Week 18: Finance and physics

As you are no doubt aware, the state of the global economy is messy.  There is massive inequality in the distribution of private wealth.  In addition, a culture of debt in pervades developed economies.  As a consequence of deregulation, irresponsible government and consumer spending, and undue influence from private interests, places like Greece, Italy, and Japan now carry public debt that exceeds 100% of GDP.  Japan is the most indebted with over 200% debt to GDP ratio.  The USA will cross the 100% threshold some time next year. [CIA World Factbook]

Notwithstanding the technicalities of economics, let us for simplicity agree that massive inequality in wealth and out-of-control public spending has created a perilous economic situation worldwide.  There are many actors on the global stage attempting to right the ship by providing corporate bailouts, tampering with currency and interest rates, and propping up banks and governments through institutions such as the International Monetary Fund and the European Central Bank.  I believe that their efforts will ultimately fail.

I will attempt to explain my position with an analogy.  Global finance is far too complex for average people like me to understand, but I believe that a reasonably clear picture can be framed using a simple and fundamental law of physics.  I will do this by simply replacing the quantity of energy with the quantity of money.  Before we continue, let me caveat my statements with three clauses:

1) I am not an economist, nor am I a physicist, and my understanding of both economics and thermodynamics is elementary at best.
2) All analogies are inherently flawed.  The analogue shares characteristics with the primary concept, but is not derived from it, thus it fails to explain the intricacies of the primary concept.  
3) I arrived at this specific idea independently, but it is not original - the underlying concept of maximum entropy production has been applied to discussions of finance and other social sciences by scholars and writers far more educated and astute than me.

Right then.  Here’s a very, very brief physics lesson and some generalized definitions for the purposes of this esssay:

Thermodynamics: The study of time-dependent effects (temperature, pressure, chemical reactions, etc) of physical bodies on their surrounding environment within the constraints of that environment.

1st Law of Thermodynamics: Conservation of energy (energy cannot be created or destroyed, only changed in form) requires that a system will exchange energy with its surroundings by way of heat or work.

2nd Law of Thermodynamics: It is impossible to produce positive heat flow from a colder body to a warmer body.  In essence, inequalities in temperature and other time-dependent variables represent a potential difference that will always decay from higher to lower until both are equal, given enough time.  This leads to the central concept of this essay:

Entropy:  The measure of disorder in a system.  When a system is decaying towards equilibrium - a room with an open window reaching the same temperature as outside, for instance - entropy measures the progress of this decay.  When it reaches equilibrium, it has achieved maximum entropy.
In summary, when a system has minimal or no entropy, there is a large inequality in energy distribution - think of water trapped behind a dam as another example.  The potential exists, should the dam break, to equalize the volume and elevation of the water on both sides of the dam.  A break in the dam represents the most efficient path to maximum entropy - the “default” state of any system where energy is exchanged.  If the dam breaks, maximum entropy will be achieved in a finite time as the rate of flow, volume, and elevation of the water is equalized on both sides of the dam.
[scienceworld.wolfram.com, en.wikipedia.org/wiki/thermodynamics, entropylaw.com]

Now let’s apply this concept to global finance.  As of September 2011, the USA owes 3.634 trillion dollars plus interest to its 10 largest foreign creditors, 1.148 trillion of which is owed to China.  This represents approximately 20% of the total US public debt, which is currently increasing at a rate of about 10-11% of the GDP annually.  This massive imbalance on the budget sheet represents a high potential credit risk which, in thermodynamic terms, should decrease over time until a balanced budget (economic equilibrium) is restored.  [gpoaccess.gov/usbudget]

As it stands, debt and therefore credit risk is increasing significantly, and the dam that holds American debt at bay - confidence in the US economy by foreign investors - is weakening, which is evident in the recent decrease in America’s credit rating.  If the dam were to break (America goes bankrupt), the tidal wave of its massive unpaid debt would crash through the global economy, devastating the financial systems of every country in the world.

In this example, maximum entropy would mean that US debt and credit risk was distributed more or less uniformly amongst its creditors who, having high confidence in the American economy, would lend money at a fairly low interest rate, keeping American debt low and repayments manageable.  It would also add value to the US dollar, increasing its purchasing power, which would thus increase incentive for foreign investors to use the dollar to purchase goods and services worldwide.  This notion represents an ideal, if simplistic, foreign economic relationship that is directly in line with the law of entropy.

There is a force that tends to pull economic disparity back towards a state of equilibrium, be it the public interest, public fiscal policy, or the actions of corporations with significant economic clout.  Debts demand to be repaid.  If the disparity is greatly out of proportion with what might be considered a “safe limit,” the potential difference between the actual entropic state and maximum entropy is much higher.  Therefore, the potential corrective force is also much higher, and carries a much greater risk to those who are in its path.

