The Appallingly Bad Neoclassical Economics of Climate Change, with Professor Steve Keen

·1 hr 13 min·5 clips

Steve Keen realized labour without energy is a corpse and capital without energy is a sculpture, transforming economic models.

This episode features an interview with economist Professor Steve Keen, a long-standing critic of neoclassical economics who predicted the 2007-2008 financial crisis. Keen critiques how neoclassical economics has modeled and influenced climate policy, arguing its approach is fundamentally flawed. Keen began focusing on climate economics around 2015, collaborating with physicist Bob Ayres to integrate energy into economic models. He recounts a key insight that labor and capital are useless without energy input, leading him to develop new equations. His critique intensified after reading the work of Nobel laureate William Nordhaus, particularly a model showing an "optimal" global temperature increase of 4°C by 2150. Keen examines a 2009 paper by economist Richard Tol, which estimated climate damages by correlating current GDP with current temperature differences between regions like Florida and North Dakota. Nordhaus's foundational 1991 "adding up" approach claimed 87% of the U.S. economy, including finance and manufacturing, would be negligibly affected by climate change. Keen highlights that these models treat GDP as fungible, so a total collapse of global agriculture, representing about 4% of GDP, is modeled as only a 4% loss. He notes a 1994 expert survey cited by Nordhaus, where economists labeled a 3°C warming by 2090 as "small potatoes," predicting only a minor reduction in annual growth. The models assume smooth, quadratic damage functions, implying symmetrical economic impacts from both warming and cooling by six degrees. Keen contrasts this with climate scientist Tim Lenton's 2008 work on tipping points, like Arctic sea ice loss, which Nordhaus's manual cited but misrepresented to claim no major tipping points within 300 years. A major flaw is the disregard for rates of change, such as the centuries needed to develop new agricultural topsoil in a warming Siberia. The models also ignore systemic risks like fatal wet-bulb temperatures, climate refugees, and resource wars, which cannot be captured by linear GDP projections. Keen argues economists use "simplifying assumptions" to bypass these physical realities because their cost-benefit analysis framework cannot handle non-linear catastrophes. He references Tol's controversial claim that a 10°C temperature rise could be handled by "moving indoors," likening it to adaptation in Saudi Arabia. The tone is conversational and educational, but marked by Keen's clear frustration and direct condemnation of the economic methodologies. Listeners interested in climate policy, economic theory, or the intersection of science and policy will find this critique compelling. Those seeking a technical, defense of mainstream climate economics or who are uncomfortable with strong polemical language might choose to skip it.

As heard by us

A sharp, concrete critique of climate economics.

The episode treats Steve Keen as a long running critic of neoclassical economics and uses that lens to press on climate change modeling. It works best when it stays concrete: smooth damage functions, the claim that most of the economy is untouched, Florida versus North Dakota,…

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Press play for a blunt, technical takedown of neoclassical climate economics.

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