're on the unhappy path toward the decline of the
species as a whole. So that's something to think about
(28:52):
over the long run. But it follows from applying the
same principles of entropy economics to this problem and understanding
that the households are reacting rationally to the pressures that
they've been placed under by austerity minded economists who are
trying to implement their traditional theories.
Speaker 1 (29:12):
And the other thing that may bring us to a
smaller population that you mentioned again was the end of
the book, is the fragility of our food production food security.
You talk about how as high quality fossil fuel resources
are depleted, the industrial basis of food production will decline.
And again, if you weren't going to have a fewer
babies now, you certainly have fewer babies once you see
that food is no longer available in the same way
(29:33):
that it was previously.
Speaker 2 (29:35):
Yeah, I think that's right essentially.
Speaker 3 (29:36):
Yes, Okay, that's not a happy future. Is there any
way that we can head this off?
Speaker 2 (29:43):
Well, The first thing you have to do is recognize
realistically the situation that we're in. Always the first thing
to do was to change your thinking. You can change
your thinking and confront a problem rather than in this
constant state of denial about it, then at least you
have a fighting chance. If you can't do that, then
you are constantly going down and doubling down on the
(30:05):
same path. Sanctions didn't work, Let's have more sanctions. Austerity
doesn't work, Let's have more austerity. Balance in the budget. Well,
we never quite got there. Maybe if we cut taxes
and spending even more, we'll get there. Get rid of
government altogether. And you're basically putting everything into a spiral
of decline. And our argument is that is not the
(30:27):
way any successful system develops. So successful systems develop on
the basis of realistic plans. And every business knows this.
This is not news to business people.
Speaker 1 (30:41):
So we should start with less magical thinking from governments.
But James, in an environment like this, what is an
investor to do?
Speaker 2 (30:50):
I first of all deny any competence to give investment advice.
Speaker 3 (30:55):
But none of us have any I will tell.
Speaker 2 (30:57):
You that in nineteen eighty seven day the stock market
fell by thirty percent. I called my father, who of
course is the author of a great book on the
on the called the Great Crash in nineteen twenty nine,
which has been in print continuously since nineteen fifty five.
And it was hard to get through. But around nine o'clock,
(31:18):
I mean he'd finished dealing with all the reporters that
the stock market had fallen thirty percent. Said. I heard
his voice. He said, James, is that you sides? There
was a pause. He said, not to worry. I've been
in cash for three weeks. And then there was another pause,
and I thought things were the mood was about to change,
(31:39):
which was not wrong. And then he said, but I'm
sorry to say that. The same cannot be said of
your mother. She finds it very difficult to sell the
General Electric that her family bought from Edison for a dollar.
So any event, you can read my investment advice into
that anecdote. Don't be like my mother, be like my father.
(32:03):
But that is to say, if you don't, if you're
not holding the capital gains for too long, too much
of the tax burden, in which case you're like my
mother and you're.
Speaker 3 (32:13):
Stuck and you're stuck. Interesting. Thank you.
Speaker 1 (32:16):
One final question before I let you go and say,
I know I have run over, and I apologize earlier.
I sense a little note of disparagement in your voice
when you said about the amount of energy used in
crypto mining, and feeling that you're not a fan.
Speaker 2 (32:36):
You're right, I'm definitely not a fan. I see this
as a device for undermining the legitimate control that government
should exercise over their own monetary systems, and I think
that's partly the purpose is to provide a completely insulated,
opaque way to make transactions in defiance of legitimate public
(33:00):
purpose control of first of all, taxation, control of capital
flows in the countries that have capital controls. I think
there's nothing but trouble to be expected from that in
the long run.
Speaker 1 (33:11):
James, thank you so much for joining us today. Hugely
appreciate it.
Speaker 2 (33:14):
Oh that's great. I joined it enormously. Thank you very
very much.
Speaker 3 (33:24):
Thanks for listening to this week's Marin Talks Money.
Speaker 1 (33:26):
If you like us, show, rate, review, and subscribe wherever
you listen to your podcasts. We're off next week for
the Easter break, but we'll be back in two weeks.
Speaker 3 (33:33):
Check out any episodes you have missed.
