Monday, 5 August 2013

Why are there so few financial activists?

It has been an enduring enigma to me as to why there is so little public activism around finance, given that there is activism in domains such as energy and agriculture. Yesterday, Brett Scott, one of the few financial activists I think achieves anything, spoke as part of the Dangerous Ideas series.

Brett and I have very different backgrounds, exemplified the fact that  I come from the oil exploration business while Brett has a background in “deep ecology activism. Our point of contact appears to be that we agree that the financial system is a useful (natural) technology that needs to be well managed, rather than an “alien” and unnatural  system that should destroyed. I think the focus of this contact is that we share the view that finance should be “open source”, open to public participation.  As an activist Brad shows how individuals can ’hack’ finance, as an academic I try to help individuals understand the financial system in a coherent manner.

After his talk a small group continued the discussion in the sunshine.  A post doc psychologist and I discussed why there weren’t more financial activists  It has long perplexed me why finance does not attract the sort of public scrutiny that the energy and agricultural domains (for example) do.  The technological threats associated with climate change and GMOs are abstract in that the risks are yet to materialise, the risks of finace repeatedly realise themselves causing actual discomfort to millions of westerners (i.e. there is no issue that “it doesn’t matter they’re Belgians”). It can’t be because finance is “complicated”, hydraulic fracturing, nuclear waste storage and genetic modification are not exactly trivial.  It cannot be that finance is too close to power, until recently the energy industry was much wealthier and tighter with governments than finance.

To highlight one aspect of my confusion, I have just found a post asking "Can Scientists Engage Critically with Capitalism?", focussing on the domain of synthetic biology - why isn't the question asked focusing on the core domain of finance (the author comes from Manchester University which hosts Karel Williams who does do this)?

Brett was of the opinion that finance is closely associated with maths and there is massive public anxiety around approaching mathematical issues (even Tim Harford, the presenter of the BBC’s statistics show More or Less, struggled with stats at university and failed maths at A-level).  I think it is uncontroversial to argue that people who are good at maths tend not to be the “activist type”, which raises the question why should this be so. Some really significant probabilists, including Poincare (attacked the case against Dreyfus), Borel (politicialn after 1924) and Markov (actively opposed the Tsarist regime before 1917), were highly political, but we don’t hear of mathematicians being at the fore of protest movements these days.

I think the reason is there has been a massive cultural change in mathematics since the First World War.  The rise of Bourbaki and Formalism, encapsulated in Hardy’s claim that mathematicians don’t do anything useful (which I think is mis-interpreted out of context, I think his point was subtle) has created an “insincerity” in mathematics.  The result is that toda mathematicians often pride themselves in being incomprehensible (this is not a new claim). I speak with bitter personal experience, I am currently re-writing a paper that I submitted for a middle ranking applied mathematics journal and was rejected because it did not conform to the right “style”, the maths is fine but I had not presented it in the right way. I work in a branch of Probability, which is now classed as “Pure Mathematics” and had presented my work in the context of a practical problem, this is not what ”mathematicians” do, we should present our work in abstract generality with a brief mention (at the end) of possible specific applications. Anyone who has come across contemporary “Financial Mathematics” will know what I am talking about and will appreciate how this approach makes it difficult to understand/follow the mathematics because of the peculiar narrative structure of Pure Mathematics.

Most mathematicians are Realists, who might claim that “2 + 2 = 4 was true at the time of the dinosaurs”, implying the mathematics is independent of human thought (synthetic a priori); or Formalists who argue that the statement is a tautology: 2 := 1 + 1, 4 := 1 + 1 + 1 + 1 and so 2 + 2 = (1 + 1) + (1 + 1) = 4 (analytic a posterior). Neither position allows much room for debate and people are left thinking that if its mathematical it must be true. These two philosophies for the foundations of mathematics uniquely alienates the discipline from people's lives.  I take a more Pragmatic / Intuitive approach, following Poincare, to mathematics and see the discipline as being"socially constructed" and so containing the potential for error (a accessible account can be found in Hersh, for example).

Mathematicians frequently argue that the financial crisis was a consequence of bankers not knowing "enough" maths, maybe the problem is that the general population have been cowered into not engaging with anything mathematical.

Brett’s observation was comforting in that it suggests to me that there is a point in  this blog, whose use of the word “Magic” in its title is a nod to Mauss’ association of “magic” with that which is hidden and captures the similarity in one of the key issues facing both mathematics and finance, the veil that its practitioners draw over the subject.

