Objectivism and Modern Physics

Scott Aaronson has posted a skittering critique of Atlas Shrugged. I will focus on the subject matter related to his own expertise as a scientist:

More important, in a book with hundreds of pages of philosophizing about human nature, there’s no mention of evolution; in a book obsessed with “physics,” there’s no evidence of any acquaintance with relativity, quantum mechanics, or pretty much anything else about physics. (When Stadler starts talking about particles approaching the speed of light, Dagny impatiently changes the subject.) It’s an interesting question whether Rand outright rejected the content of modern science; maybe we’ll pick up that debate in the comments section. But another possibility—that Rand was simply indifferent to the sorts of things an Einstein, Darwin, or Robert Stadler might discover, that she didn’t care whether they were true or not—is, to my mind, hardly more defensible for a “philosopher of reason.”

The book, however, is not obsessed with physics, or even "physics." Physics is featured as the hero's profession. The validity of relativity or quantum mechanics is just not relevant to the book's theme, which may count as another possibility for why such matters were not addressed in it.

It is likely that, were she asked, Ayn Rand would have responded that she could not judge the validity of modern theories of physics because she did not have the requisite expertise. In fact that is how she did reply when asked about the theory of evolution, even while being an atheist and an admirer of science generally. It makes no sense to conclude from the fact that she was not an expert, and that she was honest enough to withhold judgment, that she was "simply indifferent."

But independently of Ayn Rand's knowledge of the subject, it's a legitimate question: even though Objectivism doesn't take positions on the validity of particular scientific theories, are the metaphysics and epistemology of Objectivism in fact consistent with quantum mechanics and relativity?

The question is not well-posed, however, because these theories have each been interpreted in startlingly different ways. I would argue that some more-or-less mundane reformulation of relativity, concerning such issues as the meaning of the concept "entity" and whether space or spacetime or "the metric" can be said to exist as a substance, does not run afoul of any aspect of Objectivism. However, I am not much interested in this question, because for non-philosophical reasons (e.g., the non-locality exhibited in Bell experiments) I believe relativity is best taken as an effective theory, with no metaphysical claims to make about the ultimate nature of space and time.

Quantum mechanics is a more interesting subject. It is clear that insofar as quantum mechanics was interpreted (more accurately: forced into a mold) by Bohr or Heisenberg or multitudes of popular accounts, there is a clear conflict with Objectivist metaphysics. Objectivism holds that the external world exists independently of consciousness. The way the measurement postulate of quantum theory is usually presented, at least when it is done forthrightly without the waving of hands, consciousness is asserted as some irreducible object with direct causal power in the external world.

Does this mean that Objectivism would logically entail the rejection of quantum mechanics? No. David Bohm's interpretation of quantum mechanics, for instance, obviates any subjectivism. Against the usual understanding of the physical processes involved in measurement, consciousness has no fundamental role to play in Bohm's theory and, to paraphrase John Bell, we may actually contemplate objects to be a certain way in reality, independently of us, rather than just to be observed to be so. In fact if you want a perspective on quantum mechanics from someone upholding metaphysical realism--the aspect of Objectivism relevant here--John Bell is a perfect example.

What Bell called the "unprofessionally vague" formulation of quantum mechanics adopted by the mainstream of its practitioners, I would go marginally further to call unscientific and ultimately the product of a campaign by Bohr and his followers to transplant certain then-fashionable philosophic ideas into the foundations of physics.

That the residue of Bohr's silly philosophy has lingered for 80 years on the scientific project of understanding the quantum world is a shame on the physicists who have always, down-deep rejected this play-philosophy but have never wanted to risk being thought overly philosophical or pedantic for raising the issue. Indeed the virus of quantum subjectivism thrived by virtue of another philosophic microbe that was simultaneously unleashed against the immune system of the host: the methodological doctrine of positivism.

It was an effective combination. First, here, take this dose of the-moon-isn't-there-when-you're-not-looking. It's making you sick? Well you shouldn't be dwelling on these metaphysical issues, which don't mean anything anyway, so just swallow it, shut up, and calculate like a good little boy.