Speaker 1 (33:34):
In the meantime, I strongly recommend my conversation with author
and economist David Williams about his book Money, The Story
of Humanity and how the evolution of currency is central
to the rise and fall of civilizations. Don't forget to
keep sending questions or comments to Merror Money at Bloomberg
dot net. You can also follow me and John on
Twitter or x. I'm Maren s w and John is
(33:56):
John Underscore Stepic.
Speaker 3 (33:58):
This episode was hosted by Me Mary in Somerset Web.
Speaker 1 (34:01):
It was produced by Somersadi and Moses and sound designed
by Blake Maples and special thanks of course to James Galbraith.
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merrin Talks Money,
the podcast in which people who know the markets explain
the markets. I'm Maren Sumset Web. This week, I'm speaking
with American economist Professor James Galbraith. James as a professoran
(00:23):
government at the University of Texas at Austin. He was
executive director of the Joint Economic Committee of the United
States Congress in the early nineteen eighties and before that
in Economous for the House Banking Committee. He's also written
several books on economics. Most recently is co authored Entropy Economics,
The Living Basis of Value and Production. This is a
book GMOs Jeremy GRANTSLM. Called essential reading on the very
(00:44):
podcast only a matter of months ago, and the book
that we are going to focus on in today's discussion. James,
Welcome to Merrin Talks Money.
Speaker 2 (00:52):
Thanks very much. There's a pleasure to be with.
Speaker 1 (00:53):
You your kind, and you couldn't be more highly recommended than
by Jeremy who every time he comes on it's one
of our most listen to podcasts. Okay, so you have
written this book which I have gamely battled my way
through because some of them's in the middle are quite academic,
but it's incredibly interesting, useful reinterpretation of the way that
(01:15):
economies should work. Correct me if I get any of
this wrong. But the basic idea is pretty straightforward. It's
that in the main economists look at economies in the
way they work in terms of equilibrium, as though everything
is somehow tending to some kind of stable state at
the end of everything, whereas in fact nothing ever tends
(01:35):
towards stability. It's not how biology works, it's not how
the world works in general, so why should it be
how economies work. So in fact we should relook at
economics through the prism of not tending to an equilibrium.
Speaker 2 (01:48):
Well, yes, indeed, and since you're in Glasgow, I can
hardly forbear to mention that, although I have an enormous
admiration for your predecessor there, Adam Smith, taking a certain
amount of departure from his perspective. Really, what we're trying
to do is to bring economics into the main line
of scientific thinking that developed from the nineteenth century onward,
(02:13):
and which really make it consistent with the way life
processes are viewed, the way mechanical systems are viewed to
give an understanding that the economy is essentially an organic
construction that has to be thought of in those terms
and has the same properties as other organic constructions. That's
the broad idea of the book. That's why we call
(02:33):
it entropy economics.
Speaker 1 (02:35):
You say, that's why we call it entropy economics, but
and you probably so superior these days, you don't even
realize there's a whole lot of people like that.
Speaker 3 (02:43):
Absolutely, no, I do what entropy means.
Speaker 2 (02:46):
It means that every life process taps into high quality
resources and uses them, and in order to do any
kind of work, you have to have access to those resources,
and in the course of doing that work, you degrade them.
And that's true of living systems, as true of mechanical systems,
is true of economic systems. What we've realized is that
(03:09):
the textbook view, if you like, the standard supply and
demand view, doesn't take proper account of that fact. It
tends to view resources as a very minor part of
economic activity because they don't figure all that largely in
a construct that we call national income or GDP. But
in fact, without those resources, and without high quality resources,
(03:31):
nothing else is going to happen. Once you see that,
you understand that we've essentially misconstrued a lot of economic problems,
and we're misunderstanding why things are not going according to forecast.
Speaker 1 (03:44):
So most models do not take into account the fact
that most natural resources uscas, so they assume a type
of abundance that isn't necessarily there, or at least the
ability if one resource is not abundant, to substitute for
an almost equivalent resource.