Another feature linking mathematics and finance are their abstract nature.  With most technologies there are artefacts that can be handled.  I first appreciated this talking to the curator of the Museum on the Mound, Edinburgh’s museum of money.  He pointed out that it it is difficult to curate financial exhibitions because there are so few objects to present, and he imagined the same would be true of mathematics.  The central object in finance is a contract, a piece of text, and the central objects in mathematics are theorems, again texts. finance is actually harder to curate because people can connect to the handwriting of a genius, the writers of financial contracts are typically anonymous clerks.

Brett and I discussed a well known British financial activists group, which I think of as the UKIP of finance, while Brett appreciated my point but I think he felt it a bit harsh. What we agreed on is that it is  supported by “angry people who want answers”, and will support anyone who can offer them solutions.  This is not uncommon but another point of contact between Brett and myself is that we cannot see any clear cut solutions, I take the standard academic position that “it is a bit more nuanced” while Brett’s activism is about individual responsibility rather than directing mass movements and  I think the people who left Brett’s talk left in disappointment in that he was not telling them what to do.  In essence I think Brett and I conform to the Enlightenment ideal of the rational individual engaged in discourse.

Brett did mention he was thinking of moving on to the energy domain.  On my way home it occurred to me that there is something missing in finance that is present in energy, the very concept of energy. Everyone knows what is meant by energy, or at least they think they do.  Energy is actually quite an elusive concept.  Poincare remarked that

As we can not give a general definition of energ, the principle of the conservation of energy signifies simply that there is something which remains constant.

Today physicists regard energy is an unobservable quantity that represents a system’s capacity for work and all that we can observe is the manifestation of energy.  As a trained physicist I have often thought tht finance focuses on the observable, in particular wealth, in the form of property, when it should place an unobservable quantity at its heart, and I think the right unobservable is “credit”.  This might bring me into disagreement with Brett who (I think) suggested money was a way of storing capital/labour, I think of money as the manifestation of a system’s capacity for “credit”.  “Credit” is, for me,  the key unobservable in finance that equates to energy in physics (though I do not think credit is a conserved scalar) and by redirecting finance to concentrate on the ebb and flow of credit, rather than the more apparent ebb and flow of money.  This point was lost on someone who discussed wealth differences and I remarked the issue was not so much an exclusion from wealth but anexclusion from credit. This is my motivation for focusing on the importance of the "silver rule of reciprocity and the golden rule of benevolence" to finance and, less unorthodox, why I think the issue of uncertainty is central to finance.

An unexplored area of disagreement between Brett and myself could be in how we regard scarcity and uncertainty.  As a deep ecologist I suspect Brett is fundamentally concerned with scarcity, as an oil explorer I have long been focused on problems with uncertainty.  I think if there is a fundamental difference between Brett and myself, it will be here.


  1. There is a big intrinsic difference between energy and credit: energy exists, and an energy "generator"(for example, an electrical one) do not "generate" energy, but converts it from one form to another; while credit(fiat money) can be really generated in unlimited amounts - inflation.

  2. I agree that unfettered credit will lead to inflation, and I think the technical issue that makes credit difficult to deal with is that it is unlikely to be conserved: science advances when it can fix a concept in absolute terms. However I think the relationship is subtle, the same level of credit may or may not leads to inflation, I think the other key aspect is to what ends the credit is being applied: productive or consumptive.

    I don't think the issue is that energy exists but credit does not.

  3. Two corrections and one comment:

    1) "principle of the conservation of energy signifies simply that there is something which remains constant"

    This is backwards. First, definitions (for simplicity, let's keep everything classical--no quantum mechanics, which doesn't really change anything): Start with mass, then the flux of that mass across time is the energy and the flux across space is the momentum. This is just the definition, and doesn't have any implications for your point.

    Noether's theorem says that each symmetry of the lagrangian is associated with a conserved charge. In particular the charge which is conserved is the flux of a quantity across the invariant states. Thus, that "energy" is conserved is just a statement that the lagrangian ought to be invariant to time translations. In that way, energy isn't a "thing" at all, just the empirical result of time invariance. And yes, this means that it is entirely possible that energy isn't conserved on the largest scales in the universe.