Legislators and bankers are fighting a losing battle against a monetary force that is for all intents and purposes analogous to a fundamental force of nature.  There is far too great a disparity between the rich and the poor, and the creditors and their debtors, to be sustainable.  The use of bailouts - basically robbing the public purse for the sake of a few more profitable quarters for the banks - is tantamount to using chewing gum to patch the cracks in a dam.  Eventually, the massive inertia of an unbalanced system pushing back towards maximum entropy will destroy the last attempts and preserving the status quo.

Word count: 1,092

Week 17: The fundamentals

When I was growing up, a lot of people told me that I was smart.  As well intentioned and complimentary as this may have been, it wasn’t helpful.  Being young and immature, I hadn’t reached a point where I was ready to question the implications of thinking one’s self more intelligent than the average.  For the record, I don’t really believe that I’m any smarter than most people, and I don’t say that just to be humble.

The two most important things I’ve learned so far in life are the following: 1) I should never miss a good opportunity to keep my mouth shut, and 2) all I know is that I know nothing (thanks, Socrates).  But once again, in my youth I hadn’t come across these gems of wisdom just yet, and I was inclined to believe that I was smart and I wasn’t afraid to open my mouth to let everybody know.

One of the long-term consequences of this early behaviour is a lifelong problem with developing good work habits.  We all make our own universe; when people told me that I was smart, I chose to interpret that to mean that I didn’t need to work as hard as everybody else to make it through school.  I slacked off and rarely studied.  It’s true that I didn’t find high school to be particularly challenging, but that’s because I chose not to challenge myself.  I did the minimum work required to pass in most cases.  If I was really smart like some people said, I would have realized that the intelligent choice would have been to apply myself even more than everybody else and elevate my understanding to the next level instead of being arrogant and ignorant.

It’s been a decade since I started high school, so with the benefit of hindsight, I’m a lot better at catching myself now before I slip in to self-destructive patterns of behaviour that stem from thinking that I don’t need to study to understand.  One of my least favourite things to hear is that I’m successful because I’m “smart.”

As a father, I’m proud of my son and I know that he’s a smart boy, but I also know that I won’t be doing him any favours by telling him that all the time.  I think that it’s important to caveat that sort of compliment with the admonition that intelligence is never a predictor of success.  It’s a grave error to draw a causal link between smarts and success when there a tenuous correlation at best.  Nobody who achieves true mastery of any pursuit has ever done so by virtue of their intelligence alone.  It’s the same idea that makes people think that some individuals are “naturally talented.”

There’s no question in my mind that everyone’s brain comes out wired differently.  Some people will already have a neural structure that reinforces learning in certain areas while struggling with it in others.  That’s why there are a lot of different learning styles - auditory, visual, tactile, etc.  The same concept holds true for things like math and science, musical ability, artistic ability and other talents as well.  But like intelligence, natural talent is a poor predictor of actual mastery of that art form.  To draw an example from my own life, I’ve been playing music on a few different instruments for most of my life, but if you sat me down with a piece of sheet music that I hadn’t seen before, I would butcher it for my first several attempts.  I definitely have a natural inclination towards playing music and learning instruments, but I haven’t practiced the fundamental theories and basic techniques with any sort of rigor or discipline for several years, so I’m not actually very good at any of them.

We’ve all watched, awestruck and perhaps a bit jealous, as some tremendously talented individual or group presents their craft.  Less apparent than, say, the fantastic musical performance unfolding before our eyes is the process that allowed it to take place.  Namely, the thousands of hours that were invested in study, practice, writing and arranging.  It’s easy to forget about the process or initiative that brought a talent to life.

*If you chanced upon a talented graffiti artist’s notebook, you would see the process that led to the bold experiment with letters on a wall.  The chosen tag, now executed with speed and precision, would have been repeated hundreds of times until the artist was confident in his handstyle.  The artist would have attempted, set aside, and developed letters and forms over thousands of iterations before they could be understood and duplicated.

If you were listening when a drummer executed a stylish fill, you heard the end result of perhaps thousands of hours of practice.  The accents and the patterns in the interplay between the hands and the feet may have been composed in a very careful and deliberate attempt.  They may have emerged from a moment of musical serendipity when they played what felt right and it came out golden.  Either way, the drummer had to recognize how the appropriate application of certain rudiments leads to a certain feel and which ones lend themselves to particular styles of music.

This thread will be familiar with anybody who practices to develop a talent.  It takes a basic manoeuvre, a rudiment, that is practiced until it becomes instinctive.  Then the artist (or scholar, or teacher, etc) can call it up and execute it with speed and precision and deft skill.

It makes me sad when people say that they’re not smart or talented enough to learn how to do something.  When confronted with a high-level presentation of skill, it can be extremely intimidating - frustrating, even - for a novice.  But what is being performed is simply a higher order presentation of the fundamentals.  The basic ingredients are simple and logical and anyone can learn them.  Math, music, art, writing - it’s all there for everybody who’s willing to put in the work.