Speaker 2 (04:00):
Yeah. Well, a small example from the book. One can
look at gold mining towns in northern Canada northern Yukon territory,
and you discover that if you accounted for them in
the standard way, gold mining would not be a very
large piece of their economy because they had lots of
hotels and taverns and saloons and I suppose brothels and
other things. But the fact was that when the mines
(04:23):
ran out, those places were abandoned and deserted, and they're
now ghost towns. You know, that's a small example of
something which happens on a much larger scale. One can
look at what's happening right now in for example, in Germany,
which is suffering from an extremely high cost of resources
as a result of policy decisions that were taken over
(04:43):
the last few decades, especially the last few years, and
the fact the industrial system of Germany is suffering very
seriously from that. In the meantime, if at what's happening
in the United States for the last ten years or so,
with the advent of let's say, fracking of natural gas,
mostly in the Permian basin here in Texas, you see
(05:04):
the foundation of it of much stronger for the time
being any way, much stronger overall economy, and even stronger
manufacturing compared to what it would otherwise be.
Speaker 1 (05:15):
So in Germany, these economic modelers looked at what they
were doing with their energy system and said, well, you know,
we won't be using fossil fuels anymore to the extent
that we don't have to, and we will shut down
on nuclear industry, etc. They were misunderstanding the fact that
without access to cheap and abundant energy resources, the rest
of their economy couldn't operate in the way that they
(05:35):
had previously expected.
Speaker 2 (05:37):
That's essentially a major piece of it. A second piece.
A second piece of the argument relates to the relationship
between the government and markets. In the conventional view, these
two things are basically opposed. They're antagonistic to each other.
The government interferes with what, in an ideal world would
be a let's say, a perfect market outcome balance. We
(06:00):
call it an equilibrium. But in the reality, all markets,
all sophisticated markets, but essentially all markets require government. Now,
they wouldn't exist without having a regulatory framework. And that's
essentially the same way that our bodies would not survive
if we couldn't regulate temperature and blood pressure. Our machinery
(06:21):
would not work if we didn't keep it cool and
operating within its design limits. And the same is true
for our economies. So if you then think that deregulation
is going to make your economy more efficient, our prediction
would be no general regulation is going to cause breakdowns.
And you see that, of course in real life when
you look at the financial system in the United States.
(06:42):
We deregulated it really beginning in the early nineteen eighties
and extensively at the end of the nineteen nineties and
early two thousands, and then we're right on schedule. In
two thousand and seven, two thousand and eight, it broke
apart and melted down, and we're still to some extent
suffering from the consequences. The economist said, well, well, that
was an unpredictable shock, something nobody could have expected, et cetera,
(07:05):
et cetera. And the answer is no, if you think
about it from a systematic point of view, it was
entirely predictable based upon the policy decisions that were taken,
which were in turn based upon an economic theory. So
in some sense, we're trying to bring our theoretical perspective
in line with way in which basically any business or
(07:25):
any observer of the real world knows that it actually works.
Speaker 1 (07:29):
You're hardly the first to say that a lot of
the economic theories and models that we work with are
fairly useless. They're terrible predictors, and if they worked very well,
maybe we wouldn't get ourselves into mess up, to mess up,
to mess So it's no shock to anyone to be
told that everything's wrong. So why is it that we
(07:50):
haven't changed the way that we try to run economies
and the way that we operate on models. When I
did my economics degree at University of Half, an economic
agree is does that many many, many years ago I
was taught the same thing that I think undergraduates are
still taught today.
Speaker 2 (08:07):
That's an excellent question, But I think the answer to
it lies in the way politics and economic power intersect.
There are always forces that want to run the system hotter,
that want to make an easier, faster profit out of
in a given situation, and who don't care about the
long term sustainability of an economic system. This is the
(08:29):
way in which in which the way speculative forces operate
on the economy and the way political forces operate on institutions.
So you have attention there.
Speaker 1 (08:40):
Let's go back to this idea of resource scarcity and
the use of resources and the running down of resources
inside a system. There's nothing that can actually be done
about that, So how do you change policy to take
account of it.
Speaker 2 (08:57):
Well, normally, in order for the condition had changed policy
to occur, historically, there has to have been a major disaster.
