Podcast Summary: The Peter McCormack Show - Episode #134

Steve Keen – How Modern Economics Became Ideology
Date: December 9, 2025
Host: Peter McCormack
Guest: Steve Keen

Overview

This episode features economist Steve Keen, renowned for his critical views on mainstream economics, particularly neoclassical and Austrian schools. The discussion centers on why economics often drifts into ideology, the flaws in dominant models, how money and credit function, and the real-world consequences of economic theory on politics and society.

Keen strongly argues that modern economics, especially in Western systems, is dominated by untested, ideologically skewed models that fail to explain or manage economies effectively. The conversation ranges from the theoretical foundations and inter-school rivalries to the nature of money, the role of government, and the persistent problem of asset inflation and inequality.

Key Discussion Points & Insights

1. Economics as Ideology

• Keen claims that economics has become more ideology than science, especially in political circles.
  • Quote [00:00]: "Economists get away with this garbage. And it is garbage in my opinion, because you don't need the economist to have an economy... economists effectively have no skin in the game, to use Taleb's phrase."
• The fragmentation into various schools (Austrian, neoclassical, Post Keynesian, Marxist, etc.) leads to more confusion than clarity.
  • Quote [01:47]: "We have a whole range of competing schools of thought about how the economy operates, all of which talk past each other."

2. Economics and Politics

• Politics selects for ideologues, not those who understand systems, resulting in a flip-flop between left and right extremes without genuine comprehension of how economies function.

  • Quote [03:05]: "You flip between the two because both of them fundamentally are wrong...neither side understands it."

• Political systems are outdated and poorly suited to manage complex economies, tracing even basic concepts like "left" and "right" to century-old political structures.

3. Price Determination: Cost vs. Scarcity

• Keen describes the central debate over what sets prices:

  • Classical/Post Keynesian: Prices set by cost of production
  • Neoclassical/Austrian: Prices set by demand and supply, utility and costs

• Real-world evidence supports the cost-based view for most manufactured goods, with scarcity/demand really only dominating unique or perishable goods (fine wines, agriculture).

  • Quote [10:06]: "Manufacturing goods, you don't go into the local Sainsbury's and if there's a large queue, you don't see the price rises. If there's nobody there, you don't see the prices fall. There are these prices which are set."
  • Quote [14:26]: "There's 95% in the [manufactured goods] former and 5% in the [scarce goods] latter. The textbooks focus upon the 5%."

Memorable Moment [12:54]:

• Keen mocks the unrealistic factory examples in economics textbooks:
  • "Everybody's lining up to use the grinder… It's Keystone Cops, basically, idea of a factory. And therefore to produce more output... you get less output per machine. That is garbage."

4. Market Competition and Evolution

• Modern economies are characterized by dynamic evolution and product differentiation, not static equilibrium as neoclassical models assume.
• Brand and marketing matter—far more than most economics allows.
  • Quote [17:15]: "Everything is differentiated… you create brand value and then that enables you to get a segment of the market."

Memorable Moment [20:33]:

• "Virtually everything inside this room didn't exist 30 years ago. That's the nature of a capitalist economy. Why do we ignore that? It comes down to a bad starting point for economic theory, which is supply and demand curves."

5. Equilibrium as a Flawed Concept

• Keen heavily criticizes the obsession with equilibrium:
  • Quote [21:32]: "Equilibrium, to me, it's the biggest flaw in economic thinking is the obsession with equilibrium."
  • Real economies rarely find balance; they’re constantly evolving and disrupted.

6. Nature of Money: Commodity vs. Promise

• Major rift: Is money a commodity (gold, Bitcoin) or a promise (credit, state fiat)?

  • Keen argues money is a social relationship, essentially a promise backed by trust and enforced by institutions.
    • Quote [37:26]: "It's a promise... Money is a promise by a third party that the two parties to the transaction accept in full settlement of a purchase."

• Historical evidence suggests commodity money (gold) only dominated during social breakdowns (wars). Otherwise, credit and state money prevailed.

[39:08]:

• "Money is a Promise by a third party that both parties to a transaction, except in full settlement of an exchange of goods."

7. Government, Credit Creation, and Inequality

• Both private banks and governments create money; banks do so by lending (loans create deposits), governments by deficit spending.

• Keen demonstrates with his Ravel software how government deficits (rather than bond sales) create positive net worth in the private sector, balancing the negative equity of government.

  • Timestamp [74:00]: "The treasury getting a negative net worth creates identical positive net worth for the private sector."

• Absence of the government as “money creator” would mean the private/non-bank sector is always in negative financial equity—pushing society toward booms, busts, and asset bubbles.

• Asset price inflation and leverage are primarily driven by private bank credit, not government money creation.

  • Quote [121:38]: "Asset prices... are driven by the demand side and the demand side is borrowed money."

8. Inflation, Interest Rates, and Distributional Effects

• Keen challenges the neoclassical idea that interest rates control inflation; expectations and "animal spirits" matter more.
• Inflation mainly results from social conflict over income distribution, markup seeking by firms, and wage demands (when workers have bargaining power), rather than from pure monetary expansion.

Memorable Moment [95:15]:

• "The varying of interest rates as a control mechanism is a peculiar outcome of neoclassical economists being in charge of the economy..."

