Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.com

The Physics of Wall Street

By James Owen Weatherall

Narrated by Kaleo Griffith

JAMES OWEN WEATHERALL

James Owen Weatherall believes in a science of economics. The thematic intent of Weatherall’s book, “The Physics of Wall Street”, is that Quants are essential resources for economic recovery, security, and stability.  Weatherall suggests that science and mathematics should be pursued in economics with the vigor of WWII’s “Manhattan Project”, the equivalent of America’s monumental scientific effort to create the first working atomic bomb.

Weatherall is a brave soul suggesting that Quants are saviors rather than devils in the financial world.    Quants are an elite group of educated mathematicians and physicists that work for major investment houses like Goldman/Sachs. Their job is to create investment bundles, like financial derivatives, to attract public investment.  Financial derivatives were not invented by Quants but Quants use the idea of asset bundling to create new investment products.

The Quants creation of mortgage-backed financial derivatives nearly collapse the world economy in 2007.  These derivatives had short-term value in enriching Wall Street and long-term consequence of beggaring the world economy.

YOUTUBE REPRESENTATION OF QUANTS: The Alchemists of Wall Street-http://youtu.be/aybe7iVHJ7E

If knowledge is power, knowledge is gathered through experience and information.  Maybe it is time for America and other struggling economies to create a team of physicists, philosophers, managers, and mathematicians to build new models for a 21^st century economy.  Weatherall certainly thinks so.

Weatherall, a physicist, philosopher, and mathematician, is well suited to suggest science and mathematics are needed to improve economic policy.  Weatherall reviews the history of financial modeling in economics.  He explains modeling as a way of statistically measuring the consequence of financial theory, policy, and action in an economy.  He slyly introduces the subject by referring to highly successful Quant groups that outperform investment competitors.  Weatherall offers their success as an example of how important the introduction of science and mathematics is to economics.

Weatherall cautions readers and acknowledges the limits of modeling as a precise predictor of consequence in an economy.  Weatherall offers a Physics’ analogy.  Like Physics’ explanations of the nature of matter, all financial actions have consequences that are a matter of probability; not certainty.  Weatherall infers that having a calculated probability is better than trusting blind luck.  Financial modeling (creating a model of financial cause and effect) offers a standard of measurement to inform one of whether a financial policy and its implementation improve or diminish desired results.  A model is a tool; not an end point in the discovery of a successful economic policy.  Models, like that which led to the 2007 crisis, can be wrong.  Constant reassessment of models is critical to their continued use.

YOUTUBE REPRESENTATION OF AN ECONOMIC MODELS FAILURE: The Collapse of the American Dream in Animation-http://youtu.be/mII9NZ8MMVM

Weatherall is not suggesting that there is some undiscovered economic model that will cure the world of economic mistakes but that better use of the Sciences will improve probability of successful economic outcome.  Though Weatherall does not refer to Keynes in his book, a reading of Keynes history suggests that he would agree with Wetherall’s assessment.  Keynesian economics is a model of economics that Keynes fiddled with all his professional life.  An often told criticism of Keynesian economics is that it changes over time but Keynes always argued that a change of opinion is not a refutation of an experimental model but a revision based on changed economic circumstances.

Weatherall insists on using a scientific method to analyze economic policy.  He argues that the physical world described by the science of Physics clearly demands re-thinking theories of economics.  Current physics theory finds that certainties do not exist in the real world.  Reality is a matter of probability.  What economists believe based on the past must be tested in the present.  The test results will be probabilities but informed probability far outweighs blind luck.

Weatherall infers that economic tests are presently being done by small groups of Quants that are enriching their employers but are being ignored by governments that need Quant assistance in managing national economies.

If knowledge is power, knowledge is gathered through experience and information.  Maybe it is time for America and other struggling economies to create a team of physicists, philosophers, managers, and mathematicians to build new models for a 21^st century economy.  Weatherall certainly thinks so.

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.com

Keynes Hayek: The Clash That Defined Modern Economics

By Nicholas Wapshott

Narrated by Gildart Jackson

 ”Keynes Hayek”, written by Nicholas Wapshott, is a liberals-eye-view of modern economics.  John Maynard Keynes was a genius of economics that practiced what he preached.  Friedrich Hayek was a scholar of economics that wrote a popular political treatise titled “The Road to Serfdom”.  Hayek’s “Road

NICHOLAS WAPSHOTT

JOHN MAYNARD KEYNES (1883-1946)

to Serfdom” is a road not taken by the United States; in fact, America’s road is paved by Keynesian capitalist companies.

Economics, the dismal science, is rarely thought of as an interesting subject.  It lies somewhere below a layman’s interest in quantum mechanics and the belly of a bug.

FRIEDRICH AUGUST von HAYEK (1899-1992)

However, Wapshott manages to give a terrific account of the fundamental difference between John Maynard Keynes’ and Friedrich Hayek’s view of economics, a subject that generates today’s bitter conflicts in the American Congress.

The sad truth of these conflicts is that elected officials are confused by the subject and rarely read or listen to books like Wapshott’s for informed opinion.  One doubts that many legislators have read this book or Hayek’s famous book, “The Road to Serfdom”.  After listening to “Keynes Hayek”, Keynesian economics appear critically relevant to sustainable recovery of faltering capitalist economies.