There was one in nineteen twenty nine, and it led
to in the United States a four year depression through
to the election of Franklin Roosevelt in nineteen thirty three,
and from that a real extraordinary change in the structure
(09:19):
of the American economy occurred, with the creation of a
vast number of regulatory institutions and the setting of a
policy direction which emphasized the use of new energy resources.
What Roosevelt had going for him was that at that
time it just had the discovery of major oil fields
in Texas, so that you could focus investment on highways,
(09:42):
in air fields and other activities which used that energy resource.
Speaker 1 (09:46):
But suddenly discovering new sources of abundant energy is not
a policy, it's a stroke of luck. So I suppose
my question is that lacking a new source of energy,
lacking another type of natural resource that we haven't really
come up.
Speaker 3 (10:00):
You see the way energy.
Speaker 1 (10:01):
Moves through the ages, from wood to coal, to oil,
gas or whatever.
Speaker 3 (10:07):
Whatever.
Speaker 1 (10:08):
Being the question, Nuclip, there isn't another option out there. Realistically,
all we can do is attempt to move to renewables,
and that's, as I say, it's a policy choice. But
it's not the same as finding a new source of
dense energy.
Speaker 2 (10:21):
Well, there's the modern situation posses additional difficulties. The fact is,
of course we are today using more coal, using more wood,
we're using more oil, we're using more natural gas than
we ever have in the past. So all of those
things continue to be used even as new sources, as
nuclear power came on, as renewables have come on. That's
(10:43):
the first thing. Secondly is that there is obviously a
climate question which has to be considered in this equation,
and that's a relatively new consideration. But the idea that
you can move from high quality resources to low quality
resources to ones that were what we call the return
learnt on energy invested is not very high. It's a
physical fact. It's a problem, and it has to be
(11:06):
taken into account. It's going to limit how much you
can get out of renewables in the long run. So well,
I'm not, certainly we're not saying that renewables are a
bad idea, but what they have to be looked at
realistically in terms of what they can contribute to the
effective functioning of a competitive economy, of a prosperous economy.
(11:27):
These these problems have to be faced seriously.
Speaker 1 (11:30):
Okay, So if global economic organizations and big governments at
the moment accepted the premise of your book and accepted
your ideas, what policy choices would they be making now
that are different the ones that they are making?
Speaker 3 (11:46):
Do you think?
Speaker 2 (11:48):
I'll offer two big, big thoughts here. One is that
our societies have developed an enormous amount. Well, it's basically
one big thought, if you like, with two aspects of it.
The society has developed a lot of fixed overhead. One
piece of this is the financial sector. It's much larger
than it ever used to be. It absorbs much more
(12:10):
in the way of resources, and adding to the size
of the mass of the financial sector, one now has
the enormous energy resources that are being absorbed by mining
for cryptocurrency. In this kind of thing, we need to
think about whether we can cut back and make that
sector much smaller, much more efficient, and make it serve
the productive sector rather than being the master of the
(12:32):
productive sector. Number two is the question of the military.
We have an enormous overburden of military expenditures. This is
particularly true of the United States, which has the largest
the military expenditure in the world. Much of it invested
in technologies which are now plainly obsolete, and this needs
to be reconsidered in a serious way. How to get
(12:53):
rid of the overburden of the nuclear forces that can
never be used. Of a navy whose technologies were essentially
fixed in the nineteen forties and modestly upgraded since then,
but are now outclassed by new developments. We haven't reconsidered
these things, and we're continuing to pour resources into them,
which could be used more effectively to build up a
(13:15):
prosperous and sustainable society. And until you confront the fact
that you're overinvested in certain things and you can't really
move resources efficiently to where you which should have them.
Speaker 1 (13:28):
So, if the US is overinvesting in defents in the military,
which is something maybe you couldn't say about the rest
of the world, where is it under investing Where should
resources be diverted to.
Speaker 2 (13:37):
You can look around the United States and find plenty
of places where you could make useful new investments. And
if you look at the need for essentially a reurbanization
and again more efficient use of the energy resources that
we have, and you look at the kind of needs
that the population actually has, then you need to support
(13:58):
a population that is healthy, that is growing, that has
useful employment opportunities. Essentially, one needs to rethink what our
national priorities really are. And this is actually going on now.
