Yanis Varoufakis Interview

Greek. Economist, politician, leader of MeRA25 and DiEM25, former Greece’s Finance Minister, author and professor

1. Why does economics matter?

Everything we do, and everything that is possible within our social milieu involves questions of dealing with the manner in which we produce our daily lives, both individually and collectively. All that is the realm of economics, so economics matter to the extent that life matters – in a world of limited resources and in a world where humanity is facing both external and internal constraints. So in a sense, any attempt to separate the economic from the political, from the moral, from the philosophical, is bound to produce bad politics, bad economics, bad life and terrible economics.

The “economic” is part and parcel of the human condition, and to the extent that the human condition matters, our understanding of economic relations is crucial.

2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?

Economic science is, to begin with, not a science in the same way that mathematics is not a science and philosophy is not a science – in my understanding, maybe it’s an Anglo-Saxon understanding, but nevertheless, economics is not a science like physics is, like biology in the sense that we do not produce verifiable or falsifiable theories, but we do produce systems that help sharpen our thinking regarding the economic circumstances that we face.

The problems that economics faces, which in a sense transcends schools of thought – this is a problem that pertains to neoclassical economics, to Keynesian economics, even to Marxist economics – the problem we face is this: the moment we try to emulate the natural sciences, the hard sciences, mathematics, by turning the world out there into a mathematical model of economic variables, the problem we face is that in order to solve this mathematical model – because without a solution, you can frame economic dynamics beautifully mathematically, but without the solution you cannot answer any questions using that model. In the same way that in mathematics, if you have a system of n equations and many more unknowns, it’s a beautiful system but it’s irrelevant because you can’t solve for it.

To solve the system of equations that is our mathematical economic model, we have to make assumptions that move us away from really existing capitalism. So we face a huge trade-off: either we solve the system and then we have something definite to say – but what we say is irrelevant to really existing capitalism, or we don’t solve the system, in which case we don’t have much to say about even our own model.

That is a conundrum. That is almost a classical tragedy that economists face. Economists have a tendency to solve the model because you cannot pursue a career without actually publishing something that has some tangible hypothesis, that has certain theorems, which you can then try to ascertain whether those theorems are supported or falsified by the data, by empirical means. So careers are made on the basis of forcing solutions upon models by means usually of hidden assumptions, which ensure that your theories aren’t going to be absolutely relevant to really existing capitalism. So the more successful we are theoretically, the less relevant we are to the economic world that we live in.

And this is a major explanation of the fact that economic theory has never been able to illuminate the real problems that practitioners of economics face, whether you’re functioning at the level of government, at the level of a corporation, of a bank, of a central bank, OECD, the IMF. In the end, policy is driven by politics, by vested interests, by the profit margins of corporations and then at the end of the day, you can come up with any justification using the mathematical models and the economic models.

And that means that in the end, the mathematical economic models of different economic schools of thought, doesn’t matter which one we’re talking about, end up as a legitimizing veneer, an ideology that appears as a science, which it is not. And therefore, because we as economists, we can only understand one thing really: how lucrative monopoly is, by creating these wonderful economic models that are exceptionally complicated and aesthetically pleasing, whether we’re talking about dynamic general equilibrium models or game theory or macroeconomics and so on, those are so complicated that only a handful of people understand them.

People out there who do not understand and think that it must be that those who do understand them are the experts, those who understand them are experts in understanding those models, but they have no clue of how the economy works. So you have a feedback effect between economics as a legitimizing ideology a little bit like theology in the Middle Ages: extremely complicated, aesthetically pleasing, very interesting discussions between theologists, you couldn’t have an opinion about matters of state in the Middle Ages if you didn’t know your Bible upside down and you couldn’t have very complicated conversations about Theope and various other dogmatic discussions between the Catholics and the Orthodox and so on and so forth.

But of course this was all a veneer for the fact that a certain power – greed – was replicating itself using very interesting logical arguments and pseudoscientific constructs in order to legitimize the exclusion of the many from the decisions that affected them and the reproduction of systems of power.

3. What role does economics play in society? Does it serve the common good?

Plays the role of religion with equations and some statistics. In other words, just like religion traditionally played the role of legitimizing existing power – the power of the emperor or the power of the feudal lords, and at the same time was utilized by usurpers and rebels in order to oppose the oligarchs, the feudal lords’ rule through some kind of hierarchical schism. That is the role that economic theory plays. The fact that it uses mathematics gives it the appearance of a scientific, non-religious objective role that increases its religious power. And especially when you combine that with statistics the power of this religion is turbocharged because there’s nothing as powerful as the misuse of statistics.

