Jamie Galbraith interview with La Ma?ana (Uruguay)

1.            What motivated you to write this book together with Jing Chen?

Jing Chen reached out to me years ago over email with a paper, which I read and found fascinating.  We corresponded and eventually began to collaborate, first on articles for obscure journals and eventually on this book.  He is a deep and original thinker with strong mathematical and physical insight, I am a better writer and a decent judge of policy implications. So the partnership is highly complementary, in this and other respects.  [Note the word is complementary with an "e", not with an "i".]  We have only met in person on three or four occasions.  

2.            What is the central critique that “entropy economics” makes of conventional economics?

It is that conventional economics has failed to make the conceptual transition that has characterized every other scientific and social scientific discipline since the mid-19th century, which is the abandonment of static equilibria (or the tendency toward such equilibria) and the adoption of evolutionary principles.  Eventually physics uncovered the entropy law, which puts paid to any concept of a "living equilibrium."  We are not the first to make this critique. Far from it!  Our contribution is to provide succinct mathematical expressions for the application of the entropy law to value and production, and to surround those expressions with clear verbal exposition and discussion of some of the major policy implications.  

3.            You argue that markets do not naturally tend toward equilibrium. What are the implications of this view for economic policymaking?

First and foremost, that there are no markets without governments to regulate and supervise them.  Just as there are no living creatures without regulation of the energy flows that they need to survive (in humans, temperature and blood pressure are two examples), and no mechanical processes without regulation of the energy flows that power them (in cars, radiators; in reactors, cooling systems).  Self-organization, in short, is a myth. Not all regulations are good regulations!  But the task of effective regulation is indispensable and, indeed, a key distinction between so-called "developed" and "developing" countries is that the former have more sophisticated, more effective, more smoothly-functioning regulatory systems, which ease the burdens of life.  Yet it is also a fact that the more complex a system, the more fragile it is and the more prone to crisis.  The task of policy making is to try to make a complex and efficient system work smoothly for as long as possible, recognizing that, unfortunately, crises are endemic and nothing lasts forever. 

 

4.            In the book you highlight the importance of limits, planning, and regulation. How do these translate into actual economic policy today?

 

All biological, mechanical and economic systems tap into low-entropy, high-quality resources in order to function.  The quality of those resources is thus a critical element in the prosperity of the economy and the society.  To extract resources requires fixed investments, which are made according to plans -- genes in living systems, blueprints and designs in mechanical systems, habits, regulations, laws and constitutions in human societies. Hence planning is indispensable, and a decline in the quality of resources can threaten the economic viability of previous plans.  Regulation, as noted, is essential to prevent a system from running out of control and breaking down.  Also, all regulation is associated with keeping inequalities, in one form or another, under control -- this is true of regulations affecting safety, the environment, law-and-order, and economic inequalities.  Inequalities are unavoidable and necessary -- they are the driving force behind all forms of work. But they cannot be allowed to get out of hand or they tend to destroy the system in which they are embedded.

5.            One of the central contributions is a theory of value based on scarcity. How does this differ from classical or neoclassical theories of value?

Scarcity theories of value -- including the labor theory -- are familiar in the history of economics.  Walras called his units "raretés" or units of scarcity.  But the dominant value theory roots value in "marginal utility" -- a psychological construct whose ultimate reference point is unobservable, so that essentially the theory reduces value to price as though there were no distinction.  But of course prices can exceed values, and do frequently, as any consumer knows.  A scarcity theory, based on entropy, specifies a lower bound for the viable production of a good or service.  It is the lowest value consistent with viable production, given the real costs of extracting the necessary resources, including labor.  Our formulation of the theory allows two factors to drive economic value above this lower bound: the degree to which a product or service has penetrated a given market space -- its scarcity in the market -- and the number of suppliers at a given time, or degree of monopoly power. Thus as market penetration increases and the number of suppliers increases, economic value tends to decline toward the viable minimum.  Producers seeking high valuations emphasize the novelty of their products and try to monopolize their market spaces by limiting the substitutability of their goods.  In our theory, therefore, economic value is a dynamic process; the tendency is not toward equilibrium but rather toward the point where production is no longer attractive.  This is the fate, of course, of most production lines and product lines over time, which is why the economic system is constantly renewing itself with innovation and new monopolies and oligopolies.  

