Tag Archives: Quants

Crushing the Stack

If in The Code Economy Philip Auerswald managed to give us a succinct history of the algorithm, while leaving us with code that floats like a ghost in the ether lacking any anchor in our very much material, economic and political world. Benjamin Bratton tries to bring us back to earth. Bratton’s recent book, The Stack: On software and sovereignty provides us with a sort of schematic with which we can grasp the political economy of code and thus anchor it to the wider world.

The problem is that Bratton, unlike Auerswald, has given us this schematic in the almost impenetrable language of postmodern theory beyond the grasp of even educated readers. Surely this is important for as Ian Bogost pointed out in his review of The Stack: “The book risks becoming a tome to own and display, rather than a tool to use.” This is a shame because the public certainly is in need of maps through which they can understand and seek to control the computational infrastructure that is now embedded in every aspect of our lives, including, and perhaps especially, in our politics. And the failure to understand and democratically regulate such technology leaves society subject to the whims of the often egomaniacal and anti-democratic nerds who design and run such systems.

In that spirit, I’ll try my best below to simplify The Stack into a map we can actually understand and therefore might be inclined to use.

In The Stack Bratton observers that we have entered the era of what he calls “planetary scale computation.” Our whole global system of processing and exchanging information, from undersea fiber-optic cables, satellites, cell-phone towers, server farms, corporate and personal computers along with our ubiquitous smartphones he see sees as “an accidental megastructure” that we have cobbled together without really understanding what we are building. Bratton’s goal, in a sense, is to map this structure by treating it as a “stack”, dissecting it into what he hopes are clearly discernible “layers.” There are six of these: Earth, Cloud, City, Address, Interface and User.

It is the Earth layer that I find both the most important and the most often missed when it comes to discussions of the political economy of code. Far too often the Stack is represented as something that literally is virtual, disconnected from the biosphere in a way that the other complex artificial systems upon which we have come to depend, such as the food system or the energy system, could never be as a matter of simple common sense. And yet the Stack, just like everything else human beings do, is dependent upon and effects the earth. As Bratton puts it in his Lovecraftian prose:

The Stack terraforms the host planet by drinking and vomiting its elemental juices and spitting up mobile phones. After its short career as a little computing brick within a larger megamachine, its fate at the dying end of the electronics component life cycle is just as sad. What is called “electronic waste” inverts the process that pulls entropic reserves of metal and oil from the ground and given form, and instead partially disassembles them and reburies them, sometimes a continent away and sometimes right next door. (p.83)

The rare earth minerals upon which much of modern technology depends come at the cost of environmental degradation and even civil war, as seen in the Democratic Republic of Congo. Huge areas of the earth are now wastelands festooned with the obsolescent silicon of our discarded computers and cell phones picked over by the world’s poorest for whatever wealth might be salvaged.

The Stack consumes upwards of 10 percent of the world’s energy. It’s an amount that is growing despite the major tech players efforts to diminish its footprint by relocating servers in the arctic, and, perhaps soon, under the sea. Although gains in efficiency have, at least temporarily, slowed the rate of growth in energy use.

The threat to the earth from the Stack, as Bratton sees it, is that its ever growing energy and material requirements will end up destroying the carbon based life that created it. It’s an apocalyptic scenario that is less fanciful than it sounds for the Stack is something like the nervous system for the fossil fuel based civilization we have built. Absent our abandonment of that form of civilization we really will create a world that is only inhabitable by machines and machine-like life forms such as bacteria. Wall-e might have been a prophecy and not just a cartoon.

Yet Bratton also sees the Stack as our potential savior, or at least the only way possible without a massive die off of human beings, to get out of this jam. A company like Exxon Mobil with its dependence on satellites and super-computers is only possible with the leverage of the Stack, but then again so is the IPCC.

For the Stack allows us to see nature, to have the tools to monitor, respond to, and perhaps even interfere with the processes of nature many of which the Stack itself is throwing out of kilter. The Stack might even give us the possibility of finding an alternative source of power and construction for itself. One that is compatible with our own survival along with the rest of  life on earth.

After the Earth layer comes the Cloud layer. It is here that Battron expands upon the ideas of Carl Schmitt. A jurist under the Nazi regime, Schmitt’s ideas about the international order have become popular among many on the left at least since the invasion of Iraq by the US in 2003 not as a prescription, but as a disturbingly prescient description of American politics and foreign policy in the wake of 9-11.

In his work The Nomos of the Earth Schmitt critiqued the American dominated international order that had begun with the US entry into WWI and reigned supreme during the Cold War  as a type of order that had, by slipping free the of the anchor of national sovereignty bound to clearly defined territories, set the world on the course of continuous interventions by states into each other’s domestic politics leading to the condition of permanent instability and the threat of total war.