And when I say about misuse, I’m not talking about so much an intentional attempt to defraud people, no, it’s far worse than that. Most of the economists using empirical data out there are doing their best to come to the truth, but this is something that I had an experience of as a young econometrician-statistician: if you are taught to emulate physics in the social realm as an economist, econometricians, statistician, then by definition, there’s no other way of doing it.

You start with a mathematical model (your theory, your theorem), you reduce it to a functional form, a mathematical form that is consistent with your hypothesis. And then try to find whether the data contradicts that functional form, and if it doesn’t, you say, “ah! See, my model, my theoretical hypothesis has been confirmed to the extent that it has not been falsified by the data.” The trouble here is that while the functional form that has been not confirmed but not falsified by the data is consistent with your hypothesis, there is no way of knowing how many alternative hypotheses are also consistent with with functional form.

In other words, you have not confirmed your theory. There are usually an infinity of theories that are consistent with a functional form that the data does not contradict, in which case we have proved nothing. And the reason why that is not a problem in physics or in other natural sciences is the fact that they have the laboratory and we do not have the laboratory. I mean, we do have economic labs and I have spent 10 years of my life doing economic experiments, but we cannot do an economic experiment regarding the Euro Crisis.

You cannot re-run the Euro Crisis and say, OK, now imagine if austerity was not unleashed upon the people of Greece, of Italy and so on, what would have happened? We cannot do that. We cannot. We don’t have a rewind button to go back and do the experiment again. And historical data doesn’t help us with that. As for the laboratory, we fill it with humans and we ask them to play games with one another, we pay them depending on how they behave within the parameters of a game. And this is extremely interesting. I mean, I spent a decade having enormous amounts of fun doing that, and I’ve learnt a lot.

But in the end, all you can do is you can test hypotheses of how people behave in the lab, which does not necessarily throw light on what’s going on out there. So this is the reason why it is impossible, even if you try to use economic methods, both theoretical and empirical, in a manner that approaches any degree of objectivity.

4. Economics provides answers to problems related to markets, efficiency, profits, consumption and economic growth. Does economics do a good job in addressing the other issues people care about: climate change and the wider environment, the role of technology in society, issues of race and class, pandemics, etc.?

The problem is worse than this. It is not just that economics knows how to deal with the question of efficiency, but in the real world it doesn’t know how to deal with the world of externalities and climate change and so on and so forth. The failure is far more deep seated. I don’t think economics can even understand or illuminate questions of efficiency. Allow me to give a particular example, and I hope that it’s not too specialized. But one of the things that economics students, one of the first things they learn in economics 101 – or actually, I’ll mention two things that we learn in economics 101.

One of them is demand and supply, standard stuff, the downward sloping demand curve and the upward sloping supply curve. You do that even at high school if you do a bit of economics. And the second concept is a concept of efficiency, of optimality. And here I shall mention the definition that everybody uses in economics of efficiency and optimality: that of Vilfredo Pareto, the Italian economist, Pareto efficiency, Pareto optimality.

Let’s look at these two, because these are supposed to be the bread and butter of economic theory. They are both highly problematic and I’ll explain why. Take the demand curve. The demand curve shows you, supposedly, the relationship between the price of a commodity and the level of demand for that commodity, how many units of it will be purchased at different prices Ceteris Paribus, all other things being equal. Right? Assume that the amount of money is spent for each consumer are the same, the prices of all competing goods are the same, substitutes, of compliments, that nothing changes, tastes are the same.

In other words, the demand curve is a hypothetical construct. It does not exist in real time because in real time the Ceteris are not Paribus as I like to say. All other things are not equal; incomes change, prices change. So in real time, the demand curve does not exist. It is a hypothetical concept. Same with the supply curve, the upward supply curve. Now, when we teach economics students, we say, OK, here’s the demand curve, here’s the supply curve, equilibrium is in the middle.

In other words, they say there’s one price, which is the price at which the demand and supply curve intersect, and the quantity is such that if that price and quantity existed, and this was the demand curve and the supply, we would be in equilibrium, there would be no reason for the price to shift. That’s fair enough. But it’s one thing to say that, and it’s quite another to say that if the demand curve shifts upwards, then prices are going to follow a path leading from the first point, which is the intersection, to the second point of intersection.

That that you cannot say. Why can you not say it? Because remember, the whole premise is that Ceteris Paribus. So if the price that’s shifting, the price of tea or coffee, that means that the demand and supply curves of all other goods will start moving around. Which means that their price is not going to be the same, which means that the demand curve that you shifted would now start shifting because it’s shifted, and it is impossible to work out mathematically how it will shift when everybody, everything is sort of shifting all over the place.