 

6.            You also introduce a new conception of production, which includes increasing and decreasing returns, uncertainty, and the rising costs of resources. How does this framework help us understand phenomena such as the energy crisis or climate change?

 

Our conception is not really new!  What we do is give very compact mathematical (and verbal) expression to a process that is intuitively familiar to any business firm.   These ideas, which relate fixed and variable cost, uncertainty, discount rates and project duration, are well-known to all who make investment decisions.  The expression we offer helps to understand the basic dynamics in many different respects: such as why higher levels of uncertainty depress profit expectations for long-term business investments, and why rising resource (energy) costs can and do destroy the profitability of previously profitable investments.  

7.            How does entropy economics allow us to analyze issues as diverse as trade, finance, or demography?

 

We give examples on all of these topics in the book.  To take just one -- demography -- entropy economics explains that in rich societies, children are a large fixed cost, and families undertake to have many children only when they have confident expectations of being able to afford them.  When resource prices go up (as in the 1970s) or income expectations go down (as after 2008), families economize on their expenses by having fewer children, and fertility rates fall.  Thus austerity and precarity are driving forces behind the ongoing decline in reproductive forces, which will cumulate in the decades ahead.  

8.            Do you think this theoretical framework can guide concrete public policies in the face of challenges such as global warming or inequality?

 

Global warming is very difficult, for reasons we explain in the book.  In particular, it is very difficult to collect and distribute diffuse sources of energy (wind and solar) -- the so-called renewables, while high-quality, relatively-low-carbon natural gas will be used before lower-quality, higher carbon sources.  Thus in lieu of major advances in the nuclear sphere, the great tendency in the long term will be a reversion toward coal, which is dirty but abundant.   Inequality -- as noted above -- is essential for anything to happen; without it no work of any kind would get done.  But excessive inequality is dangerous.  Understanding that the task is to regulate inequalities, not eliminate them, would help guide concrete policies in this area toward results that might be widely acceptable, as has been the case in the past in certain historical periods, such as the New Deal era in the US.

9.            From an academic standpoint, what reception do you expect your proposal to have within the economics discipline? Do you foresee a paradigm shift or strong resistance from the mainstream?

I have been pleasantly surprised by the handful of respectful reviews seen so far. Actually very surprised.  But I do not expect the so-called mainstream to be heard from.  Their practice is to ignore fundamental criticism from outside their own sphere, restricting discussion to a narrow band of the "freshwater v. saltwater" variety.  This is the treatment accorded to every significant dissenting tradition, and I don't expect to be treated differently.  I only hope to be read by people with curious minds, and to be evaluated (and, if necessary, criticized) by people with an openness to our ideas, so that over time our work can be regarded as among the significant dissenting traditions that merit reading. 

 

10.          If you had to summarize in two or three practical conclusions the key message of the book for non-specialist readers, what would they be?

1. Resources are fundamental.   2.  Inequality is necessary but should be controlled.  3.  Government is indispensable; there are no markets without it.  4)  More sophisticated  and complex systems are more efficient but more fragile; crises are endemic and nothing lasts forever.    All basic common sense, except to economists. 

 

11.          In our last conversation back in 2023, you were very critical of U.S. monetary policy. How do you assess the situation today, under Trump’s second term, marked by a more protectionist and confrontational stance?

 

Interest rates are the Federal Reserve's toy, but they did not have any significant effect on either inflation or growth and employment.  Reducing them is the right move, but slow reductions are a form of sound without fury, signifying very little. 

