“No problem can be solved from the same level of consciousness that created it.” — Albert Einstein
Can scientists help economists and regulators stabilize financial markets?
A number of scientists – people who pride themselves on acknowledging the limits of their knowledge and who use a rigorous process to expand the boundaries of what’s knowable – say “yes”.
We need to understand how and why the crisis happened and why warnings over the last years were not understood or heeded. We need to use this knowledge to stop this crisis and get the economy functioning again. In the longer term, we need to redesign and reregulate the financial system so that it performs its necessary functions without leading to periodic crises of global scale…
(A) critique of the neoclassical paradigm has been developing from within economics as well as from the study of complex systems for the last twenty years. To this can be added other insights about how to describe markets which depart from neoclassical assumptions. These can be combined to yield a new scientific conceptualization of economic systems. This needs to be developed before it can yield precise detailed models of the economy of sufficient complexity to be reliable. But it offers a lot of promise…
The real success of the American economy has been in its functioning well as an incubator for innovation in real goods and services. This has given us expertise and technology, which has now led to the invention of financial instruments whose use, in a failed theoretical context, largely unregulated or comprehended, threatens to undo all the economic progress of the last decades. The question in front of us is whether the same spirit of innovation can be applied to the principles of economic theory that governs financial markets so as to base the design and regulation of those markets on correct and verifiable principles and models…
If we had embraced uncertainty management rather than risk management and done even a rudimentary job of estimating the uncertainty in the system, the mathematics would not have been nearly as courteous to the preposterous positions taken in the markets, which doomed our last financial system. This is to say nothing of the myriad principal-agent problems with incentives rampant throughout the system.
Not everyone agrees with them of course, but it seems like they could hardly do worse than those with “titles or authoritative baritones” that have allowed their speed to execution outpace their speed to comprehension. Because in the last analysis:
(We) don’t believe that citizenship in the United States should now hurriedly be converted into forced participation in an unaccountable secretive national hedge fund which buys lousy assets at inflated prices from banks mismanaged for personal profit by multi-millionaires, and makes non-consensual capital calls on uninformed, captive, financially unsophisticated families.