So it is impossible to talk about how prices change in the context of the demand and supply framework that we teach in economics 101. You see, here is a fundamental difference between economics and physics. Physics 101 is also full of simplifying assumptions to keep the analysis simple. Beginner’s physics starts with, let’s say, assume there’s no gravity, assume there’s no air resistance, assume this and other things that we know are not true.

But you say, OK, let’s work out the laws of physics without gravity, without dust, without all these imperfections. So we have a very simple relationship between mass, acceleration velocity. You have to create, to come up with the simplest versions of the laws of thermodynamics. And these are correct given the assumptions. And then you introduce grains of imperfection, let’s say, OK, let’s now introduce that. Let’s introduce air resistance, a little bit of dust.

So the mathematical formula becomes a bit more complicated, right, but the relationship between the amount of imperfection, complication that we introduce, and the complexity of the theory is analogous. Whereas in the demand and supply framework that I just described, you just add one speck of realism -time, you just add time – and the whole thing blows up. There is no analogy, it’s not analogous, the imperfection or the complication introduced and the complications that you get in the model. The model just blows up. It’s no longer relevant the moment in the demand and supply framework we introduce time.

So that’s why all of microeconomics, and that’s something that most economists do not know even after they finished university, is that all the microeconomics they’ve learned, the equilibrium models rely on the assumption that there’s no time. The moment you introduce time it all disappears. Imagine if you had a physics that only applied as long as there’s no gravity anywhere. It would be completely useless physics.

So it’s not that economics understands prices and quantities, demand and supply and so on, but then it has problems with things like climate change because of the complications introduced by externalities. Even if there were no externalities, the model is absolutely unrealistic. And any attempt to make it more realistic by adding things like time in it, or actually space, distance, the whole thing collapses because the moment you introduce distance you introduce monopoly, or a degree of monopoly and the whole thing collapses.

Efficiency, OK, let’s take the concept that the concept that I mentioned before of Pareto optimality, of Pareto efficiency. How is it defined? It is defined on the basis that if you have, let’s say, two people, only two people in the world: Robinson Crusoe and Friday, that’s a standard example in economics, and you’ve got two commodities, X and Y, fish and bread. And there is a finite quantity of fish and a finite quantity of bread, of X and Y.

Every distribution of X and Y between these two people yields a certain level of utility for each one of them. And you define an efficient distribution of X and Y between these two people. As a distribution such that you cannot improve the well-being, the utility of one without reducing the utility of the other. That’s the standard – and it makes some sense, right?

I mean, imagine if there were a couple of kids and there was a certain number of toys and you distribute the toys between the two kids. And suppose now that after that you could take one toy from one kid and give it to the other one and take another one from the second kid and give it to the first one. And both of them were happy. Then, of course, the first distribution was not efficient, and as long as you can redistribute the toys between those two kids and one of them gets happier without the other one getting unhappier, you are not in an efficient distribution.

And when you reach a point where whatever thing you change, at least one of them is going to be worse off then you can say that’s an efficient distribution. That’s the way that economists understand efficiency. OK, but that presumes that these children or people are sociopaths. The only way of defining that efficiency is by assuming that people are sociopaths.

In other words, what do I mean by that? I’m being very specific here. I’m not grandstanding. It assumes that each of these individuals doesn’t give a damn about the other, they only care about how many toys they have, how much fish they have, how much bread they have themselves. So sympathy is not allowed. A situation, in other words, where you take a bit of bread from me and you give it to you, and let’s say you’re starving and I’m not, and suddenly I feel okay, that’s nice because, you know, for Fabio, he was starving and starving less. That’s not allowed. And I’ll tell you why it’s not allowed. Envy’s not allowed. You know, you have all the toys and I have very little toys, very few toys and somebody takes it away from me and gives it to you, I didn’t care very much about the toy, but you do you like that one.

And I think, hang on a second. He’s already much happier than I am. And they’re giving him even more happiness and they’re not giving me any more. Now, that’s not allowed either. Why is it not allowed? Because if envy and sympathy are allowed, the whole construct, the mathematical model of efficiency, of Pareto efficiency collapses. Because the only way of working out what is efficient and what is not is to assume that what you have does not have an impact on my ability, either negative (envy) or positive (sympathy). Because if it does, then it is impossible to define a priori which distribution is efficient and which one is not.