The orthodoxy has loosened its grip over the past two decades, but the cultural damage within physics has been significant. The effect is that Bohm's theory, while offering such a simple, direct alternative to vagueness and subjectivity, and while perhaps gaining ground since Bell's own endorsement, is currently not even the most popular among alternative interpretations. I suspect the reason for this is the psychological fall-out from physicists' historical acceptance of Bohr's ideas. Once one has given credence to such silly metaphysical claims, it is hard to just admit it was all a needless house of cards.

Instead we have the rise of things like the consistent histories or many worlds interpretations, which to their credit seem to have been motivated by a desire to dispense with subjectivism, but ultimately fail to accomplish their goal without the adoption of similarly radical philosophic positions. Many worlds, in particular, winds up solving the measurement problem (the failure to infer anything about measurement outcomes from the Schrodinger equation without ad hoc postulates) by baldly denying the reality of whichever one distinct measurement outcome we observe. It is asserted instead that despite our perceptions all potential outcomes actually occur, and that it is merely our narrow consciousness that, for some inexplicable reason, fixes itself to a single random one.

In other times the vacuousness of such an explanation would have served to disqualify it from serious consideration. But in the aftermath of Bohr's obscurantism, its roundaboutness in comparison to a simple alternative is felt as a mark of profundity. Bohm's theory has some other objections of a more technical nature leveled against it, which I think are all wrong and am glad to discuss, but I suspect this psychological factor is the real source of its limited acceptance.

At one time this contentious legacy was more-or-less confined to a basement in the house of modern physics, from which the youth were barred by the pad-lock of positivism. Normal physicists were busy with the work of understanding new discoveries about the most basic interactions of elementary particles and the fascinating properties exhibited when large numbers of them got together. As these new discoveries in the former area have been cut off to a slow trickle, and as the old ones have virtually all been accounted for by the triumphant standard model of particle physics, attention has shifted to certain neglected but foundational matters of principle in order to further unify our theories of nature and to amplify and exploit the peculiar phenomena of the quantum world. As a result it was necessary to re-enter that old basement.

The troubling development of particle physics since the early 80s has demonstrated how such foundational matters are of more consequence than the positivists would like to admit, but I'll postpone additional commentary for now.

South Park on Economics

A recent episode of South Park tackles the economic contraction and gets its hands on a methodological error at the root of so much blather on the subject. Despite the show's characteristic insight into the psycho-epistemology of this error, the writers miss badly in trying to place it within the landscape of economic theories, which results in their endorsement of the very doctrine that the error produces.

At the beginning of the episode "Margaritaville" we witness various characters presenting alternative views on the cause of the recession. (One even focuses on the artificial suppression of interest rates.) The writiers' own view is eventually articulated by the character Kyle, but we first hear another character Randy as the primary foil for this view. Randy blames people for getting too deep into debt in order to consume too much, too frivolously. He regards overconsumption as acting to offend "the economy," prompting "the economy" to exact retribution on people by means of a recession. Randy piously renounces the luxuries of modern society and calls for an ascetic life less likely to bring on the economy's wrath.

But compare Randy's reification of "the economy" with that of so many accounts in the media, having been given theoretical cover long ago in Keynes' idea of the "paradox of thrift." Keynes holds that in a recession, while the individual's selfish interest is to reign in his own spending and investment in response to decreasing income and turbulent asset markets, "the economy" would be actually served by greater spending levels that would obviate the collapse of marginal businesses.

Kyle sets his sights on this approach to economics when he invokes the opposing doctrine of methodological individualism, the recognition that "the economy" is nothing but a set of interacting individuals, that it does not possess any will of its own to be visited on the penitents. Kyle proceeds to skewer Randy's anti-consumptionism as running afoul of the principle of individualism.

When Randy first offers to explain the causal chain by which overconsumption leads to a bust, the critical part of his monologue is drowned out by a noisy margarita blender; his subsequent accounts only degenerate into mysticism. This appears to be a clue about the economic confusion of the writers, who don't even bother to identify the reasoning of their foil before saddling him with the reification fallacy.