• Post-Keynesian/MMT view: You can create money as long as real resources aren't constrained, and inflation is controlled. But asset price inflation primarily benefits the rich, worsens inequality, and needs to be managed through regulation.

9. Government's Role and Scope

• Keen defends state provision of key goods (public health, infrastructure) as essential for society’s welfare and counterexample to pure free-market approaches.

  • Quote [136:01]: "That should be provided by the state. That's a good reason for state provision."
  • Trade-off: Some things are best left to the market, but others (sewerage, public health, utilities) require state action.

10. Morality in Economics

• The conversation turns to the importance of explicitly recognizing moral choices in economics—especially regarding distribution, public goods, and sustainability.

  • Quote [58:19]: "Some parts of morality are objective. Wiping out a species is not a moral activity... my ultimate morality is the maintenance of life on this planet."

11. Practical Reforms: Housing, Asset Bubbles, and Inequality

• Asset bubbles (especially in housing) are a major barrier to widespread prosperity. Liberalization of bank lending—not government deficits—drove house price booms in the UK.
• To restore "the American Dream," reduce asset prices and curtail speculative lending.
  • Quote [142:53]: "The American Dream in this sense is that average human can live a comfortable life... it can't be costing you an arm and a leg... somewhere to sleep."

Notable Quotes & Timestamps

• [00:00] Steve Keen: "Economists get away with this garbage... you don't need the economist to have an economy."
• [03:05] Steve Keen: "...we flip flop from one extreme to the other... neither side understands it."
• [10:06] Steve Keen: "Manufacturing goods... there are these prices which are set."
• [12:54] Steve Keen: "It's keystone cops, basically, idea of a factory... That is garbage."
• [14:26] Steve Keen: "There's 95% in the former [manufacturing] and 5% in the latter [scarcity]."
• [21:32] Steve Keen: "Equilibrium, to me it's the biggest flaw in economic thinking is the obsession with equilibrium."
• [37:26] Steve Keen: "It's a promise. There's actually the best paper that I've ever read on the nature of money is by... Augusto Agraziani."
• [74:00] Steve Keen: "...the treasury getting a negative net worth creates identical positive net worth for the private sector."
• [95:15] Steve Keen: "...the varying of interest rates as a control mechanism is a peculiar outcome of neoclassical economists being in charge of the economy..."
• [121:38] Steve Keen: "[Asset prices]... are driven by the demand side and the demand side is borrowed money."
• [136:01] Steve Keen: "That should be provided by the state. That's a good reason for state provision."
• [58:19] Steve Keen: "Some parts of morality are objective. Wiping out a species is not a moral activity..."
• [142:53] Steve Keen: "The American Dream... average human can live a comfortable life... it can't be costing you an arm and a leg... somewhere to sleep."

Significant Segments & Timestamps

• [00:00–04:17] — Economics as ideology; political systems, selection of leaders.
• [05:52–09:08] — WWII lessons on money creation, postwar economics.
• [09:08–16:19] — Debates on price theory, factory realities vs. textbook fictions.
• [21:32–22:45] — The equilibrium myth; how real economies work.
• [37:26–43:06] — The nature and history of money, promises and trust.
• [64:11–74:00] — Private and public money creation, Keen’s Ravel model.
• [95:15–101:07] — Interest rates, expectations, and inflation in the economy.
• [121:31–122:12] — Asset price inflation and policies to control it.
• [136:01–139:48] — State services, free markets, and finding a pragmatic balance.
• [142:01–144:14] — The "American Dream" vs. housing inflation, lessons for reform.

Tone and Language

• Steve Keen is candid, irreverent, sometimes caustic—e.g., calling neoclassical models "garbage," decrying "fantasy" in mainstream economics, and using humor and storytelling to make complex points accessible.
• Peter McCormack plays the role of the curious, occasionally critical but open-minded host, translating complex arguments into practical, everyday terms.

Takeaways for Listeners

• Economics is highly ideological; consensus is rare, and much of dominant policy is based on untested abstractions that may ignore how real economies work.
• Both politics and economics are deeply entwined, often in ways that serve prevailing ideologies rather than empirical reality.
• Reforms require a clear understanding of money, credit, government roles, and moral values.
• The problems of asset inflation, inequality, housing, and public goods are rooted in both economic theory and policy choices—many of which can and should be revisited.

In sum:
Keen delivers a thorough, provocative tour through the faults of modern economic orthodoxy, blending sharp critique, real-world examples, and accessible models—all while urging policymakers, economists, and the public to question economic myths and seek pragmatic, empirically grounded solutions.

For further exploration:

• Beardsley Ruml, "Taxes for Revenue Are Obsolete"
• Basil Moore, "Endogenous Money"
• Augusto Graziani, "The Monetary Theory of Production"
• "Debt: The First 5,000 Years" by David Graeber
• Ravel double-entry bookkeeping model (Steve Keen)
• Janos Kornai, Theory on demand and resource-constrained economies

Recommended listening for anyone curious about:

• Why arguments about money, inflation, and economic growth are so contentious
• How ideological commitments shape economic policy—often to society’s detriment
• Practical implications for banking, housing, government debt, and inequality