Now a world in which time is not allowed, space is not allowed, and everybody’s a sociopath, and that must be the case otherwise our basic economic analysis does not hold, is a word which is interesting but absolutely irrelevant to the world we live in, that human beings inhabit. So it’s not that I am contesting the premise of the question which is that economics is useful when it comes to practical things like efficiency, like optimality, like working out the relationship between the price and quantity of commodities, but we have a problem when it comes to non-commodities like clean air, which has no price because nobody owns it and so on, the externalities. It is true that externalities throw a huge spanner in the works of our economic analysis. But we don’t need externalities for economic analysis to be shown to be absolutely irrelevant in a world which evolves through time in which there is space, distance and in which human beings are not sociopaths.

5. As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?

Absolutely, we should. But let me let let me go a bit further back in history. The economic problem has always been the central problem of humanity. Take for instance Homer’s Iliad. In its pages you’ll find a lot of economics, because most of the Iliad is about a war that actually doesn’t take place, that’s stalled. For most of the Iliad there is no war. The Greeks are fighting with one another over the distribution of goods looted from the Trojans, and most of the time what they do is they spend cultivating the land in order to eat. So in other words, they have an economic problem and they have economic solutions and they have management problems, it’s all economics in the end. Even in the Latin tradition with Ovid, you’ll find that the way in which Achilles’ arms are distributed between his heirs – and this is a distribution problem. It’s an economic problem. It’s central to the founding myths and points of the classical tradition.

However, they didn’t need economists. Why? Because up until the 18th century all you needed in order to understand the economic problems of life were: you needed to understand botany, you needed to understand farming, agriculture. To see why the Roman Empire was, for instance, constrained when it came to the production of wheat in Egypt and so on and so forth, you need to understand military matters. Let’s go to another example to understand the rise and fall of the Spanish Empire. You had to understand the manner in which the Conquistadors went over to Latin America and looted the gold and brought it to Spain and what effect that had on the price of gold and so on and so forth.

You didn’t need economic models for that. You needed to be a good historian, political scientist. You had to understand military history. You had to understand – Machiavelli could do it very, very well through his very smart analysis of political power. Economics was absolutely useless. The age of economics is the age of capitalism. Because with capitalism for the first time, you have the commodification of land and labour. For the first time, you have the decoupling of the political sphere from the economic sphere. That had never happened before. Before capitalism, if you were the Lord, you were rich, and if you were rich, it must be because you were the Lord.

There was no way you could be rich without being a member of the aristocracy. If you wanted land you conquered it, if you didn’t inherit it. There was no way of buying land and speculating on it. Because land was not commodified. So economics became possible with Adam Smith, maybe with the physiocrats before him, but nevertheless, Adam Smith, I think, can rightfully be considered the pioneer of economic theory only because for the very first time, society had a real need to understand what the hell was going on.

How could it be that the dirt, the lowly, socially lowly merchant could suddenly have more power than an aristocrat? And how was it that decisions were being made that change people’s lives, that did not pass through the high echelons of political power, because suddenly economic power became decoupled from political power. And that’s where economics emerged. But economics had two stages. The first was the classical period, as we know, with people like Adam Smith, David Ricardo, John Stuart Mill, Thomas Malthus, Karl Marx, people who were not economists.

I mean, if you ask them “what are you?”, the last thing they would say was “economist.” Adam Smith was a philosopher. Karl Marx was a revolutionary. John Stuart Mill was a politician. David Ricardo was a financier and the landlord. He would never answer to your question, never filling a form which says “occupation: economist” – never. So that was the interesting Classical period when there was simply a hunger to understand this new world in which economic power was divorced from political power or separated from political power.

But then there’s a second era of economics, which is what your question pertains to. That’s the era of professional economists, of people who would declare themselves to be economists, of people who got positions in universities as economists. And from the moment that economics became embedded in the academy as a separate science, as a separate discipline, I would say, with its own rituals and journals and ways of accrediting those who had the right to speak for economists. For that to take place, you had to move into this Neoclassical tradition of economics, which was a kind of emulation of physics.

So unlike Smith and Ricardo and John Stuart Mill and so on, who were discursively attacking the big economic issues, and very successfully as well, you have the academic economist who has a project as an economist, not as an intellectual who wants to understand capitalism. And the project is to impress the authorities in the university that they deserve a chair in the university. It’s not the same thing, trying to explain capitalism and trying to get a chair for yourself is not the same thing. To get a chair, to create a department, to convince the University of Cambridge, of Pisa, of Stockholm, whatever, Uppsala, that we deserve to have a chair in economics and a new discipline, a new department of economics, the way they did it – and it was quite natural because at the time the archetypal science was physics – was to emulate physics. So how did they do it? They said, OK, how does physics work? Take Newton, for instance, Newtonian physics. Newton begins with an axiom, an assumption which could be right or wrong or could be right. That’s why it’s an axiom. And the axiom was that, for instance, energy does not disappear, it simply changes form.

