Chapter 8 - A New Manhattan Project
This chapter is strange. It’s not like the others. It’s mainly a rant on the condition of economics as compared to the condition of physics in scientific circles.
The argument is that economics lags behind other sciences, which it probably does. However that’s not of much use to a trader looking for edges, though it is interesting.
It’s also tempting to dismiss much of it as it relies on the questionable testimony of Pia Malaney and Eric Weinstein. Weinstein, might be a crackpot, but it’s hard to say for sure. He certainly acts like one, telling the world he has a theory that will ‘put him ahead of Elon Musk in the visionary hierarchy’ and then NOT sharing his paper on that theory, for the past year or two at least. That’s crackpot behaviour.
At the same time there’s no doubt that he knows a lot about math. His ‘portal’ interviews while somewhat too focused on himself show that he has a deep professorial knowledge about many things, especially math and physics. He’s also presumably smart enough to have Peter Thiel entrust him with his investments. So, tough call.
I’m leaving it in because the sections about CPI are something everyone should know and Schiller didn’t touch on it in his course.
This chapter is strange. It’s not like the others. It’s mainly a rant on the condition of economics as compared to the condition of physics in scientific circles.
The argument is that economics lags behind other sciences, which it probably does. However that’s not of much use to a trader looking for edges, though it is interesting.
It’s also tempting to dismiss much of it as it relies on the questionable testimony of Pia Malaney and Eric Weinstein. Weinstein, might be a crackpot, but it’s hard to say for sure. He certainly acts like one, telling the world he has a theory that will ‘put him ahead of Elon Musk in the visionary hierarchy’ and then NOT sharing his paper on that theory, for the past year or two at least. That’s crackpot behaviour.
At the same time there’s no doubt that he knows a lot about math. His ‘portal’ interviews while somewhat too focused on himself show that he has a deep professorial knowledge about many things, especially math and physics. He’s also presumably smart enough to have Peter Thiel entrust him with his investments. So, tough call.
I’m leaving it in because the sections about CPI are something everyone should know and Schiller didn’t touch on it in his course.
- Pia Malaney
- Weinstein’s wife and economist
- Eric Weinstein
- MIT postdoc researcher with a PhD in math from Harvard
- For years Malaney had tried to convince Weinstein that economics was more than mathematically simple ideas
- Finally she succeeds and now Weinstein is driving for collaboration
- The index number problem
- “The problem concerns how to take complex information about the world, such as information about the cost and quality of various goods, and turn it into a single number that can be used to compare, say, a country’s economic health and status at one time to its economic status at another time.”
- Malaney and Weinstein devise a solution based on gauge theory
- Gauge theory
- “modern gauge theory — the topic on which Weinstein wrote his dissertation — was largely the work of Jim Simons, the mathematical physicist turned hedge fund manager who founded Renaissance Technologies in the 1980s”.
- This is a gross exaggeration. It’s largely the work of Yang-Mills. Simons did contribute something to the theory but that too was largely the work of Chern, his partner.
- Eric Maskin
- Malaney’s advisor thinks the idea is great
- Weatherall annoyingly sidetracks with an essay about CPI and the difficulties involved in tracking the value of money with a basket of goods
- The Boskin commission is tasked with coming up with better ways to calculate the CPI
- Weinstein and Malaney see the commission as their chance to get their theory added to public policy
- Hermann Weyl
- At ETH Zurich at the same time as Einstein
- Matter curves spacetime, causing gravity - in the relativistic perspective
- Curvature in the physics sense is defined by “how hard it is to keep an arrow pointing in the same direction as you move it around the surface.”
- On a curved surface, different paths can lead to different results (angles) - this is known as path dependence
- On a flat surface, no matter what route is taken, the ant faces the same way - "path independent of parallel transport”
- The example given for path-dependence is one of those pathetic attempts to take an abstract concept and make it concrete using a physical example even though it makes no sense
- “If you go to the store and buy groceries, the amount of milk you have when you get back home is path independent. The amount of milk isn’t going to change if you take a different route home from the store. The amount of gasoline in your tank, however, is path dependent. If you take the direct route home, you will usually have more gasoline left when you arrive than if you had taken the scenic route.” Milk and gasoline. That’s what it’s all about.
