Emanuel Derman

Something about naive liberal humanitarianism often bugs and irritates me more than correspondingly naive reactionary beliefs, and I (probably wrongly) end up judging more severely than I should otherwise good people who espouse it naively.

Paul Berman, in his  rambling but very interesting post about the late Vaclav Havel, captures Havel’s description of what that something is. I quote Berman and Berman’s quotes of Havel. All italics are mine.

(Berman:) The Western-style democracies boasted of rule of law, human rights, democratic elections, market economies, and so on. Havel reminded everyone that these institutions, for all their charms, are “technical instruments,” useful only for achieving other purposes; and it was still necessary to acknowledge and refine and choose among the other purposes. In his estimation, an acknowledgment of other purposes required a notion of the transcendent.

He was happy to speak about what he called “the basic values of the West,” meaning a democratic market society with human rights. He looked on the “rapid dissemination” of the Western values as “the only salvation of the world today”—the best guarantee of “human freedom, justice, and prosperity.” Only, he could understand why, in different parts of the world, the spreading of these particular Western values might arouse skepticism and hostility:

(Havel:) The main source of objections would seem to be what many cultural societies see as the inevitable product or by-product of these values: moral relativism, materialism, the denial of any kind of spirituality, a proud disdain for everything suprapersonal, a profound crisis of authority and the resulting general decay of order, a frenzied consumerism, a lack of solidarity, a selfish cult of material success, the absence of faith in a higher order of things or simply in eternity, an expansionist mentality that holds in contempt everything that in any way resists the dreary standardization and rationalism of technical civilization.

(Berman:) He blamed the democratic world for what he called “its limited ability to address humanity in a genuinely universal way.”

Havel: As a consequence, democracy is seen less and less as an open system that is best able to respond to people’s basic needs; as a set of possibilities that must be continually rediscovered, redefined, and brought into being. Instead democracy is seen as something given, finished, and complete as is, something that can be exported like cars or television sets, something that the more enlightened purchase and the less enlightened do not.

In other words, it seems to me that the mistake lies not only with the backward consumers of exported democratic values, but in the very form or understanding of those values at present, and in the climate of the civilization with which they are directly connected, or seem to be connected in the eyes of a large part of the world. And that means of course that the mistake also lies in the way those values are exported, which often betrays an attitude of superiority and contempt for all those who hesitate to accept the offered goods automatically.

1. Consider two countries, America and China. Suppose (only suppose) China manipulates its currency to keep it low, thereby making exports cheaper and imports expensive, benefiting its balance of payments and mercantile ambitions, harming America’s.

2. Now consider America alone, with two subpopulations: borrowers and savers. Suppose someone at the top manipulates T-bill prices, keeping them high (i.e. keeping interest rates low), benefiting the borrowers and harming the savers.

My question:

Why is 1. often considered reprehensible and unfair, while 2. is merely business as usual and unremarkable, even praiseworthy? Is there something fundamentally different about 1. when compared with 2.? Are bonds fundamentally different from currencies, stocks, real-estate, other assets?

Or does it just depend on who you are?

We’ve been in a bull market for Treasury Bonds since the late 1970s, and, as a student pointed out to me recently, and I think I can confirm, we’ve been in a bull market for academic grades too.

As long-term rates have compressed towards zero, so have grades compressed towards A and even A+.

In grad school, many universities consider anything below an A- the moral equivalent of an F, even though a B sounds like one note below an A, and expect students to understand that. It’s hard to figure out why this happened — I remember the start of it during the Vietnam war, when low grades might have annulled an academic deferment. But it’s also part of some general feel-good thing. And the subtle pressure of student grading of faculty, and faculty being judged on it.

The day will come, though not too soon, when universities, like ratings agencies, will be held liable for the judgement implied in the grades they hand out.

Meanwhile, we need a new gold standard for grades.

I have been reading an interesting post by Mark Thoma on how the Fed can prevent the next financial crisis, inspired by the release of minutes of Fed meetings in 2006.

Professor Thoma makes the following good points:

The Fed’s errors can be placed into two broad categories, the failure to ask the right questions before the crisis, and the failure to act quickly and aggressively enough once the crisis began. The first problem had a lot to do with economists’ undue faith in their own models and abilities – the financial meltdown problem had been solved so no need to worry about that – while the second problem is at least partly due to the way in which the public interest is represented on the Fed.

I’d like to add a third error. The Fed’s blithe confidence in their models and forecasts influenced society’s behavior. Therefore, not only were their models wrong, but their unacknowledged wrongness arguably made things worse.

In the social arena, wrong models have psychological consequences that affect the things they are modeling. Nonlinearity is built into the system, and is especially large and significant when forecasts made using the models are widely disseminated from the top.

How is belief in the Fed’s current projections affecting the projections themselves?

When I say that the probability of throwing 3 heads in succession is 1/8, that refers to the fact that if I toss three coins a large number of times, I believe that the number of times I get three simultaneous heads will asymptotically approach a ratio of 1/8. Each individual throw is of course governed by well understood mechanical laws, but the sequence of uncontrolled tiny effects at the start of and during each coin toss effectively produces a pseudo-random result.

When I say the probability of Ron Paul getting elected is small, I don’t refer to an ensemble of identical events at all. Randomness doesn’t come into it either. I think that what I really mean is that I CANNOT EASILY IMAGINE A PLAUSIBLE DETERMINISTIC SERIES OF EVENTS THAT WILL CAUSE THAT TO HAPPEN.

These are two very different uses of the word probability. There should probably be a different word for the second use. All of this makes me increasingly suspicious of the use of probabilities in describing societal events.

In quantum mechanics — i.e. in the real world as we understand it today — matter can have two kinds of formerly apparently contradictory qualities.

The same applies to people.

Matter propagates as a wave but materializes (for observers) as a particle.

Similarly, people can be both free and yet enslaved, depending not only on circumstance but on the observer too.

Example:

When I do something GOOD, I like to say I acted freely, and I experience it that way.
When I do something hurtful or BAD, I sometimes excuse myself by saying I couldn’t help it (meaning I experience the cause as compulsion, provocation, reaction, environment, upbringing, parents, circumstances …)

But, when you do something GOOD OR BAD, I tend to praise OR respectively blame you as though you acted freely, in either case.

People can be simultaneously responsible for their actions, and yet not exercising free will. Or vice versa.

Quantum ethics.