You can see that the new administration, the Trump administration,
is clearly rejecting of forty or fifty years so past
(14:20):
priorities are past complacency. But the problem is it also
has a very outdated vision of what direction things should go.
They think they can revive the American automobile industry and
make it into the world leader. And you know, I
think that's a not a realistic view when you compare
what is happening, what the capabilities of the American companies
are compared to those that operate in other parts of
(14:43):
the world, most notably in China at the moment. So
there's a certain naive te associated with this, But the
underlying instinct that things should that priorities should change, is
not wrong.
Speaker 1 (14:54):
And why is it not realistic to think that America
can rebuild its automobile industry. And one of the things
that I've seen you talking about is the way that
for example, sanctions on Russia closing Russia down to a
degree allowed it to reinvigorate its economy, and tariffon on
China again semiconductor areas, etc. Given it a way to
revitalize or invigorate parts of it economy. Why would that
(15:16):
not work for the US.
Speaker 2 (15:17):
That's an interesting question. Let me talk a little bit
about the Russian case. This is a very clear cut
example of the problem of applying the conventional economic theory
to a practical policy question. The idea, which was very
clearly stated by the policy authorities, was that they could
remove crucial building blocks of the Russian economy through sanctions.
(15:40):
They could take away its financing, they could take away
its technology, they could take away these important Western companies
that were managing things. They could encourage bright young people
to leave the country. And all of this, in fact,
to a degree, actually happened. What they didn't understand was
that they were actually creating the conditions under which Russian businesses,
(16:02):
which in Russia's become basically a business economy over the
past twenty five years, in which Russian businesses could grow
and profit and expand. And so there was a major
shock to the Russian economy that was in fact the
effect of the sanctions. But once that shock was registered,
and once it was clear it wasn't going to go away,
the conditions for indigenous economic growth were extremely good. Resource
(16:26):
prices were low, domestic financing was available, capital could be
bought very cheaply from the exiting firms and then converted
to by domestic producers, and all of that happened. And
the Russian economy has grown I think twice as fast
as the European economy, maybe more than that, in the
last several years, and it's now the fourth largest one
(16:47):
in the world, after only China, the United States, and India.
So now we're seeing that the consequences of the sanctions
policy were exactly the reverse of what was clearly predicted.
And the reason was not that the sanctions were ineffective,
but that they actually were a gift to the Russian
Federation in terms of what it wanted to do. I
(17:08):
think that's an exceedingly clear example. Now in terms of
what the United States might do, I think it would
be much harder in the context of the US to
impose the same strict incentive structures that were imposed on Russia,
although to some degree, restructuring the financial sector, restructuring of
(17:28):
the national security sector, the creationists Trump is clearly doing.
Of trade barriers, relatively low energy prices. These are going
to attract European companies, for example, to invest in the
United States. So a little bit of this is going
to go on, but I'm inclined to think that it
will not have the same let's say, mobilizing effect on
(17:50):
the US because, among other things, we simply haven't got
that kind of spirit in what remains of our major
industrial corporations. They're going to be inclined to say, how
can I profit in the short run and raise their prices,
increase their dividends, diversify, acquire other companies the way oligopolists
tend to do. They will be hesitant to expand capacity
(18:15):
and maybe not capable of moving forward technologically to catch
up with these same industries and other parts of the
world which are now well ahead of them. So I'm
inclined to be a bit pessimistic about the capacity of
American capitalism to achieve the same kind of gains. That's
a pity, unfortunately, but that's the way I see it.
Speaker 3 (18:35):
Maybe it'll be pleasantly surprised. Can we talk about that
the near.
Speaker 1 (18:40):
Future and where you see the US economy over the
next couple of years. There is a new consensus building
everyone at the end of last year having said that
the US would not fall into recession. Now as being
economists after economists after economists raise their expectations of the
US being in recession in the relatively short term.
Speaker 3 (19:04):
What do you see there?
Speaker 2 (19:05):
Well, I'm a habitual pessimist, and I think the element
of uncertainty at the moment is very high, which tends
to work against major long term investments.
Speaker 3 (19:17):
Here.