To offer some level of objectivity, one should know Wapshott is characterized in Wikipedia as a British liberal that graduated from college with a degree in Politics.  Wapshott is not an economist.  His occupation is as a journalist, author, and broadcaster. His examination of these two economists is not a technical examination of either Keynes’ or Hayek’s abstruse economic theories; i.e. Wapshott explains the history of Keynes’ and Hayek”s macroeconomic impact on world economies, particularly the American economy.

Wapshott characterizes Keynes as a brilliant economist with a pragmatic genius for integration of economics and government.  He views Hayek as a well-meaning but primarily theoretical professor of economics.  In contrast to Hayek’s academic use of economic theory at universities, Keynes was employed by the British during WWI to practice economic theory in government.  Keynes used his academic understanding of economics in the real world.

Keynes and Hayek lived through the great depression and WWII but Keynes worked with high level government officials during all three social upheavals. Hayek sat on the “economics” sidelines, explaining why Keynes’ actions were wrong.  Hayek was thinking while Keynes was acting.

To give an example of Keynes genius, he correctly predicted WWII because of the economic imbalance caused by the Versailles treaty that required unrealistic war reparations from Germany.  Rather than reparations, reinvestment was recognized by Keynes as the cure for world economic pain and failure.  (America learns that lesson after WWII with the Marshall Plan to rebuild Europe.)

Keynes met with Franklin Roosevelt and helped move America toward a government sponsored public works program to mitigate unemployment after the 1929 crash. This early 1930′s sponsorship successfully reduced unemployment to 1929 levels.  After this success, Roosevelt caved to congressional pressure for deficit reduction.  He drastically cut government funding for public works.  With that change of policy, unemployment rapidly increased and the economy began to falter.  Roosevelt reversed course again by re-instituting Keynesian stimulus to increase public works spending.

Critics suggest that entry to WWII, not government public works’ stimulus, pulled the United States out of the depression.  Pearl Harbor’s attack, in one sense, muddies the truth of Keynes’ economic belief in the good of deficit spending in economic crises.  On the other hand, it proves Keynes’ point; i.e. war preparations created full employment through more deficit spending.  The difference is that deficit spending improved the economy through war preparation rather than public works.

Hayek experienced the devastation of WWI in his native country of Austria.  Severe inflation destroyed his family’s wealth.  He was a disciple of Ludwig von Mises, a leader of the classic liberalist school of economics.  The classic liberalist school of economics taught that a free market will eventually right itself and that any government intervention to mitigate an economic recession or depression will delay economic recovery.  Hayek focused on microeconomic theory to support his classic liberalist belief.  Keynes focused on macroeconomics because of his role in government administration.  Keynes had a real-world laboratory to test his economic theories; Hayek did not.  Keynes famously said that those who believe the economy will right itself in the long run may be right but in the long run, we are all dead.

Hayek is several years younger than Keynes.  Hayek dealt with the theory of economics while Keynes dealt with the implementation and administration of economics in the real world.  It is not that Hayek did not exist in a real world but the consequence of theory is not proven like the consequence of action.  The laboratory of Hayek’s economics was of the mind while Keynes was of the real world.

Wapshott argues that Keynes’ insistence on creating jobs through government support of public works successfully reduced unemployment in America after the 1929 crash.  Keynes argument, according to Wapshott, is that deficit spending when unemployment is rampant is critical to economic recovery.  Keynes argued that when people are employed, they spend money, pay taxes, and create more jobs.

In a faltering economy, Keynes argues raising interest rates is a mistake because money becomes idle.  Money is not reinvested in the economy because high interest rates keep money in the bank.  With savers’ idle money, unemployment increases and the economy continues to fall until the economy collapses.  The rich are eventually drawn down by the same faltering economy that already decimated the middle class and poor.

How is this different from what exists in today’s economy?  Keynes would ask why are countries willing to create huge deficits to go to war while they are reluctant to create deficits in peace when the economy is collapsing.  In reading “The Road to Serfdom”, even Hayek acknowledges the importance of government support for the unemployed.  George W. Bush, an avowed small government laissez faire Republican, knew that a stimulus program had to be passed to avoid American’ economic collapse.

Hayek argues that Nazi Germany came into being because of socialist state control of the economy.  He concludes that government planning distorts the free market.  One can easily agree with his argument but Hayek’s argument is not a disagreement with Keynesian economics.  Keynes proves his economic arguments in the real world by showing how economies recover with government intervention.  Hayek theorizes that government intervention in state economies always damages capitalist society.  History suggests otherwise.

Hayek makes no distinction between a state that controls private enterprise and a state that supports private enterprise.  Even Margaret Thatcher had some understanding of the difference.

Examination of historical events proves Hayek wrong.  Even with Reagan, huge deficit spending propped up the economy.  Though Reagan dramatically reduced government expenditures for social services, government spending for national defense nearly doubled.  One might call Reagan’s actions Hayek’ economics, but it was Keynesian economics in practice because American debt nearly doubled in the Reagan years.

“Keynes Hayek” should be required reading for American legislators.  America is not sacrificing the future with deficit spending for public works.  Public works, like much-needed bridge repairs and power grid improvements, creates jobs, increase American wealth, and insure the future of American prosperity.  Keynesian economics rescued America twice, once in 1929 and now in the 21^st century.  How much more proof is needed?