Randy is unable to point out the role of the Fed's artificially suppressed interest rates in distorting debt markets and creating asset bubbles, leading to a feed-back loop of anomalous trends and skewed expectations. Were he able, he would find a causal basis for his suspicion of contemporary consumption patterns, which basis would both circumscribe his critique of consumption in general and point him toward the real culprit: not some generalized psychological malfunction, but government control of the monetary system.

Without such a causal understanding, Randy's critique turns easily into maniacal asceticism, which Kyle can confidently reject. Kyle is thus lead to the other side of this false alternative, whereby consumption dependent on ever-increasing amounts of credit is viewed as a benign economic phenomenon, vulnerable only to a collective crisis of faith -- just like the economic order itself is vulnerable if men were to suddenly doubt each other's future productivity and eschew money as a store of value.

Randy's failure in causal understanding has redounded to Kyle, for Kyle's analogy here falls apart when the illusory nature of the boom is grasped. No amount of faith or paper money can turn the inflated prices of boom-spawned assets into real wealth. These prices are the transient responses of an unstable economy pushed far off its natural, equilibrating course by the haphazard forces of fiat money injection -- they are an artifact, not a measure of real wealth.

Once the monetary injections cease or sufficiently abate, these transient signals die, and we glimpse the reality of an economy drained of its most-needed capital. The selfish acts of consumers-turned-savers are precisely what such an economy needs to start restoring this capital and sustain a genuine expansion. The last thing needed is for people to risk financial ruin by running themselves further into debt to finance still more consumption, all for the sake of "the economy."

Culprit: Mark-to-market?

[HBL] Regulations mandating mark-to-market accounting, wrong as
they may be, are certainly not the cause of the present economic
contraction. These regulations are not why banks and other financial
companies found it profitable to securitize unprecedented amounts of
mortgage (and other) debt on the back of cheap short-term financing.
The regulations are at most an impediment to restructuring after the
fact of the debt bubble is recognized.

But let's take a step back and look at what mark-to-market actually
means in the present context. If you are holding a (tranche of a)
securitized pool of mortgage loans, mark-to-market does not mean that
you have to wait for that exact security to trade and assign precisely
that traded price as its "fair value." An individual, customized
mortgage-backed security may be, itself, entirely illiquid because
there may be only one of them, you own it, and you haven't sought
bids.

What mark-to-market typically means is that you must infer the price
of your security from prices of related ones that are liquid (e.g.
tranches of the market standard ABX index). This inference,
accomplished through some kind of mathematical model, is meant to
extract a prediction of future mortgage default rates (and
correlations) from the market prices of liquid securities and then to
translate that prediction into terms relevant for the valuation of
your own security.

It may be that an individual player has better information than that
encoded in the prices of these liquid securities, hence could produce
real gains by holding certain positions without marking them to
market. But for this to have a real macroeconomic impact, there must
be systematic misvaluations in these liquid securities (that are known
to some public companies but not to hedge funds or other private
players).

On the other hand, an undeniable factor behind current, low market
valuations of mortgage debt is the real uncertainty we all have about
future default rates. What we do know is that a massive debt bubble
was blown up on loose monetary policy and that dire times are ahead
for the borrow-and-spend culture if and when our foreign creditors
wise up and start to reassess the soundness of holding piles of green
paper as a store of value.

The Monetary Somehow

[HBL] A common objection to Austrian businesss cycle theory is about its ability to explain the cluster of entrepreneurial errors that give rise to malinvestments and then the bust. It is suggested that inflation should cause interest rates to rise, not sink, and that flexible markets should simply be able to adjust to easy money.

First, the means by which the central bank causes an inflation (monetary expansion) is the suppression of certain interest rates below the natural level that would have prevailed under free banking. Only this can increase the volume of loans, which in a fractional reserve system tends to increase the money supply. Other rates (usually for longer-term debt) may rise later to include an inflation premium, but e.g. the Fed retains continuous control over short-term rates, at least until a real crisis occurs like the present one. (In fact it was the divergence between short and long term rates that fueled the loan securitization boom behind the current crisis.)

And this is critical: the Fed does not just take (plundered) capital and act in certain debt markets. Rather, it controls those markets with an unlimited supply of fake capital. It fixes prices in those markets. It undermines the role played by those prices in coordinating entrepreneurial activity -- in this case, coordinating the flow of capital toward projects of different duration and riskiness. Instead its fake price signals bring about massive discoordination in debt markets between the investment appetite of savers and the risk characteristics of borrowers.