Speaker 2 (19:17):
The problem is that, first of all, this administration it's
basically likely to be a one term administration. It could
lose control of the Congress in less than two years.
The tariffs have been imposed, but or are being imposed.
The question is how long will they last. I'm inclined
to think that there will be a lot of weight
(19:38):
and see amongst the major sources of business investment to
see whether the climate that the administration is trying to
create will in fact be a lasting one. The President
has declared tariffs and then taken them off and clearly
using them for short term political purposes. So if I
were considering investing a large amount of mone a new
(20:00):
productive capacity, I wouldn't be entirely committed to it at
this stage. I don't see that kind of rapid transformation
that some people are hoping for. Will there be a
recession in the short run, I think it's entirely possible.
What thing that goes against that is that the household sector,
which is the largest part of the American economy is
(20:20):
pretty stable, and it tends to continue to do what
it does to consume to take out debt when necessary
until it can no longer do so. So things can
go on for quite a while before this expansion comes
to a final end. But we're clearly in what shall
we say, I'm certain and even unchartered waters at the moment.
Speaker 1 (20:43):
Yes, with all that in mind, obviously, one of the
things this administration is attempting to do is just cut
the size of the state via the Department of Government Expenditure, etc.
Speaker 3 (20:53):
But with the possibility of.
Speaker 1 (20:55):
Recession ahead, are you concerned about the US debt marketcerned
about the extent of public debt in the US?
Speaker 3 (21:04):
That can that go on indefinitely?
Speaker 2 (21:07):
Well, first of all, I don't see that the administration
is succeeding so far in reducing public expenditure. They're making
all kinds of gestures in that direction and doing a
fair amount of damage to existing institutions, regulatory agencies, regulatory
structures which will degrade economic performance in the long run.
(21:27):
So they're running against their declared objectives with all of that.
But that said, so far as I have seen, public
expenditure continues to grow. It continues to grow because much
of it's on automatic pilot anyway, so that will sustain
economic activity. Am I worried about the fact that the
Treasury issues debt or pays interest on reserves in order
(21:48):
to placate the investment community by giving them bonds that
pay interest or other assets that pay interest. No, I'm
not worried about that so long as the broader community
wants to buy those bonds, which so far there's absolutely
no sign that is losing its interest in doing so.
And there's no reason why would the United States pays
a bill with a check that creates a dollar balance,
(22:11):
and the person receives it, if they don't have an
immediate use, they like to convert that into an interest
bearing asset, so the Treasury issues a bond. This is
not itself a problem of sustainability. If things really started
going against the dollar, that would show up in a
decline in the dollar exchange rate, but we're not seeing
that either. In fact, we're seeing that with uncertainty, the
(22:34):
dollar tends to rise because other currencies, the euro in
particular and I guess the British pound, you know, they're
not considered to be a safe so people tend to
flee to the treasury bond market because it's large and
it's liquid. So again, one can look at the level
of interest rates, the long term interest rates, and you
just don't see the kind of warning sign that there's
(22:55):
going to be a significant decline in the dollar anytime soon.
Speaker 1 (23:00):
We talked earlier about the US misallocating expandit share and
spending two months on military et cetera. When you look
at the extent to which the debt interest burden is rising,
and obviously this is the case in all high public
debt countries that UKNQ did, the percentage of public spending
that is going towards debt interest rises and rises and
(23:21):
begins to crowd out public services.
Speaker 2 (23:24):
It doesn't crowd out public expender just adds to it.
And what it does is provides income or provides increments
to the wealth of the wealthy. So it's a it's regressive.
It distributes, redistributes the balance of purchasing power toward people
who have capital assets, who hold treasury bonds on away
from people who are living hand to mouth on their
(23:46):
wages and their salaries. And that is that that's a problem.
That is why I don't favor a policy of high
interest rates, and I think the Federal Reserve List what
has been doing in the last four years is essentially pointless,
except that in so far it affected that kind of redistribution.
But let's say, does it draw real resources that the
(24:06):
government would use for other purposes. No, it doesn't do that,
because when the government has other purposes, it simply legislates
that they should be achieved and the process moves from there.
Speaker 3 (24:18):
Are you worried about inflation.