Bratton updates Schmitt’s ideas for our era in which the control of infrastructure has superseded the occupation of territory as the route to power. Control over the nodes of  global networks, where assets are no longer measured in square miles, but in underwater cables, wireless towers, and satellites demands a distributed form of power, and hence helps explain the rise of multinational corporations to their current state of importance.

In terms of the Stack, these are the corporations that make up Bratton’s Cloud Layer, which include not only platforms such as Google and FaceBook, but the ISPs controlling much of the infrastructure upon which these companies (despite their best efforts to build such infrastructure themselves), continue to depend.

Bratton appears to see current geopolitics as a contest between two very different ideas regarding the future of the Cloud. There is the globalist vision found in Silicon Valley companies that aims to abandon the territorial limits of the nation-state and the Chinese model, which seeks to align the Cloud to the interests of the state. The first skirmish of this war Bratton notes was what he calls the Sino-Google War of 2009 in which Google under pressure from the Chinese government to censor its search results eventually withdrew from the country.

Unfortunately for Silicon Valley, along with those hoping we were witnessing the last gasp of the nation-state, not only did Google lose this war, it has recently moved to codify the terms of its surrender, while at the same time we have witnessed both a global resurgence of nationalism and the continuing role of the “deep-state” forcing the Cloud to conform to its interests.

Bratton also sees in the platform capitalism enabled by the Cloud the shape of a possible socialist future- a fulfillment of the dreams of rational, society-wide economic planning that was anticipated with the USSR’s Gosplan, and Project Cybersyn in pre-Pinochet Chile. The Stack isn’t the only book covering this increasingly important and interesting beat.

After the Cloud layer comes the City layer. It is in cities where the density of human population allows the technologies of the Stack to be most apparent. Cities, after all, are thick agglomerations of people and goods in motion all of which are looking for the most efficient path from point A to point B. Cities are composed privatized space made of innumerable walls that dictate entry and exit. They are the perfect laboratory for the logic and tools of the Stack. As Bratton puts it:

We recognize the city he describes as filled with suspicious responsive environments, from ATM PINs, to key cards and parking permits, e-tickets to branded entertainment, personalized recommendations from others who have purchased similar items, mobile social network transparencies, GPS-enabled monitoring of parolees, and customer phone tracking for retail layout optimization.  (p. 157)

Following the City layer we find the Address. In the Stack (or at least in the version of it dreamed up by salesmen for the Internet of Things), everything must have a location in the network, a link to which it can be connected to other persons and things. Something that lacks an address in some sense doesn’t exist for the Stack. An unconnected object or person fails to be a repository for information on which the Stack itself feeds.

We’ve only just entered the era in which our everyday objects speak to one another and in the process can reveal information we might have otherwise hidden about ourselves. What Bratton finds astounding is that in the Address layer we can see that the purpose of our communications infrastructure has become not for humans to communicate with other humans via machines, but for machines to communicate with other machines.

The next layer is that of the Interface. It is the world of programs and apps through which for most of us is the closest we get to code. Bratton says it better:

What are Apps? On the one hand, Apps are software applications and so operate within something like an application layer of a specific device-to-Cloud economy. However, because most of the real information processing is going on in the Cloud, and not in the device in your hand, the App is really more an interface to the real applications hidden away in data centers. As an interface, the App connects the remote device to oceans of data and brings those data to bear on the User’s immediate interests; as a data-gathering tool, the App sends data back to the central horde in response to how the User makes use of it. The App is also an interface between the User and his environment and the things within it, by aiding in looking, writing, subtitling, capturing, sorting, hearing, and linking things and events. (p.142)

The problem with apps is that they offer up an extremely narrow window on the world. Bratton is concerned about the political and social effects of such reality compression, a much darker version of Eli Pariser’s “filter bubble”, where the world itself is refracted into a shape that conforms to the individual’s particular fetishes, shattering a once shared social world.

The rise of filter bubbles are the first sign of a reality crisis Bratton thinks will only get worse with the perfection of augmented reality-there are already AR tours of the Grand Canyon that seek to prove creationism is true.

The Stack’s final layer is that of the User. Bratton here seems mainly concerned with expanding the definition of who or what constitutes one. There’s been a lot of hand-wringing about the use of bots since the 2016 election. California has even passed legislation to limit their use. Admittedly, these short, relatively easy to make programs that allow automated posts or calls are a major problem. Hell, over 90% of the phone calls I receive are now unsolicited robocalls, and given that I know I am not alone in this, such spam might just kill the phone call as a means of human communication. Ironically, the very reason we have cellphones in the first place.