The conservation of energy principle. So this could be wrong, but he said ok, imagine that this is right. Now, what kind of relationship should I expect between force, mass and acceleration? So he says, ok, acceleration equals force divided by mass. This must be the case if energy is conserved. Then he goes to the laboratory, he tries this out, he says look it works. So: axiom, mathematical theorem, empirical evidence. That is the structure of science in physics.

so economists, professional economists, unlike the Classical economists, try to emulate them. And this is why we call them Neoclassical economists, or post-Classical economists. So they had to come up with an alternative to Newton’s principle of energy conservation.

So it had to be something that applies everywhere. The beauty about the energy conservation principle is that the applies in Italy, in Greece, on Mars and in another galaxy. It’s not specific to a place. So how could simulate something like that? So some of them thought, they borrowed a philosophical idea from Jeremy Bentham and they said: the principle of utility maximization, everybody on planet Earth, every human being has a utility function that they try to maximize.

Everybody’s utility functions is different, but the principle of maximum utility, which then has a mathematical manifestation – set marginal utility equals the marginal disutility or marginal cost. First order derivative equalization, this is the equivalent of the mathematical relation that Newton came up with between force, mass and acceleration. And then you say, ok, how can we ascertain whether this is true or not? You work out that derivative maximization means that if the price of bread goes down to buy more bread, and say “ah see, it works!”

So suddenly from Adam Smith and Ricardo and the Classical economists who were trying to answer big questions about what makes nations wealthy or poor. Why are there economic declines – David Ricardo. Why is there a business cycle – Karl Marx, who looked at the economy as an organic thing with profits and wages and rents and capital accumulation and so on, all organically connected. Move to the professional economists, the Neoclassical economists from the 1840s, 1850s, 1860s onwards, who suddenly, in a bid to emulate physics, start talking about demand curves and the relationship between the price of wheat and the quantity of wheat.

But everything else is Ceteris Paribus. And suddenly, for the reasons I have outlined in answering previous questions of yours, suddenly they create a mathematical model which is fantastically beautiful, aesthetically pleasing and utterly irrelevant to existing capitalism or to any possible capitalism. And these people, at some point, this tribe or priesthood actually, it is a priesthood, because then they have rituals about who is going to be the pope, who’s going to be the bishop, who’s going to be the cardinal and create journals that everybody is dying to publish in because this is how you become a cardinal.

So this whole shenanigan starts, this whole self-referential process of creating mathematical models which are successful to the extent that they misunderstand capitalism. So this is not a failure to understand capitalism. It’s a design baked into our economics, not to understand capitalism. And then the more mathematically powerful those models become – and this is something I spent a lot of time writing about before I became a politician – here’s the tragedy of economics: you have a process within the profession, the priesthood for establishing a career as a young man or woman PhD, you need to close your model. You need to start with a mathematical description, a pseudo-physics like description of capitalism, and you need to have something that your PhD committee, editors of journals, of important journals like Econometrica, the Journal of Political Economy and the Economic Journal and so on, they would say to you, what is the theorem that’s coming out of your work that we should pay attention to? What is it that you are telling us that is new using this beautiful model of yours? You have to say something, otherwise you don’t get promoted, you don’t get your PhD, you don’t get tenure, you don’t move on in life.

So you really need to produce, to squeeze that theorem out of it. To squeeze that theorem out of it, you need effectively to reduce the number of variables. Because otherwise you have too many variables, you cannot produce solutions like having too many unknowns in a system of equations. So you start making assumptions. Things you don’t know, you assume, right, and moreover the greatest hidden assumption that you have to make is that there is a solution to this model, you assume that the solution exists and then you try to find it.

But this is fascinating because often when you assume that there is a solution, you can find it, but what you can’t prove is that there is a solution. But what is interesting to prove is that there is a solution, but that you don’t try and prove because if you try to prove it, you can’t. So you introduce it in assumption. John Nash, the great mathematician, game theory, for instance, could only find the solution to the so-called bargaining problem by assuming that one existed.