12.          What impact is the current tariff war having on international trade and on financial market stability?

 

The current high level of uncertainty is surely having a bad effect on long-term investment decisions.  As for tariffs, US policy should be familiar in Latin America to all who remember the era of import-substituting industrialization, where tariffs were used to neutralize Dutch Disease as explained by Luiz Carlos Bresser Pereira in his important new book, New Developmentalism.  Whether the United States can pull this off successfully and retain its status as the central banker to the world economy is a very difficult question.  There is no real precedent for it that I'm aware of. 

13.          How do you interpret the expansion of U.S. military spending in this context of global tensions?

Most US military expenditure is for operations, maintenance, payroll and overseas bases.  Relatively little (though a large amount in absolute terms)  goes to improvement or modernization of capability, which is why the US military is now largely obsolescent in an age of hypersonic high-precision missiles and drones, and why Russia and China are now (by far) the leading military powers in the world.  The problem for the United States is that it is very difficult to adjust the mentality of the professional political class to this shift in global power dynamics.   And the Europeans, left behind, are in even worse shape from a psychological point of view.  They are accustomed to thinking of themselves as the major powers that they no longer are. 

 

14.          There is much discussion about the “rise of authoritarianism” in developed countries. What connection do you see between this political trend and current economic dynamics?

I regard this word "authoritarianism" as inherently misleading.  Mainstream economics and neoliberal dogma are highly authoritarian -- ask anyone who is subject to the intellectual disciplines of an economics department.   It is a curious fact that the two regimes most commonly so labeled -- Russia and China -- appear to enjoy broad support from their populations.  One might conclude that the populations are either (a) stupid or (b) brainwashed or (c) intimidated.  But no one with even casual contact with actual Russians and Chinese can hold any such view seriously. 

 

15.          What role is China playing in this new economic order? Would you say it is emerging as a real counterweight to the United States, or more as a complementary actor?

China already outpaces the United States on many measures of economic power, production, innovation and influence.  It will continue to gain strength; it is, after all a country of 1.4 billion people, at the height of modern scientific and technical prowess.  However unlike the United States (or the Marxist-Leninist-Maoist regimes of distant memory) the government of China is about governing China, and imposes no ideological agenda on the rest of the world.  Multipolarity is all about accepting diversity, mutual learning and mutual assistance.  I believe the United States might eventually fit well into this framework, once a new generation of political leadership emerges.  However it is difficult to see that happening in the present political and social environment. 

 

16.          Europe seems politically fragmented and struggles to consolidate an autonomous role. What are your expectations regarding Europe’s ability to influence the global scenario?

 

Europe has gone quite mad.  Its elites have, of course, no real influence -- who could take any of them seriously?  At the moment they seem obsessed with escalating tensions with Russia for internal political reasons, and with building up their arms industries for a war that would be over within a few minutes if it ever got started.  The only path forward for Europe is mutual security agreements on the Eurasian land mass.  But that would require the wholesale replacement of present European leadership.  For this reason, to give President Trump a bit of credit, the United States appears to be moving to wash its hands of the Europeans. 

17.          What direct consequences could these global tensions have for Latin America?

 

Good question.  Obviously should the United States strike at Venezuela the consequences could be quite dire.  Otherwise, Latin America should perhaps position itself to take maximum advantage of the opportunities of the present movement toward multipolarity, which opens up competitive sources of support for coherent development agendas.  On the whole, however, the future course for Latin America may rest with Latin Americans to a degree greater than in the Cold War and unipolar moments.  The success of Moreno in Mexico under AMLO and Sheinbaum is perhaps a case in point on this question. 

18.          Do you see opportunities for Latin America in this uncertain context, or rather prevailing risks?

 

Both, per the previous answer.

19.          Do you believe multilateral institutions such as the IMF, World Bank, or WTO still hold influence, or are they becoming obsolete in the face of hard geopolitics?

 

Largely obsolete, as new development institutions (under the SCO and the BRICS, for instance) come to the fore, offering opportunities that are not contaminated with neoliberal ideologies.  I doubt that either the Bank or the Fund can reinvent themselves in the face of determined competition by organizations with fundamentally different, more egalitarian, more democratic and more developmental operating objectives.