Yet bots have also become the source of what many of us would consider not merely permissible, but desirable speech. It might upset me that countries like Russia and Saudi Arabia are vociferous users of bots to foster their interests among English speaking publics, or scammers using bots to pick people’s pockets, but I actually like the increasing use of bots by NGOs whose missions I support.

Bratton thus isn’t crazy for suggesting we give the bots some space in the form of “rights”. Things might move even further in this direction as bots become increasingly more sophisticated and personalized. Few would go so far as Jamie Susskind in his recent book Future Politics in suggesting we might replace representative government by a system of liquid democracy mediated by bots; one in which bots make political decisions for individuals based on the citizen’s preferences. But, here again, the proposal isn’t as ridiculous or reactionary as it might sound.

Given some issue to decide upon my bot could scan the position on the same by organizations and individuals I trust in regards to that issue. “My” votes on environmental policy could reflect some weighted measure between the views of the World Wildlife Fund, Bill Mckibben and the like, meaning I’d be more likely to make an informed vote than if I had pulled the lever on my own. This is not to say that I agree with this form of politics, or even believe it to be workable. Rather, I merely think that Bratton might be on to something here. That a key question in the User layer will be the place of bots- for good and ill.

The Stack, as Bratton has described it, is not without its problems and thus he ends his book with proposals for how we might build a better Stack. We could turn the Stack into a tool for the observation and management of the global environment. We could give Users design control over the interfaces that now dictate their lives, including the choice to enter and exit when we choose, a right that should be extended to the movement between states as well. We could use the power of platforms to revive something like centrally planned economies and their dream of eliminating waste and scarcity. We could harness the capacity of the Interface layer to build a world of plural utopias, extend and articulate the rights and responsibilities of users in a world full of bots.

Is Bratton right? Is this the world we are in, or at least headed towards. For my money, I think he gets some things spectacularly right, such as his explanation of the view of climate change within the political right:

“For those who would prefer neo-Feudalism and/or tooth-and-nail libertarianism, inaction on climate change is not denialism, rather it is action on behalf of a different strategic conclusion.” (p.306)

Yet, elsewhere I think his views are not only wrong, but sometimes contradictory. I think he largely misses how the Stack is in large part a product of American empire. He, therefore, misinterprets the 2009 spat between Google and China as a battle between two models of future politics, rather than seeing the current splintering of the internet for what it is: the emergence of peer competitors in the arena of information over which the US has for so long been a hegemon.

Bratton is also dismissive of privacy and enraptured by the Internet of Things in a way that can sometimes appear pollyannaish. After all, privacy isn’t just some antiquated right, but one of the few ways to keep hackable systems secure. That he views the IoT as something inevitable and almost metaphysical, rather than the mere marketing it so often is, leads me to believe he really hasn’t thought through what it means to surround ourselves with computers- that is to make everything in our environment hackable. Rather than being destined to plug everything into everything else, we may someday discover that this is not only unnecessary and dangerous, but denotes a serious misunderstanding of what computation is actually for.

Herein lies my main problem with the Stack: though radically different than Yuval Harari, Bratton too seems to have drank the Silicon Valley Kool Aid.  The Stack takes as its assumption that the apps flowing out of the likes of FaceBook and Google and the infrastructure behind them are not merely of world-historical, but of cosmic import. Matter is rearranging itself into a globe spanning intelligence with unlikely seeds like a Harvard nerd who wanted a website to rate hot-chicks. I just don’t buy it.

What I do buy is that the Stack as a concept, or something like it, will be a necessary tool for negotiating our era, where the borders between politics and technology have become completely blurred. One can imagine a much less loquacious and more reality-based version of Bratton’s book that used his layers to give us a better grasp of this situation. In the Earth layer we’d see the imperialism behind the rare-earth minerals underlying our technology, we’d see massive Chinese factories like those of FoxConn, the way in which earth destroying coal continues to be the primary energy source for the Stack.

In the Cloud layer we’d gain insight into server farms and monopolistic ISPs such as Comcast, and come to understand the fight over Net Neutrality. We’d be shown the contours of the global communications infrastructure and the way in which these are plugged into and policed by government actors such as the NSA.

In the City layer we’d interrogate idea of smart cities, along with the automation of inequality and digitization of citizenship along with exploring the role of computation in global finance. In the Address layer we’d uncover the scope of logistics and  find out how platforms such as Amazon work their magic, and ask whether it really was magic or just parasitism, and how we might use these insights for the public good, whether that meant nationalizing the platforms or breaking them into pieces.

In the User layer we’d take a hard look at the addictive psychology behind software, the owners and logic behind well-known companies such as FaceBook along with less well known such as MindGeek. Such an alternative version of the Stack, would not only better inform us as to what the Stack is, but suggest what we might actually do to build ourselves a better one.  