But the problem with the bargaining problem is that it doesn’t have a solution. But if you assume that one exists, you can find it, and you can find it but it’s useless because it has nothing to do with really real bargaining, because the real bargaining is indeterminate, doesn’t have a solution. But who understands that? The mathematics is so complicated. It’s so beautiful that you get Nobel Prizes and so on and so forth. The tragedy, however, is this: the assumptions you make in order to find a solution in economic theory – high-powered mathematical economics – is the same assumption that financiers have used since the end of Bretton Woods in order to pinpoint the expected value of financial derivatives. The moment you assume that there is an equilibrium, you can find what the equilibrium is. The problem as you know, however, in finance is that there is no equilibrium in real life, or if it is, it’s unstable and dynamically unstable, which is why the world blew up in 2008.

So the same intellectual dishonesty, which is essential in order to promote an economist’s career, the same and precisely the same intellectual dishonesty is the intellectual dishonesty perpetrated in the financial sector in order to create the financial derivatives that blew up in 2008. So I’m coming to your question because your question is about moral responsibility of economists. Yes, we have a huge one. Because by turning a blind eye to the hidden assumption that a solution exists before we can find it, we are replicating the intellectual subterfuge and crime that has led to enormous costs being inflicted upon humanity by the financial sector.

And you know, this connection is much closer than one might think. The same people who came up with the financial economics theorems that were then used by the financial sector in order to produce the so-called value-at-risk measures that the Lehman Brothers CEO had on his desk every day thinking, OK, now I know what is the maximum I can lose.

Of course, it turned out that was a ridiculous underestimate, but it’s the same trick that academic economists use in order to publish their articles, that financial engineers use in order to infect the world with financial instability and fragility that led to 2008, which is our generation’s 1929, from which we have not recovered and from which I do not think we can recover.

6. Does economics explain Capitalism? How would you define Capitalism?

What to begin with? Economics succeeds only by not explaining capitalism. The radical point that I’m making is that it is one thing to fail. It’s quite another to succeed in your own discipline by ensuring that your own discipline is irrelevant vis-a-vis its subject matter, which is capitalism. It’s a very radical claim and I know that, and it’s one that really annoys most of my colleagues in the economics profession.

In medicine, for instance, we know that for many, many years, centuries, doctors were doing more harm than good. But that was not because that’s what they wanted. It’s not because they benefited professionally by killing more patients than they cured. It was a learning process. At some point, when was it, 1900, 1910, doctors started curing more people than they killed and they became useful through accumulated knowledge. In economics this is impossible because as long as economics or economists are in the business of creating quantitative models which are meant as abstractions of capitalism, such as the once you have them you convince yourself that you have understood the architecture of capitalism, as long as that’s what economists do, economics would only succeed in building these models if these models are dangerously irrelevant to capitalism. So effectively, they make themselves blind and deaf to capitalism in order to complete their models as models of capitalism. That’s my radical denunciation of economics. Now, I love economics because it’s like the Copernican system, right? Sorry, the Ptolemaic system.

The Ptolemaic system, it was a beautiful system. It was wrong but it was still beautiful, I’m perfectly capable of understanding the aesthetic value of a general equilibrium theory. But if you really want to understand capitalism, you have to set general equilibrium models aside in the same way that the Ptolemaic system needs to be ignored if you’re going to understand the cosmos. So your question was, how do I understand capitalism? Well capitalism, for me, is defined by two markets. The market for labour and the market for finance, for credit.

It is the only economic system in history where the process of work was regulated through a very weird market, the labour market. The reason why the labour market is weird is because it’s the only market in which the buyer doesn’t care at all about what he’s buying. So an employer buys time. They buy 40 hours a week of your time, let’s say eight hours a day for five days, whatever.

However many hours is specified by law. So they buy that time of yours, but they don’t care about that time. What they care about is your work. Is the amount of value you input into commodities – goods and services. But that they cannot buy. That is a human creativity process which can never be contracted. There’s no way you can write down in a contract that which comprises the creative power of labour, so the employer buys labour time hoping to extract creative labour, productive labour during that time. And the extent to which the commodity has value depends on how much creative labour is going into it, not how much time, because I can be employed for eight hours a day and do nothing. Stare at the wall, right. So unlike every other commodity who’s buying and selling is fully specified by contract – get so many iPhones, I’m going to buy a thousand iPhones from you for this price, that’s the quantity. The moment you signed that contract the exchange is finished and it’s no longer economically interesting.

You know what there is to know: so much money, so many iPhones, end of story. And there is no reason to have a human relationship between the buyer and seller. I mean, they may have a human relationship, you go to a market place, you say OK, how much for the potatoes? 3 Euros. OK. You don’t need to have a human relationship beyond that, you can have it.