The free market is the price system. You cannot sabotage the most critical price signals in the economy and expect entrepreneurs to just intuit what price signals (interest rate levels) they really should be responding to.

(Incidentally, this relates to the primary deficiency of classical, pre-Austrian accounts of the business cycle: the failure to appreciate the effect of inflation on not merely the total extent but also on the heterogeneous structure of production -- the effect on not merely the volume of loans but on how the new loans systematically misappropriate real capital for uses contrary to the actual risk-aversion and time-preference of savers. Mises' accomplishment was to unify the classical understanding of the cycle as monetary in origin with Bohm-Bawerk's theory of capital and interest.)

Central banking is dangerous because its fascism is subtle. Honest people can pretty easily realize the harmful nature of things like CRA and Fannie/Freddie (whose business depended on the Fed-induced interest rate divergence, by the way). Because of this there is a tendency to overestimate the role of such things in a credit cycle that is fundamentally the result of fiat money.

It may be a total waste of political capital to agitate against CRA or Fannie/Freddie if the fiat money system survives to distort and waste another day.

Culprit: Mortgage Fraud?

[HBL] Mortgage fraud was not the cause of the real estate bubble. It is hard to believe that the morality of homeowners has deteriorated so dramatically over just the last few years. But then why would there be such a sharp rise in mortgage fraud recently?

Indeed, why would a mortgage company go along with or even itself prompt home buyers to misrepresent their current and expected future incomes? If the reason were that the mortgage company intended to pawn off its shoddy loans to banks and other investors, then why would these investors buy them?

The answer is that for years people had been buying homes outside their budgets by periodically extracting additional cash from these homes as their market values continued to rise. It was only this peculiar but seemingly robust trend of rising home values that could spawn systemic analytical complacency on the part of home buyers and mortgage companies. And it was only this trend, further distorted by the carnival mirrors of a legally enforced oligopoly of ratings agencies, that could provoke so many investors to follow suit.

So the real question is: what was the source of this home value trend itself? I have posted before to argue for the essential role of monetary policy here and won't belabor that now, but one aspect of this cause is important for understanding the cognitive and ethical problems faced by mortgage market participants.

If you had simply decided not to participate in the boom and forgo the substantial upside in your home value or mortgage investment portfolio, the dollar-denominated investment assets you purchased instead have deteriorated in the inflationary downside all the same.

There was no simple path by which you could escape the pincer movement of the Fed's monetary policy. Your best bet was to organize even your most basic financial decisions around a detailed understanding of macroeconomic theory, including Austrian monetary analysis, which has eluded most professional economists -- and even that could not tell you when the bust would come and how bad it would be. Such is your burden in a system of socialized banking.

The Role of Speculators in an Inflation

[HBL] Regarding the role of financial speculation in the midst of inflationary monetary policy, it is sometimes asserted that speculators are macroeconomically benign in that they help to adjust the market to foreseeable consequences.

But consequences of what: underlying realities or government dictate? Speculation expedites the onset of future prices. But as the government begins to inflate, future prices in the booming sector(s) will be severed from future underlying realities and usually even less reflective of those realities than are present prices. Adjusting to future realities is productive; adjusting to botched dictates is destructive.

A rational speculator knows that a continuous stream of new money is being funneled into the housing market. He knows that insofar as others have not anticipated this stream, or are not able to keep close tabs on it, current housing (and related) prices have not been sufficiently bid up. Therefore, he will go long housing, always looking out for indications that the inflation has started to abate so he can reverse his position and capitalize on the bust. Rational speculators aggravate the boom and expedite the bust--the former an example of government force disrupting the harmony of rational self-interests, the latter an example of those self-interests realigning when force is withdrawn.

Moreover, while such a strategy is certainly possible, based on the speculator's own detailed macroeconomic expectations, this kind of estimation cannot replace the market process itself. Relying on these estimates to diagnose macroeconomic imbalances absent genuine market prices in one sector is akin to relying on socialist planners to run an economy without market prices in general. Such estimates may be sufficient to guide an investment portfolio, but not to guide an entire market sector in all its particularity.