 

Pandemonium, Kingdom of the Quants 2

THE QUANTS

Quants is a term for a breed of mathematical wizards who, from the early 1970s forward, essentially built the computerized system of finance we have today. Before the quants, Wall Street types were largely made up of testosterone filled, play- by- the- gut traders- (think Gordon Gekko of the 80s classic- Wall Street- though no doubt with harrier  knuckles than Michael Douglas.) After the quants, Wall Street would be filled with refugees from the world of quantum physics or other math heavy branches of the sciences. Its myriad of financial transactions would be no longer be based on the gut instinct of human traders, but run by advanced algorithms that churned away the world’s daily business within a bewilderingly complex network tied together through satellites and fiber optic cables that literally circled the globe. The world for the first time had truly become “one world” with everything of value in it symbolized in electric strings of ones and zeros.

How did this come to be so?

A book probably destined to become the definitive story of the rise of the quants is the Wall Street Journal’s Scott Patterson’s The Quants: How a new breed of math whizzes conquered Wall Street and nearly destroyed it. Patterson begins his story with Ed Thorp, who started his career not as a Wall Street trader, but as an academic with a penchant for gambling.

The journey to quantdom began with the quest to beat the roulette wheel. Thorp was sure he could figure out a “scientific system” to predict where the ball would fall, and thus conquer chance and make himself a fortune. He found an unlikely ally in the economist, and gagater, Claude Shannon.

In a scene that reminded me of the 60s classic Get Smart, Patterson recounts how Thorp and Shannon invented a roulette computing computer that was placed in Shannon’s shoe. Shannon would relay the predictions to the roulette playing Thorp through a radio device in his ear. The scheme, of course, went nowhere, and could have ended up getting the both of them killed. Thorp, however was not to be deterred, chance could be beaten, even if it wasn’t the chance of the roulette wheel. He turned his attention to BlackJack, where he did, indeed, come up with a winning strategy that he would turn into a best selling book- Beat the Dealer.  With one kind of chance beaten, Thorp set out to conquer another, and he set his eyes on the biggest casino in the world, the one found on Wall Street. Thorp’s core method, as it would be for all quants, would be to use advanced computers, and highly sophisticated mathematics borrowed from the physical sciences, to divine the future of the market, the outcome of the great financial game, and in the process make a killing for himself.

Thorp, who with philosophy major, Jay Regan, started the computer based trading firm Thorp and Regan, was but the first of a flood of people with an advanced mathematical background who would stream into Wall Street, especially after the 1980s, enabled by financial deregulation, the explosion of super-fast and relatively inexpensive computing, and the development of sophisticated mathematical finance.

Thorp’s quant brethren, a good deal of whom also had a taste for gambling included: Ken Griffin (Citadel Investment Group), Cliff Asness (AQR Capital Management), Boaz Weinstein (Deutsche Bank), and Jim Simons, who emerged from the super-secret field of military cryptography to create what is perhaps the most successful quant fund in the world (Renaissance Capital Management).

I should step aside from Patterson’s narrative for a moment and provide a general picture of the historical circumstances that coincided with the rise of the quants. The quants were just one of many groups linked together by newfound faith in “the market” that had emerged from the failure of Keynesian economics. To overly simplify the matter, Keynesianism, which had grown out of the collapse of the global economy in the 1930s, held the position that government managers should interfere with the economy to prevent a rerun of the Great Depression, and perhaps more importantly, believed that such interference with the economy would work. This interference was largely what is called “counter-cyclical”. When recession struck the government would run up huge budget deficits to keep unemployment from going so high that it would derail consumer spending, thus, in theory, avoiding the vicious circle of unemployment-less spending-more unemployment that had characterized the Great Depression.

By the 1970s, Keynesianism was a spent force. Yes, another Great Depression hadn’t occurred, but Western economies became mired in unemployment and seemingly intractable inflation as this great sketch by comedian Father Guido Sarducci illustrates better than any economist could.

The revolution that Ronald Reagan (though Reagan with his oversized budget deficits was perhaps more of a Keynesian than some would admit) and Margaret Thatcher launched in the early 1980s would assert not only that markets were smarter than any government manager, but that giving the freest reign possible to the markets would eventually lead to prosperity for all.

The argument between those who favored some sort of government management of the economy, and the proponents of the wisdom of the markets, was at root an epistemological argument- an argument over how knowledge worked. The Keynesians might have argued that if an economy was to avoid the kinds of crises experienced in the 1930’s you needed able management at the top, an expert who kept the ship on course. The position of the market proponents was that knowledge was best processed from the bottom up, as individuals made decisions based on their interactions with one another. Based on these interactions, the sum of all individual interactions- the market- was an order of magnitude smarter than any individual bureaucrat who by necessity had to understand the economy on an abstract level, and thereby risked losing so much of the economy’s actual detail that they lost touch with reality itself.