You can to have a discussion about the weather or football or politics, but it is irrelevant to the economic transaction. Whereas, in the labour market, the moment you sign the contract, that’s when the fun begins. Because then once you say, OK, I will be going to be working for you for 40 hours a week, you enter the business, the factory, the shop, the architectural design studio, whatever, as an employee, and that’s when the economically interesting part of a relationship begins.

But that is not a market anymore. You exit the market. So this is a very weird market. It is a market where what is being sold is not what is being bought. And therefore you have this twin nature of labour. Now that is unique to capitalism. It was not the case under Feudalism. In Feudalism you were a peasant, you worked the land, at the end of the day or the season the Lord came around and collected 60 percent of the of the of the produce, end of story.

There was no market. You were not selling anything, you were not buying anything. The relationship between the lord and the peasant was a political relationship. They would leave you enough so that you do not rebel and cut their heads off. But this is not something that economics or markets have anything to do with. So the labour market.

Now, there’s a second market which is equally weird because the moment the surplus value – the difference between the value of the creative labour and the value of the labour time, this difference is surplus value from which profits, rents, interest emerges – the moment that becomes accumulated and ends up in the financial sphere, then it has to be invested.

And usually those who own it do not invest it themselves, they give it to a financial investor to invest for them, a banker, an agent, a broker. And that’s when the financial investor will have to write a contract, which is again weird, because there’s no way of specifying in advance how much money the investor will make on behalf of the owner of that surplus value. So the financial market – the market for money – and the labour market, these two weird and strange markets that are the source of all instability in capitalism and exploitation and bubbles and crisis, these two markets are what define capitalism and make it distinct from every other form of social organisation, socioeconomic organisation.

7. No human system to date has so far been able to endure indefinitely – not ancient Egypt or Rome, not Feudal China or Europe, not the USSR. What about global Capitalism: can it survive in its current form?

Over the last few years I have put forward a proposal, a hypothesis which has upset various people because I’ve already answered this question by saying that we don’t live in capitalist times anymore. That is not a question whether capital can survive because capitalism has evolved out of itself into something distinctly different.

When I was a young man, the discussion between supporters of capitalism and socialists, opponents of capitalism, was based on the difference between the primacy of the private sector, the free market and the state, sector-state planning, government. The supporters of capitalism, of free markets, were arguing that the market, including the labour market and the financial market, is a decentralised decision making process which works to the extent that it is separate from government. Government only provides the rule of law so that people don’t steal from each other, and enforces contracts between private players, and it is through this decentralised decision making where greed turns into public good. This is if you want also the Smithian, Adam Smith’s point that when everybody is maximising their own profit or utility without anyone caring about the common good, the common good is served most optimally. So that was the pro-capitalism argument.

And the anticapitalist argument, the socialist argument was that the market generates, yes, enormous amounts of goods, unleashes productive forces, but at the same time unleashes huge crisis and destroys life prospects for whole generations, and in the end, it is inefficient because some of those slumps you cannot get out of and therefore you’re going to have to need either a kind of Keynesian state intervention or a central planning of sorts like that of the Soviet Union or indeed of places like Japan, which are to a very large extent, or those economies, even though there was private ownership, there was a lot of central planning with keiretsu and so on.

So this was an interesting debate during which I cut my theoretical and intellectual teeth. But then we had the crisis of 2008, the collapse of 2008. And after the collapse of 2008, this discussion was no longer relevant. Why? Because we no longer have the distinction between the private and the public, between the state sector and the private sector. Since 2008 capitalism has been kept – or what we call capitalism – has been kept alive by central banks. On the one hand, you’ve got central banks pumping out huge quantities of state money, we give it to the private banks that are all bankrupt after 2008. The private banks, like zombies, survive on the basis of this money that is coming to them from the central bank, they lend it on to corporations. The corporations do not invest it in themselves because they fear that the little people out there don’t have enough money, the aggregate demand is too low, to buy what these corporations can produce. This is why you have the absurd phenomenon of corporate savings. You have Apple with more than $200 billion of savings.

I mean, why do corporations need to have savings? When I was a student we were being taught that in capitalism, households save and corporations borrow to invest. When Apple and Volkswagen are saving, you realise that this is not capitalism as we knew it. So Volkswagen gets a lot of money from Deutsche Bank, which gets it from the European Central Bank.

Similarly, in North America, with Apple and so on, they keep getting money from the Federal Reserve even though they have savings. And what do they do with this money?