Speaker 2 (24:20):
Yes, of course I always worry about inflation. The question
is what is the cause and what are the policies
that are appropriate to maintain reasonable stability in the price level. Well,
first of all, what was driving inflation in the early
part of this decade twenty one and twenty two was
first and foremost the rise in oil prices from the
very low base in the middle of the pandemic. That's
(24:43):
what drove up gasoline prices and other heating oil and
so forth, and fed through into food prices. So dealing
with that that was actually done by the Biden Whitehouse
when it started selling oil from the Strategic Reserve. That
was the anti inflation policy. What the Federal is irve
started doing in March of twenty twenty two was basically
(25:04):
Eyewash started raising interest rates, the price changes started coming down.
In June, three months later, they'd only raised the interest
rate by less than a percentage point seventy five business points. Actually,
they were basically saying, oh, we're waiving our magic wand
we're the ones who were controlling inflation. Didn't have anything
to do with it, and they still don't. And now
(25:25):
they're caught in a little bit of a dilemma because
they thought the inflation had gone away, but of course
it hasn't. And the administration, assuming the tariffs go into
effect and start feeding through into prices, they're going to
see that in the price indices. And then questions was
their policy of failure? Was the policy that they've been
pursuing for the last three years just a failure And
(25:46):
the answer to that is it was neither a success
nor a failure. It was just not relevant to the
change in the price level. So when you have a
price level problem, you need to deal with it with
its actual sources, which in our situation, energy prices, the
supply chain disruptions, and then some strange things that go
on in the housing sector, which I think I won't
(26:07):
trouble you with. But thank you are largely statistical.
Speaker 1 (26:12):
Okay, I've had you for a while now, so I
want to move on to the end of your book.
Let's go back to the book, and I'm sorry to
have to tell listeners.
Speaker 3 (26:21):
That the last chapter is not hugely optimistic.
Speaker 1 (26:23):
You described yourself at the beginning as a fairly relentless pessimist,
and towards the end you say that human society has
become complex, rigid, and fragile, and whether this human society
can withstand even relatively small changes in the operating conditions
laid down by previous human societies under the earlier conditions
(26:44):
is an open question. So your vision of the future
of humanity in a warming and greening world isn't particularly
happy one, is it. There's a transition period for us
that isn't great.
Speaker 2 (27:00):
No, it's not a terribly happy outlook, because we just
apply the same principles to the economics of the household
and what we observe. And this is something by the way,
that I learned from my students who are perfectly candid
about this, is that, first of all, modern households have
very large fixed expenses, They have mortgages, they have car payments,
(27:24):
they have utility bills, and if they have children, they
have a major tuition payments and all of that. And
so when they're placed under austerity programs, which they have
been in most of the wealthy countries for the last
twenty years at least, what do they do. They figure
they've got to economize somewhere. And the way they economize,
(27:46):
one of the most important ways, is to have fewer children.
And so you see and practically every in fact, in
every upper income society in the world, under these circumstances,
the fertility rates fall, and ultimately population begins to fall.
It won't happen in the short run at the global level,
because there's still countries in some countries which have large
(28:08):
populations of young people, a few countries that have high
fertility rates, but it will happen eventually if this continues,
and as populations get older, the stresses on young families
become even greater, and so you ultimately look at a
let's say, a downward spiral. It's very much like the
(28:29):
famous statistic r that we all became familiar with in
the COVID epidemic when it falls below one, then you're
on the happy path toward the end of an epidemic. Well,
if you apply that to demography and have the same principle,
you're on the unhappy path toward the decline of the
species as a whole. So that's something to think about
(28:52):
over the long run. But it follows from applying the
same principles of entropy economics to this problem and understanding
that the households are reacting rationally to the pressures that
they've been placed under by austerity minded economists who are
trying to implement their traditional theories.
Speaker 1 (29:12):
And the other thing that may bring us to a
smaller population that you mentioned again was the end of
the book, is the fragility of our food production food security.
You talk about how as high quality fossil fuel resources
are depleted, the industrial basis of food production will decline.
And again, if you weren't going to have a fewer
babies now, you certainly have fewer babies once you see
that food is no longer available in the same way
(29:33):
that it was previously.