To return to Patterson’s narrative, the strange thing about the quants is that they were both true believers in the free market, who simultaneously held that they were so smart that they could “beat the market”-the title of one of Thorp’s books.  This idea that the market could be outsmarted flew in the face of the prevailing theory of how markets worked, the so-called,  Efficient Market Hypothesis. The idea behind the EMH was that markets were always smarter than any individual or subgroup because markets reflected the total of information exchanged between individuals.  If you own what is called an “Index Fund”, through your 401K  at work, or for some other reason, your retirement future is built on the assumption of the EMH. That is, an Index Fund buys an entire market assuming that there is no way for human beings to be able to pick winners and losers- the hope being that winners out number losers over the long haul.

Quants certainly believed in the wisdom of the market. They even had a word for it “Alpha”, the website Seeking Alpha, and the hedge fund magazine Alpha get their name here. What the quants believed was not that the market was wrong, but that it was slow. If, through their sophisticated mathematical models and lightning fast computers, they could get to the “Truth” first- say by buying up a stock that their models told them was about to rise in price- they could make a killing. And many of them did just that.

Here’s Patterson on the quest for Truth of the quants:

The Truth was a universal secret about the way the market worked that could only be discovered through mathematics.  Revealed through studies of obscure patterns in the market, the Truth was the key to unlocking billions in profits. The quants built gigantic machines- turbocharged computers linked to financial markets around the globe- to search for the Truth, and to deploy it in their quest to make untold fortunes. The bigger the machine, the more Truth they knew, the more they could bet. And from that, they reasoned, the richer they would be. (The Quants, p. 8)

The quants, using their sophisticated mathematics were largely responsible for the creation of a whole host of financial exotica, such as Credit Default Swaps, that came to the public’s attention with the financial collapse of 2008. Many of their creations were meant to hedge risks, thereby “guaranteeing” profit, and became a large component of the delusion that human beings had gotten so smart that full-blown financial crises were a thing of the past. Economists called this lack of crises, what proved to be a mere calm before the storm “The Great Moderation”- a delusion that was believed in all the way up to Federal Reserve Chairman, Alan Greenspan himself. Once the valuation models the quants had devised to price their exotic financial instruments was shown to be an illusion, the financial institutions that held them started to unravel.  As the financial system verged on the edge of collapse in 2008, the quants models, which predicted that the market would soon return to equilibrium, stopped working. Panicked investors were not acting as the model of human beings as rational actors would suggest. Quant funds were forced to join in the massive selling, or risk being wiped out entirely, as the value of not just the exotic instruments they invented, but the market itself, evaporated in the biggest decline since the 1930s.

There had been lone prophets who tried to point out the fundamental errors in the models of the quants. One of these prophets was the mathematical genius Benoît Mandelbrot who, way back in the 1960s, observed that many markets rather than reflecting the smooth structure one would expect from a phenomenon of rational actors looking for the best price, was instead filled will all of these crazy spikes as prices alternatively soared then crashed. A more contemporary critic of the quants was the trader and writer, Nassim Taleb, who pointed out that the mathematical models of the quants, which were based on the physical sciences where predictable averages- Gaussian bell curves- were the order of the day (say the average human height- Mediocristan) did not work in the realm of economics because it was prone to extremes (say a sample of average income with Bill Gates in the mix-Extremistan).

The cries of the prophets were for-not until the whole system reached a point of near implosion.  An implosion that was only halted by a massive Keynesian intervention and reinflation in the form of bailouts and stimulus aimed largely at the financial sector, but also elsewhere (GM) by the world’s most powerful governments and their central banks. An action that almost certainly lacked much, if any, democratic legitimacy, and that, while probably having saved us from a full-scale implosion of the global economy, has not allowed us to escape what is proving to be a long“soft-depression”. Indeed, if the current crisis in the EU portends the future, governments may have merely postponed an economic reckoning that will likely now be centered on the bloated finances of the governments of the rich countries rather than the financial markets themselves.

