Sunday, March 22, 2009

The Postmodern Origin of the Financial Crisis

This needs further maturing, but it's been quite a revelation! With hindsight it would have been a surprise had some Postmodern lunacy not been at the bottom of the financial crisis!

The Big Picture (hat tip: 12010 AM The Big Talker Radio) just published the full text of a speech recently delivered in Toronto by Paul Volcker, former US Federal Reserve Board chairman, and now a member of the Obama team advisory board on the economy. A digest of the main points is available on Articles and the full text is here.

The bursting of the sub prime mortgage bubble is evidently the direct cause, but there's a not so obvious, even more profound explanation underlying it.

This is attributable to the deviation from Aristotelian principles on the academic level. Anthony Rizzi of the Institute of Advanced Physics in his ground breaking book "Science Before Science" has been explaining why it is so vital for science to return to the level of the real world. In this interview Rizzi explains part of the hiatus physics has in explaining reality:

"Technically, modern physics is focused on physical beings (that is, changeable beings), and then only insofar as they are quantitative. Hence, modern physics by its very methods leaves much of reality behind."

Another part of the problem can be summed up in the Postmodern habit of not properly identifying. On the humanities level it's a world that thrives on false analogy. In science theories remain stuck on the level of ideas; the hypothetical is never reduced to the sensory level. Because of it, any number of silly fallacies and blatant misunderstandings occur.

One such is the belief in amateur cosmology circles that reality consists in twelve parallel universes resting on a membrane, just because theoretical physicists' calculations have said so.

Apparently such enormities are not limited to the nebulous confines of the ivory tower: they have now spilled over into the real world of haute finance and bread and butter economics where they have been wreaking havoc on the global economy.

To list a few other common fallacies:

- The notion that an object only exists if it can be measured;

- The extraordinary error of ascribing matters occurring on the macro level (including philosophy), in terms of the erratic behavior of particles in quantum mechanics;

- That historical events are a natural phenomenon, dependent on the course of human evolution (otherwise known as 'progress');

- The old wives tale that moral relativism is infallible, because Albert Einstein's genius as a physicist is beyond question.

But here's the thing. You cannot use chemistry to do algebra; you cannot use biology to do politics; you cannot use genetics to do cosmology; you cannot use theoretical physics to do philosophy; and you cannot use French to do English!

The law of identity is not negotiable: A=A, always! A is not sometimes B, depending on your vantage point, as relativist Postmodernists are fond to argue.

What are we talking about, relative to the financial crisis? Let's borrow a direct quote from the Volcker speech:

There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now.

You know, they all said these events only happen once every hundred years. But we have “once every hundred years” events happening every year or two, which tells me something is the matter with the analysis. So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken (...)
Consider the neologism: financial engineering. I wonder where that stems from? Sounds to me very much like a sociologist had been moonlighting as a mathematician and got himself outsourced to work as a banker (or something) ...

To be continued.

N.B. Margaret Thatcher knew what few people are aware of today: economics is not an exact science!

- Filed on Articles in "Economics and Monetary File" -


Rob said...

There's irony in that fact that the post-modernists are both relativists and reductionists.

And even the innumerate have a child-like faith that everything can be reduced to numbers.

great article here on The Mathematical formula that killed Wall Street:

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