Regarding the role of targeted interventions like the CRA, the inflationary boom would occur somewhere whether or not the CRA were enacted.

However, such interventions may favor certain sectors as hosts for the boom. An endogenous factor in the recent boom was innovative methods for securitizing the new mortgage loans and exposing them to the investment community at large. This allowed savings to be pulled continuously back into the housing market. If you held money market funds, you were probably doing your own small part to fuel the boom.

Marginal home loans became profitable by securitization into asset-backed paper, yielding ample return on the back of financing at artificially low (Fed-dictated) short-term rates. From a macroeconomic perspective, these loans should not have been made. They were a waste of real capital. Expediting this waste, which is what speculation accomplished, was in aggregate a bad thing, a result of disharmonized interests. Speculation necessarily also augmented the waste due to the additional demand it created.

(Incidentally, there's nothing wrong per se with securitization of home loans or anything else through CDOs and other financial technology. Sure, these things accelerated the boom, in the same way that tank technology accelerated Hitler's advances. The problem is not technology, the problem is the underlying impetus, be it false money or a false ideology.)

Some argue that without targeted intervention like the CRA, there is a kind of symmetry in the loan market that would prevent a bubble forming in any one sector alone. But the nature of an inflation is that wherever a bubble first begins to form, positive feedback from speculation magnifies it as long as the inflation keeps pace. Where the bubble nucleates may depend on things like the CRA and may be hard to predict, but once it does nucleate, it is a runaway process, diverting capital from where there is a real demand for it.

Distortions introduced by the abolition of market interest rates generate massive opportunities for speculation. But it has to be recognized that, however near the end of the inflation, this speculatory action is not even an approximate substitute for the abolished market process. The speculators' estimates involving gross macroeconomic aggregates may diagnose crude imbalances; they cannot comprehend a detailed reorganization of the entire structure of production to suit the real preferences of millions of people stranded in a world of distorted capital prices.

The one kernel of truth in the indictment of the use of derivatives in the recent boom is the role of the ratings agencies, whose seal of approval (AAA) has bred analytical complacency on the part of investors looking to purchase securitized mortgages and the like. The place occupied by these agencies in the market, however, is a product of government interference. They are in effect a legally enforced oligopoly. An AEI piece from 2005 is informative. This narrower problem is more amenable to correction by speculators.

Seeds of the Crisis

[HBL] Some are skeptical about the adequacy of inflationary monetary policy to sustain a narrow housing bubble over a period of years when the new money is spent quickly by home buyers, equilibrating them with the rest of the economy.

Indeed the housing bubble is just the leading edge of a generalized debt bubble, whose other manifestations (e.g. college loans, US government debt, credit card debt) are only starting to make themselves known. All of these have been fueled not by a one-time monetary injection, but by a sustained policy of holding interest rates below the natural level that would have prevailed in free debt markets.

As long as interest rates are artificially suppressed, new money is continuously conjured up in the bank accounts of those who would otherwise not have been deemed creditworthy. The prices of what they spend it on are bid up. The suppliers of those bid-up goods and services in turn increase their own expenditures, bidding up a new set of goods, etc. The whole structure of production, the markets for capital goods tied to different stages of processing toward different final products, is gradually rearranged to accommodate this new demand as if it were actually backed by new supply.

Furthermore, as the boom gets underway, additional self-reinforcing tendencies come about. The constant bidding up of certain goods attracts speculators whose additional demand will bid them up even further, attracting more speculators, etc., tending to continuously pull the new money back into the sector(s) in which it was first deployed.

But when the monetary spigot ceases to spew (fast enough), the feedback is reversed, and whole industries implode, releasing masses of capital that had been built-up over years and are now only partially transferable.

This Misean process cannot be set off by targeted interventionist programs, like the Community Reinvestment Act (CRA). Such programs do artificially increase demand for certain goods, but apart from a cessation of the program, there is nothing to cut off the new demand. A self-reinforcing boom culminating in an abrupt bust is the signature of unsustainable monetary meddling.