This may seem like a particularly long and drawn out detour from what I had promised in the post preceding this one, that is, to apply what I had learned from David Hawkes’ reading of Paradise Lost to the quants. So, without further ado, let’s see where this takes us:

I should say right off the bat that what I am about to do is apply religious concepts to secular phenomenon. This might strike some as vulgar and a debasement of spiritual concerns. I understand this concern, and think it real myself, but nevertheless find this effort worthwhile. My suspicion is that when we peer underneath things we today believe to be wholly secular, we will find ideas that have their origins in religion. The reason we likely don’t recognize this is that ours is the first truly secular age,  that is, it is the first age whose social conventions are devoid of any explicitly religious context, or, in other words all other ages have approached both the human and the natural world through religious ideas. It is from this realization, not from any sense of my own personal religion or spirituality (I have little of either) that I think approaching the world using religious concepts is sometimes helpful, and this is the case even if the current religions are no more “real” than the religion of the Greek gods.

To continue: It would be a mistake, I think, to believe the quants were brought low by the vice of greed alone, and Milton/Hawkes can perhaps help us see why.  The broken relationship (sin) that underlies the whole of Paradise Lost is the sin of idolatry, and for our purposes, one can see this most especially in the construction of the capital of Hell, Pandemonium. The fallen angel Mammon (again meaning money) whose vision becomes the basis for Pandemonium was, while he was still in Heaven, transfixed by its beauteous gold. Mammon confuses this mere symbol of Heaven’s beauty for the beauty of Heaven itself. If its golden visages could be duplicated, in the logic of Mammon, then the fallen could recreate Heaven in what was actually Hell. It is this confusion, of the power brought to us by money, Milton seems to be telling us, with the powers of Heaven and of God, which is the danger point of our relationship with earthly wealth, rather than the animal-like greed for more and more. Mammon’s Pandemonium, is perhaps, like the beautifully decorated Anglican (and before that Catholic) cathedrals that dotted England in Milton’s day, a confusion of style over substance, an affront to the idea of God as the source of charity and love.

Ultimately, this boils down to an argument over what we should attend to during this short life of ours. The quants were, without doubt, brilliant individuals. Yet, they chose to use this brilliance not to seek out cures for disease, or find ways to aid the poor, or even to unveil the beauty of creation through science, but sought the generation of riches for themselves, and wealth for the already well off members of the hedge funds they managed. (Hedge funds, by law are limited to people with a minimum of a million dollars in assets).

The quants might respond that the wealth they were chasing would eventually make its way down to the lower classes like manna from Heaven. It would be a difficult argument for the quants to make in regards to the poor, given how hard the financial crisis, in part caused by the quants, has been on the least well off. It would be just as difficult a case for the quants to make for the middle class whose imaginary wealth- the value of their houses and stocks- disappeared as quickly as the electrons it was made of, once the power of cheap borrowing, of leverage, short- circuited.

It is not merely, however, the fact that the quants could be accused of idolatry in the sense of their worship of wealth, of which many could be accused, but that they were guilty of idolatry in that they both exalted their own idea of “truth” in a way that was almost quasi-religious, and that they practiced what was in a sense a form of divination.

On the first point: the mathematically inclined seem almost cognetally prone to a form of Platonism. That is, they tend to look at numbers not as mundane symbols to be manipulated for our purposes, but as part of some sort of higher reality whose truth stands above all human convention. You get this weird faith in the ability of numbers to capture reality in the most practical of people, “show me the numbers”, means the same thing as show me the truth, a phrase whose underlying assumption is that the truth can best be captured by abstract digits.

For the quants, “Alpha” was not some limited model of the financial world, but the deep, underlying truth of the it. Alpha was not a symbolic representation of the market, but was the market itself. The fact that this idea was neither rational, nor pragmatic, but instead constituted a sort of faith, can be seen in the fact that the quants’ belief in Alpha was not subject to doubt. Critics, such as Benoît Mandelbrot, or Nassim Taleb weren’t really engaged or answered, they were brushed aside because they didn’t conform to this “faith”. In an earlier age, such heretics might have been burned at the stake, but in our humane present, they were subject to the intellectual equivalent- they were ignored. This blind faith was only called into question by the quants when their “god” failed them and their models were shattered by the hammer blows of reality.

On the second point, I don’t think it is surprising that many of the quants started as gamblers, and not just because Wall Street is the greatest casino on earth, which it certainly is. Rather, gambling has a deep relationship with divination, and what the quants were really trying to do was peer into the non-existent future in order, as all divination does, to assert control over the existent present.

It’s a chicken-and-egg- question of whether gambling or divination came first in human history, and for all intents and purposes, it seems the further we go back the more indistinguishable the two probably become. The fact that a person’s future could be predicted using cards- the modern version of this is, of course, the Tarot deck, or dice, makes perfect sense if we put ourselves into an idolatrous frame of mind- which is essentially the frame of mind of almost all pre-scientific forms of thinking. The key mistake of idolatry is to confuse the symbol with the symbolized. This mistake seems to naturally imply that the more “like” the actual thing our symbol for something is, the more it actually is the thing being represented. An individual life is subject to chance, therefore, if we know the outcome of a game of chance we will be able to predict what will happen in an individual life.