Speaker 2 (29:35):
Yeah, I think that's right essentially.
Speaker 3 (29:36):
Yes, Okay, that's not a happy future. Is there any
way that we can head this off?
Speaker 2 (29:43):
Well, The first thing you have to do is recognize
realistically the situation that we're in. Always the first thing
to do was to change your thinking. You can change
your thinking and confront a problem rather than in this
constant state of denial about it, then at least you
have a fighting chance. If you can't do that, then
you are constantly going down and doubling down on the
(30:05):
same path. Sanctions didn't work, Let's have more sanctions. Austerity
doesn't work, Let's have more austerity. Balance in the budget. Well,
we never quite got there. Maybe if we cut taxes
and spending even more, we'll get there. Get rid of
government altogether. And you're basically putting everything into a spiral
of decline. And our argument is that is not the
(30:27):
way any successful system develops. So successful systems develop on
the basis of realistic plans. And every business knows this.
This is not news to business people.
Speaker 1 (30:41):
So we should start with less magical thinking from governments.
But James, in an environment like this, what is an
investor to do?
Speaker 2 (30:50):
I first of all deny any competence to give investment advice.
Speaker 3 (30:55):
But none of us have any I will tell.
Speaker 2 (30:57):
You that in nineteen eighty seven day the stock market
fell by thirty percent. I called my father, who of
course is the author of a great book on the
on the called the Great Crash in nineteen twenty nine,
which has been in print continuously since nineteen fifty five.
And it was hard to get through. But around nine o'clock,
(31:18):
I mean he'd finished dealing with all the reporters that
the stock market had fallen thirty percent. Said. I heard
his voice. He said, James, is that you sides? There
was a pause. He said, not to worry. I've been
in cash for three weeks. And then there was another pause,
and I thought things were the mood was about to change,
(31:39):
which was not wrong. And then he said, but I'm
sorry to say that. The same cannot be said of
your mother. She finds it very difficult to sell the
General Electric that her family bought from Edison for a dollar.
So any event, you can read my investment advice into
that anecdote. Don't be like my mother, be like my father.
(32:03):
But that is to say, if you don't, if you're
not holding the capital gains for too long, too much
of the tax burden, in which case you're like my
mother and you're.
Speaker 3 (32:13):
Stuck and you're stuck. Interesting. Thank you.
Speaker 1 (32:16):
One final question before I let you go and say,
I know I have run over, and I apologize earlier.
I sense a little note of disparagement in your voice
when you said about the amount of energy used in
crypto mining, and feeling that you're not a fan.
Speaker 2 (32:36):
You're right, I'm definitely not a fan. I see this
as a device for undermining the legitimate control that government
should exercise over their own monetary systems, and I think
that's partly the purpose is to provide a completely insulated,
opaque way to make transactions in defiance of legitimate public
(33:00):
purpose control of first of all, taxation, control of capital
flows in the countries that have capital controls. I think
there's nothing but trouble to be expected from that in
the long run.
Speaker 1 (33:11):
James, thank you so much for joining us today. Hugely
appreciate it.
Speaker 2 (33:14):
Oh that's great. I joined it enormously. Thank you very
very much.
Speaker 3 (33:24):
Thanks for listening to this week's Marin Talks Money.
Speaker 1 (33:26):
If you like us, show, rate, review, and subscribe wherever
you listen to your podcasts. We're off next week for
the Easter break, but we'll be back in two weeks.
Speaker 3 (33:33):
Check out any episodes you have missed.
Speaker 1 (33:34):
In the meantime, I strongly recommend my conversation with author
and economist David Williams about his book Money, The Story
of Humanity and how the evolution of currency is central
to the rise and fall of civilizations. Don't forget to
keep sending questions or comments to Merror Money at Bloomberg
dot net. You can also follow me and John on
Twitter or x. I'm Maren s w and John is
(33:56):
John Underscore Stepic.
Speaker 3 (33:58):
This episode was hosted by Me Mary in Somerset Web.
Speaker 1 (34:01):
It was produced by Somersadi and Moses and sound designed
by Blake Maples and special thanks of course to James Galbraith.
Host
Merryn Somerset Webb
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