    2) "I agree that unfettered credit will lead to inflation" As an empirical matter, this is just not correct. Nor should we theoretically expect it to be so. This is a fallacy which I think is quite correctly referred to as "immaculate inflation"--Krugman likes the term at least, but I'm almost sure he didn't coin it. The point is that you need actual economic actors to raise prices, and moreover that is something happening across the economy (inflation can remain, say 2%, even as house prices double--this is a relative price shift, not inflation).

    The point is that credit--private money creation--need not be inflationary, basically unless the credit growth results in demand expanding faster than the economy's productive capacity.

    3) As an aside, your belief that finance is about credit seems wrong to me--and for related reasons. I would say instead that finance is about information... borrowing from Hayek, prices encapsulate a vast amount of information about the underlying economy and finance studies the process of arbitraging those prices.

    That's just my two cents.

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  5. (1) is a quote from Poincare to make a rhetorical point, Poincare died in 1912 and it is not surprising it is out of date. (2) I agree I should have written "may" instead of "will", (3) I think Keynes was keen on credit, and so if you tend to Hayek we are likely to disagree. On a more serious point, I think credit relates to uncertainty (you are unsure of the future)and information to scarcity (you lack information, and as I say, I think this is a key distinction.

    Thanks for your comments and I apologise for my looseness in language.

  6. There is the maths question, but I don't think that's the main thing that puts people off. As you say, there are activists about issues that are complex and need some maths to understand properly.

    My opinion is that, for most people, money=power. So, if they want to change something about finances, they tend to approach it as a power issue, rather than a purely bean-counting problem. Think of the Occupy movement, how it immediately became about power.

  7. THIS WAS SENT BY BSECONOMIST, unfortunately I was kack-handed on my phone and when moderating I deleted it rather than published it.

    Thanks for the reply. I just wanted to comment that I don't "lean toward Hayek"; I'm a microeconomist and Hayek made profound contributions to price theory which I happily use. Hayek's business cycle theory on the other hand has been proven--as a matter of scientific fact (not to be confused with truth)--to be wrong. And Keynes seems to be mostly right. I know there are a lot of Austrian-economics-trolls out there and I am most definitely not one of them. I just want to clarify that.

    While I'm here anyway, I'm still confused about your views on point (3). I'm pretty comfortable about the risk/uncertainty distinction, but I'm not sure I understand how that distinction relates to "credit". On the other hand, the creation or trading of assets must reveal private information (with the caveat that there is no such thing as an informationally efficient market). I'd be curious to hear your thoughts on this fleshed out a bit more.

  8. Interesting post, Tim. (For what its worth the little typos etc don't bother me, I prefer that post is 'off-the-cuff')

    I'm about halfway through Brett's book atm. I'm liking his "hacktivist" approach to finance.

    Where I disagree with yourself and Brett is over the conception of money itself. I see credit as an 'amplifying mechanism' and the real metaphysical problem as the nature of money itself. For me, digging into the question of what is currency & what is money, is where it's at. I also find this is where Hayek falls short - specifically he doesn't appreciate that the idea of money is anterior to price (currency).

    So in terms of financial activism, because I see money as fundamental to (an aspect of) reality, I think it's impossible to be an outside observer (to see a problem around which you can define your cause). I think Brett also says this in his own way.... that it's our relationship with money that leads us to our relationship with financial intermediaries. I think that the fear of maths might contribute to the problem but I don't think it's real story.

    Financial activism (& sometimes political activism) tends to raile against money itself. This is as much use as complaining about the weather. And worse, it's also self-defeating.

    My own brand of activism is ritual money burning. I don't do it because I think money is evil. I do it as a way of setting money free from currency. And ultimately as an act of forgiveness. I see it as a moral act.

    The comparison of money & energy is really interesting.

    - Jon

  9. I suspect we have a semantic disagreement. Prompted by an earlier comment I had another look at the OED's definition of the noun "credit", which derives from Sanskrit and Latin words for "trust". The definitions are numerous, in summary

    1. The estimate in which the character of a person (or thing) is held; reputation. (now rare)
    2. Right to be believed; authority on which to be accepted as true, truthful, or authentic.
    3. The mental action or state of accepting something as true (cf credence)
    4. The charge, trust, or care of a person
    5. Personal influence based on the confidence or trust of others
    6. Something believed as true; a belief; a report. (rare)
    7. Honour or commendation given or received on account of a particular action
    8. Something or someone creditable
    9. Trust or confidence in a customer's ability and intention to pay at some future time, shown by allowing money or goods to be taken or services to be used without immediate payment.
    10. Money lent or borrowed with an agreement as to repayment
    11. Reputation for solvency and probity in financial dealings, allowing money or goods to be taken or services to be used without immediate payment; the ability of a customer to obtain money
    12. (Accounting) An entry in an account recording money received
    13. A note, bill, or other document on security of which a person may obtain funds
    14. In various informal or fictional contexts: a unit of currency. Later also: a unit used as a measure of a person's entitlement to use of a particular resource, service, product, etc.
    (Specialised uses)
    15. Officially recorded acknowledgement of merit in an examination
    16. (Theatre etc) An acknowledgement by name, with details of function or role, of each individual contributor (actor, producer, etc.) to a production.