The quants did almost precisely this with their models. What they did is construct extremely sophisticated chance games with one caveat: that the outcome of the chance games would trend towards the equilibrium of the Efficient Market Hypothesis. Like a fortune teller they played their Tarot decks, and then confused the outcome of these games with the economy the rest of us make our living in. Perhaps like the gut-level traders they replaced, and like the successful fortune teller, much of their initial luck arose as much from their intuition as their models. Perhaps, too, like the successful fortune teller, many of them were supremely good con-men who were quick to recognize and exploit the vulnerabilities of people who believed in their predictive power.

This world the quants had helped create only became supremely dangerous for the rest of us when the gap between their models and reality became too wide, or worse was ignored. The fall of idols is always difficult to bear, and given the fact that the larger economy had become tied up in the belief in these false models, their being proven false couldn’t help but affect the vast majority of us who had never heard of a quant or a hedge fund or, or algo-trading, or a credit default swap.

The markets were only saved when the public and quasi-public institutions, the world’s most powerful governments and central banks- (the latter, which especially, had up to that point, been the most vociferous proponents of the virtues of the free market) both turned tail and “got Keynesianism” flooding the markets with cheap cash. This magical elixir to cure the burdens of debt, however, was one limited to the richest institutions and elements of society. Financial deregulation and the exotic instruments devised by the quants had turned the creditors into their own debtors, and these debtors would be cured by the magic of cheap money, a concoction brewed by the world’s central banks who had previously treated even the hint of cheap money like poison.

Something seems to be seriously wrong with our financial system, something that reaches back long before the quants, and touches upon the fundamental assumptions behind the seemingly oldest elements of our economic life- money and debt. Which leads me to the last question along this train of thought:

How might something seemingly so essential to our lives as economic creatures, our money and our debt, be viewed through the lens of idolatry?

Until next time…

* Scott Patterson, The Quants: How a new breed of math whizzes conquered Wall Street and nearly destroyed it, Random House, 2010

Pandemonium, Kingdom of the Quants 1

You wouldn’t think an epic poem from the 17th century that dealt with a war in Heaven between the angels of God and Satan, the creation of Hell, and the fall of Adam and Eve, would have all that much to tell you about the 2008 financial crisis, or, on an even deeper level, would reveal the whole of modern economics to be based on a sort of magical illusion, but you would be wrong. John Milton’s great epic, Paradise Lost does both of those things, and perhaps much more besides.

For those of you who haven’t read Paradise Lost in high school or college I will briefly lay out the story below. I have to admit that I came very late to this book, and hadn’t read it in either high school or college. Once I had I was somewhat upset I hadn’t done so earlier- it is truly one of those books that grab you and change the way you look at the world. All I can say is read this book, and don’t think you can “wait for the movie”, it’s been canceled.

The story is one that probably anyone with even a modest Christian background in some sense already “knows” even if they’ve never heard of Milton. It is the tale of Lucifer and his angelic allies’ rebellion against God, the Son of God, and the angels that remain loyal to their Creator. Lucifer’s rebellion is sparked by his claim that angels are “self-begot”, and therefore owe no worship to God and his Son. The rebels are single-handedly casts out of Heaven by the Son of God, and into the depths of Hell, where they become monstrous, shift-shaping demons. Under the encouragement of the demon, Mammon, (literally “money”), they build Hell’s capital of glittering gold, Pandemonium. This city is supposed to replicate the glorious visages of Heaven, but, though more splendid than any earthly city, remains but Heaven’s pale shadow.

Satan plots his revenge against God, and finds his opportunity in the weak link of God’s new creation- Adam and Eve. After a courageous and epic journey through the depths of Hell, Satan makes his way to the earthly Garden of Eden, where in the form of a serpent, he convinces Eve that the Tree of  Knowledge of Good and Evil God had commanded her and Adam not to eat of on pain of death, is instead the means to upgrade to a god herself.

Ye eat thereof, your eyes that seem so clear,
Yet are but dim, shall perfectly be then
Open’d and clear’d, and ye shall be as gods. (286)

Eve takes the bait, and Adam the ever dutiful husband follows her lead. Rather than leading to godhood, eating from the Tree of Knowledge results in the couple’s expulsion from the Garden and the beginning of the sad fate of human beings until the arrival, promised to Adam by the archangel, Michael, of the Messiah.

You might be asking yourself by now what in the world such a religious epic from an era so unlike our own could possibly have to do with such a real world event as the financial crisis of 2008? Surely, the state of contemporary economics is not so bad that it needs to pull from the pages of religious mythology.