They go to the New York Stock Exchange or to the Frankfurt Stock Exchange and they buy their own shares. So you have this complete decoupling between financial capital and commercial capital. Financial capital is doing magnificently well, you have a huge rage of capital accumulation, wealth accumulation, Mr. Bezos is making billions more wealth every day not because of profits. Amazon is not profitable. Look at Tesla: no profits. And yet Elon Musk is getting richer and richer and richer and richer. Why? This is all central bank money that is being diverted to the commercial banks into the corporations.

So that’s one thing: it’s all zombified by central bank money. And the other reason why it’s not capitalism anymore is because you have a situation where competition has died through mergers and acquisitions. 90% of the companies in the New York Stock Exchange belong to three companies: BlackRock, State Street and Vanguard. Three companies own 90% of all companies. They own the same airlines. This is not a competitive capitalist market. And you’ve got the high-tech sector producing all these wonderful technologies from Silicon Valley primarily, which allow for the Facebooks of the world to move away from capitalism. I mean, the moment you enter Facebook, you’re not in the market anymore.

Imagine if you were going to walk down the Main Street or High Street and to realise that every shop belongs to one man, all the goods that are sold in these shops are controlled by one man, all the advertisements, everything you see is controlled by one man. The street on which you walk, the asphalt, the pavement, the air you breathe belongs to one man. That man can decide what you see and what you don’t see.

He effectively gets into your brain, and very effectively too. Usually the suggestions that come from Amazon are very good. They’re the ones that even my best friends wouldn’t have the capacity to inform me of what I really want. But that’s not capitalism. That’s not the market, that’s feudalism. And this is why I’m calling it techno-feudalism because it’s a technically advanced form of feudalism. So to answer your question, can global capitalism survive? I would say it hasn’t survived. Global capitalism is already a thing of the past. We already live in post-capitalist times, which I describe as techno-feudalism.

8. Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?

Of course, we can imagine something better.

One of the books that marked me as a young person was Volaire’s Candide and the character in Candide of Pangloss, who used to teach his prodigée that we live in the best of all possible worlds. Now, there’s no doubt that the very, very few who control the fates of everyone out there would love us to believe that Pangloss is right and that, yes, this world sucks, it has lots of problems, but it is the best of all possible worlds.

Every ruling class wants us to believe that Pangloss was right. And if for a moment we lose our will to imagine an alternative present, an alternative set of circumstances, then we become slaves to whoever happens to be in power. And that’s true today, it was true in the Roman Empire, in the Byzantine Empire, any kind of regime. So is it possible to imagine a different system? This is a very interesting question you see, because I spent all my life as a critic of capitalism avoiding the question because it’s so hard, such a hard question.

So, I would not avoid the question. I would say, yes, it is possible to imagine a different world. But then when someone like you said to me, OK, so how would that world work? Then I would evade, because it’s too difficult to come up with an answer. OK, so how should money work? What about land? What about corporations? How should we structure the ownership of corporations? How should decision making take place in corporations?

And some years ago, my wife confronted me and said, you know, I’ve had enough of you complaining about the world we live in. You are not allowed to continue. Not another word from you until you come up with an answer to these questions. So this is why, and you will allow me to do some promotion here, this is why I published this in September, which is my novel in which I describe – in which I try to answer your question how can I imagine an alternative now, another now.

AoE: Do you think there are enough people that really want democracy?

Yes, I do think so. I do think so, the problem is, everybody wants control over their lives. Now, the problem is that when there is more than one of us, my control impedes upon your control. And the more complicated and complex society becomes, the greater the way in which my control impinges upon yours. And democracy is the only way of giving to each one of us a degree of control consistent with everybody else controlling their lives.

Also, the questions that concern all of us are very difficult questions, and none of us are smart enough to have the answers. So for me, democracy is a system. As my friend Brian Eno, the musician, says: Democrats are people who understand that they don’t have the answers and who get together to crowdsource the answers. And I think there is a big need out there for that. People are fed up with what is presented to them as democracy because it’s not democracy, it’s oligarchy with occasional stupid elections – and expensive elections.

And the tragedy is that very often this disappointment at the lack of democracy leads a lot of people who want control of their lives to fall prey to fascism, because fascists are very good at exploiting this disappointment and the hopelessness. And they say to them, like Mussolini did, like Salvini does, like Vox in Spain, here there are right wing. I’ll make you proud again. I’ll give you control of your country again. Let’s just get rid of the foreigner, the Jew, the Arabs, the Romanian, the Germans, the Italian, whatever.

Right. And so, fascism is the dark side of the need for democracy.