    "Money" is simpler, it derives from the name of the goddess in whose temple money was minted in Rome and is defined as
    1. Any generally accepted medium of exchange which enables a society to trade goods without the need for barter; any objects or tokens regarded as a store of value and used as a medium of exchange.
    2. Means of payment considered as representing value or purchasing power
    3. (Legal) Sums or quantities of money
    4. A particular coin; a coinage; denomination
    5. One of the four suits used in some packs of tarot cards
    6 (U.S. colloq). A friend.

    Reading one the books in Neal Stephenson's Baroque Trilogy I realised that "currency" (in the monetary sense) is related to current (flow), e.g. the OED defines
    1. The fact or condition of flowing
    2. The course (of time); the time during which anything is current.
    3. Of money: The fact or quality of being current or passing from man to man as a medium of exchange; circulation.
    4. That which is current as a medium of exchange
    5. The fact or quality of being current, prevalent, or generally reported and accepted among mankind

    1. Thanks, Tim. That's a comprehensive list. Work beckons for me now, but I'll come back to this later & see how my own description of money as "an aspect of reality that mediates value and enumerates certain relations through currency" weighs up against them. And may nick a few for my #moneywisdom quotes :)

      I keep meaning to ask you when I read your blog.... I came across your work via a couple of chapters you published on the authonomy website. If memory serves me right, I think the working title was the same as this blog. Any news on that project? I remember very much liking what I read.

  10. I think that you need to be more specific about why finance should be about credit rather than money.

    Money is a form of reified credit. It has several features that are not shared by other forms of credit. It is an obligation of no one(*) which we nevertheless believe (credit) will be honored by everyone; but in general, credit is an obligation by a specific party, usually to some specific party. Base money can be created or destroyed only by the central bank, whereas credit generally, including credit used as money, can be created and destroyed privately.

    Which, if any, of these features do you think are critical to finance? Do you simply mean that "finance" is the business of the private creation and destruction of credit? Then is the influence of the central bank on the financial industry excluded from the study of finance? Or do you mean that "financial crises" require the element of specific obligation for contagion (A goes bankrupt and defaults to B, who goes bankrupt and defaults to C etc.) That would seem to artificially exclude hyperinflation from the category of financial crises. Or do you mean that the proper study of finance is the larger definition of credit that happens to include money?

    (*) Yes, I know that money is "an obligation of the central bank." But since a modern CB's only "obligation" is to exchange a dollar for a dollar, that doesn't amount to much.

  11. I think hacking finance has perhaps moved into the start-up technology space where we're not really concerned by the math :). I founded a start up I'd say is "hacking finance" -- through use of crowd sourced investment strategy design we can decentralize finance and make the system more robust. But there are dozens of examples of other start ups like ours which are addressing different parts of the financial and credit system.

    1. Brett discussed this in his talk. I think it is interesting that finance is reverting to its old model where finance was conducted on a peer to peer basis (a colleague Alex McNeil has bonds issued, personally, by the Edinburgh merchant in order to fund the building of his house in the 1800s that Alex now lives in). Also, it is worth bearing in mind that securitisation was originally seen as a threat to banking, because banks had traditionally acted as intermediary's between borrowers and lenders; Secritisation was seen as undermining this. Of course it turned out that the banks came to dominate securitisation.

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  13. Uncertainty has objective and subjective aspects. Maybe we would need concepts of credit as assessed by some one or some institution, and 'objective credit-worthiness'. Normally one would hope that competition would ensure that credit given was generally close to actual credit worthiness, in the same way that insurance premiums are generally sound. But there is a range of ways in which the 'corrective' mechanisms can fail. Mathematics could be used to identify previously unrecognized failure modes, and to help study the properties of potential new systems. Activism of some form would then be needed to bring about change.

    It seems to me that mathematics currently has insufficient credit for this to happen.