Allow me in what follows to engage in a flight of fancy. What I intend to do below is ride out what is a largely unsubstantiated set of assumptions, a claim, as it were, that has only the barest minimum of research behind it. CRITICISM of such a wild set of assumptions is not only to be expected, but HOPED FOR on my part. For the last thing I would want is to turn some random thought that entered my head into some sort of IDOL, that I refuse to allow to be criticized, or much worse, have DISPROVEN.

Here then is my idea: that one of the best ways to understand the financial crisis that broke upon us in 2008 is not through any of the competing economic models out there which have emerged largely ex post facto to explain the crash, but through the lens of an idea that emerged out of religion- the idea of idolatry.

This idea, in large part, was inspired by David Hawkes, the editor of the brilliant 2005 edition of Paradise Lost I have in front of me. It is Hawkes’ point that what Paradise Lost offers us is an extended meditation on idolatry, and that the concept of idolatry can provide us with a useful guidepost, even when severed from its original ground in the Jewish, Christian or Muslim faiths. That Milton’s great work might be read as a prophecy of our own age of secular idolatry.

Hawkes sees behind Milton’s Paradise Lost, though it is embedded in religious language, what was to become philosophy’s famous distinction between the “thing” and the “thing in itself”. The awareness that we can never know the world as it truly is, but only as it is mediated for us by our senses, and perhaps most especially by our ideas, one would today call them models of it.

The only being who can know the thing in itself, in Milton’s reading of it, is their Creator and thus the world of the created, including the angles, are in a state of alienation in reference to the world.  (XXX-XXXI)

Our inability to know the world as it truly is does not, however, stop us from trying. Far too often in our quest we believe we have reached that unreachable destination.

This seemingly innocent confusion of the map for the territory, the symbol for that which is symbolized, is not, in Hawkes’ terms “ethically neutral”. Instead the thing in itself, which only God can see, becomes confused with the image we hold in our hands or place upon an altar. The illusion that we are in possession of the “Truth”, like the voodoo dolls of witches. seems to lead straight to the illusion that we have God-like control over the actual thing we have symbolized. (XXXII)

In the words of Hawkes:

…. for Milton, sin consists in the refusal to recognize, and thus in the attempt to bridge, the world of experience and the world beyond experience. This is the sin of Satan, whose basic mistake is the failure to understand the difference between himself and God is qualitative rather than quantitative. (xxxvi)

The whole of Paradise Lost is a meditation on the dangers of confusing our idols for the thing in itself, our maps for the actual territory. This delusion is seen in Satan’s futile rebellion against an omnipotent God, in the building of Pandemonium, the capital of Hell, in which the demon Mammon thinks the glory of Heaven can be obtained in the gold of the earth. It is seen in the seduction of Eve by the serpent, when she confuses what she sees -the serpents human like power of speech- with the reality of what will be gotten from eating from the Tree of Life.

Hawkes wants us to connect Milton’s meditation on idolatry with the birth of capitalism that was happening right in front of the “eyes” of the blind prophet. Persons were being alienated from their labor as they were forced from their lands and forced to become wage earners, and more importantly for our purposes, money emerged as “an independent, self-generating force- an efficacious sign”. (XV)

Above all, Hawkes wants us to see Paradise Lost not as a mere epic poem that, despite its genius, is too embedded in a  religious language that offers little guidance to the problems of our secular age, but as what Milton intended it to be, a prophecy, that was meant to capture the outlines of the future. We are that future, and if Hawkes is right, Milton might have been able to peer into the way in which the world would unfold not out of any connection with the divine, but because his genius occurred at the very moment the modern world was coming into being, allowing him to grasps its fundamental assumptions.

Hawkes writes of us:

Our own “postmodern condition” is characterized by the virtually complete dominance of representation    over reality, but few twenty-first-century thinkers are capable of constructing an ethical critique of this situation. Paradise Lost offers such a critique, and that is why Milton’s poem is more pertinent today than ever before. (XXXIII)

What Hawkes interpretation of Paradise Lost provided me with was a model to understand the financial crisis. In particular, it gave me a way to understand the role of two forces which played a role in the outbreak of the crisis: the mathematical geniuses of Wall Street known as “quants” who created a whole new system of computer based finance during the 1980s, 1990s, 2000s  that imploded with the 2008 crisis, and the emergence of “fiat currency” in the early 1970s that engendered a credit boom the likes of which was never seen before, and that was ultimately based on the illusion that money could be created out of thin air- like magic.

Next time the Quants….

* John Milton, Paradise Lost, EDITED WITH AN INTRODUCTION BY David Hawkes, Barnes and Noble Classics, 2005