Word count: 1,002

*Big shout out to my good friend, Adrian, who's been putting in work for years and is now seeing the fruits of his labour. Check out his blog: http://ajalouden.blogspot.com

Week 16: Option paralysis

This week, I wanted to pick up on a thread from last week’s ramblings - the idea of option paralysis.  The basic meaning is the hesitance and uncertainty that comes with the modern encounter with technology and digital society.  Limitless access to information can cause a crippling force against choice and decisiveness because it gives rise to virtually infinite options.  For an extrapolation, I quote Ben Weinman, the guitarist of The Dillinger Escape Plan, who explains the concept that spurned the album of the same name:

“...[t]he inspiration of the record is the idea that there are so many stimuli going on right now, there are so many computers, iPhones, TVs, media, that nobody really knows what's important anymore. There is no underground anymore because everything is homogenised and coming through the same filter. There are far fewer instances of certain circumstances affecting specific scenes, music and culture. Technology has become a substitute for actually living and experiencing things.”

The internet and mobile access to social networking has given us access to information at unprecedented and ridiculous levels.  This recalls my musings on aporia back in week 6.  This is an aporia with technology.  We have what is essentially an infinite number of potential encounters with new information, with respect to the finite number of hours that can be spent online.

This is in contrast to a time period in the very recent past when it was impractical for private households to have personal computers and wireless internet access.  The amount of information that is freely available to public users has ballooned exponentially in only a few years.  This is what Ray Kurzweil describes as “the knee of the curve” in his futurist writing (The Singularity is Near, 2005.)

Because of our short lifespans and short memories, we all tend to view progress as more or less linear.  It’s difficult for us to remember or access a frame of reference that extends backwards in time by more than a few years and make meaningful comparisons.  As an example from my own experience, I can remember the iterative progress from our family’s first CD player - an unwieldy brick of technology that was slow to load and prone to skipping - to my portable CD player barely larger than the disc it played which could be shaken and even dropped without skipping.  Pretty impressive, but it’s hard to gauge an actual “rate” of progress based on these improvements.

Even though it’s fairly obvious that the pace of technology is accelerating (consider  the decreasing interval and increasing functionality between generations of smart phones), even the view that things seem to be speeding up as we go forward is a massive understatement of the actual situation.  This gets us back to Kurzweil’s idea of the “knee” of the exponential curve that our technological progress is drawing across the plane of history.

The basic explanation of this notion is that the pace in areas such as information technology and processor speed are expanding in on a logarithmic scale, rather than on a linear scale, and they are pulling along all related facets of technology and access to information.  Using a simple decimal example, if the pace of technology was linear and it took 1 year to add 100 gigabytes of hard drive space, in 2 years, the original value will have increased by 200 gigabytes.  However, since the pace is exponential, there is an upward trend to the speed which creates a positive feedback loop to “steepen” the curve.  Using a similar example, if it takes 3 years to increase the capacity of a hard drive by a factor of 10, it will only take 6 years to subsequently increase the capacity 100 times.  If the original capacity was 10 gigabytes, it would carry 100 gigabytes in 3 years, and almost one terabyte within 6 years.

This brings me back around to the original premise.  Easy access to indefinite realms of information technology makes it incredibly difficult to allocate time appropriately, or even to have a good idea of what the appropriate allocation might be.  I currently have 6 tabs open at the top of my browser.  Ask me about allocating one’s time and resources carefully...

I can’t remember who said it, but I heard a quote recently that resonated with me on a pretty fundamental frequency: We’ve sacrificed knowledge in the name of information.  I think that one of the greatest challenges of this era (or maybe I’m projecting my own great challenges on our era) is to discover a way to filter the information into useful knowledge, rather than getting swept away by the current of the information explosion and losing our way in its trends.

I’ve written about the internet and technology a fair bit - it’s a recurring theme that anybody who reads this blog will have figured out by now.  What makes it so interesting to me is the question that I keep coming back to: how do I avoid option paralysis in the face of the incredible force and traction that gives massive networks the power to pull people along in their wake?

How many times have you seen some version of this phrase: “...if you support _________, post this in your status.”  Or perhaps, one of my personal favourites, “sign this online petition to support/discard/sustain/improve ______________”.  It’s persuasive to think that participation in online discussions of real-world issues is sufficient to affect change, and I’m as guilty of it as anybody.  Take, for example, this blog.  Just bits and bytes on a digital page.

I believe that the best way to take full advantage of the explosion of information technology is to exploit its potential to bring people together in real-world environments to share what they’ve learned online.  It requires dedication and discipline that I do not always have in sufficient quantities, but it’s something I’m working on.  We’ve seen it give rise to amazing social movements like the Arab Spring and the ongoing Occupy Wall Street movement, and it can only get bigger from here.  I’m incredibly excited by the possibility of opening public dialogue and making revolutionary movements out of the capabilities that information has given us.  I hold up these movements as a brilliant example of how to overcome option paralysis.  Let’s not allow technology to become a substitute for living.  Let’s make it a way to enhance it.

Word count:  1,070

P.S. Please go listen to "Option Paralysis" by The Dillinger Escape Plan. Srsly.