- Einstein’s general relativity depends on parallel transport path dependence
- But Weyl thought it didn’t go far enough
- In Einsteinian GR your directional arrow might not face the same way after moving around a path, but the distance would be the same
- Length, too should be path dependent says Weyl
- This new theory is called ‘gauge theory’
- Gauge theory
- Idea is that there is no universal, once-and-for-all way to “gauge,” or measure, the length of a ruler
- Just as the amount of gas left in your tank depends on the path you take to work (direct or scenic route) the length of a ruler needs to be measured in the same location otherwise it’s path-dependent (if you say so)
- In Weyl’s theory there is no way to measure the same rulers at different locations, but that’s ok, because a ruler in Copenhagen can be brought together with a ruler on Mars if you can figure how to get them to the same place
- This is still not path independent but that’s ok as long as you figure out how the change in length depends on the path you take
- Weyl needed a way of ‘connecting’ different points in a formal way
- “To determine if two quantities are equal in a physical theory, you need a standard of comparison that accounts for possible path dependence”
- Yang and Mills
- Weyl’s overall theory was inconsistent with some experimental results and was forgotten
- However gauge theory was resurrected in the 1950s
- If length is path-dependent are other quantities path dependent?
- Yes
- They usher in the ‘gauge revolution’
- 1973 - three fundamental forces of particle physics - electromagnetism, weak force, strong force appeared to have been unified into a single gauge-theoretic framework
- The ‘best confirmed theory ever discovered in any field’ - the Standard Model of Particle Physics
- The academic cattle call
- The shitshow that is modern graduate study is explained - students with dissertations that are worth flogging apply to schools who decide if they want to fly them out and get them started on a path to tenured professorship
- Pia Malaney was on track for this but
- Boskin Commission
- Dale Jorgenson an expert on the index problem is unconvinced and ‘throws her out of his office’
- The gist of it is that Malaney gets screwed by Jorgenson and the Boskin commission because they have their own reasons to leave the index number as it is. Revealed, annoyingly, later.
- Weinstein comes around and sees that math can be used to solve economic problems.
- Lee Smolin
- Concerned that string theory is dominating university resources at the expense of other theories like his quantum gravity theory
- Weinstein says the situation is the same but worse in economics
- Weinstein and Smolin meet and talk several times
- The banking crisis confirms for Weinstein the need to revamp modern economics
- Social Security
- Aging boomers are putting the system at risk
- No politician could risk drawing attention to the problem and suggest reducing benefits
- Moynihan and Packwood, senators
- Get blamed for the ‘solution’
- To come up with $1T without anyone noticing:
- Change the value of money
- Projections for social security costs are based on expected rate of inflation
- Inflation is based on the CPI (consumer price index)
- If the inflation rate can be artificially lowered income from the social security tax would rise
- Program administration costs would fall
- Taxes would be raised and entitlements would fall
- Inflation must be reduced by 1.1%
- Robert Gordon
- Economist and member of the commission
- Jorgenson reported that they were aiming for $1T in social security savings
- They needed to come up with an inflation reduction
- They broke into teams to work it out
- When the results are combined presto - the corrected inflation was 1.1% lower
- These findings are criticized ‘from all corners’
- The project was ‘rushed and careless’
- Now we know why the commission needed Malaney to ‘go away’
- The New Manhattan Project
- A conference at the Perimeter institute (Lee Smolin's think tank)
- The idea is to get a large group of smart people in the room to think about how to fix economics
- The conference is a ‘success’ but the chapter ends without telling us how exactly
- Smolin says there was too much bullheadedness; no one agreed on what the problems were
- There were questions about funding - how would money be doled out to participants (what’s in it for me - the mantra of h. sapiens!)
- Smolin shifts his free time from economics to climate science
- Economics is ‘intractable’ because the field is not open to new ways of thinking
- Weinstein therefore, is right, economics is ten times worse than physics
Next: The exciting epilogue of this book that is a lot more about physics than about trading, as we have learned to our sorrow!
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